UK government bonds – usually referred to as ‘gilts’ – have been at the heart of some of the biggest financial stories in recent years. Gilt markets almost single-handedly ended Liz Truss’s government in 2022, and they threatened to dislodge Labour chancellor Rachel Reeves early in 2025.
But what are gilts? Why do they matter so much – and more importantly, should you invest in them?
Gilts is a shorthand for bonds issued by the UK government. In other words they are units of government debt. When you buy one, you are lending the government money. Gilts are used by the government to raise money from investors to fill the gap between revenue (taxes) and spending.
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This makes them central to the financial system, and a key part of how the UK economy functions.
“Generally, gilts are used to borrow to improve infrastructure and fund other longer-term projects that aim to benefit the economy through higher growth and productivity,” says Rob Morgan, chief investment analyst at Charles Stanley.
“In return for lending the government money, buyers of gilts receive regular interest payments – known as the ‘coupon’ – and the return of the capital on the maturity date. This date varies according to the length of the gilt, which can be as little as one year or as much as 30 years – or more.” The average life of a gilt is 14 years, though yields on 10-year gilts are generally tracked as the headline figure when discussing gilt yields.
The government issues bonds via the Debt Management Office (DMO), which is responsible for managing gilt supply and demand and deciding what sort of gilts to issue.
There are various ways of buying gilts. Some investment platforms allow you to buy them directly, but if you aren’t able to do so you could buy an ETF that tracks the performance of government bonds or gilts.
“[Gilts] can either be bought at issue or in the secondary market,” says Morgan. “Buying at issue means that you get the same ‘yield’ on the bond as the coupon. For instance, if a bond is issued with a 4% coupon you’ll receive £4 of interest for each £100 invested every year until maturity.
“However, if you buy in the secondary market, the gilt may be trading either above or below its ‘par’ value and the return generated could be higher or lower.”
Par value can be defined as the face value of the bond – i.e. the amount the borrower is required to repay on the maturity date.
Before buying though, let’s ask the question: are gilts a good investment?
Is now a good time to buy gilts?
At the time of writing (January 2025), it’s a pretty good time to buy bonds in general, and gilts in particular.
Gilts have been top of the news agenda for much of the start of the year, because their yields have increased significantly over recent months, despite inflation holding relatively steady, not far above the Bank of England’s target rate.
High yields mean that bonds are cheap for investors to buy, as the income they provide (which is fixed – hence why bonds are often referred to as ‘fixed income’) is relatively high as a percentage of the purchase price. Stable and relatively low inflation means the real value of these fixed returns is decent and relatively unlikely to be suddenly eroded by price increases.
The caveat is that the upward pressure on gilt yields has been driven by fears that inflation could increase. Despite UK inflation falling in December, it is expected to rise in 2025, particularly as the full impacts of the Autumn Budget are felt. Similarly, global inflation could tick up as a result of some of the policies Donald Trump is likely to pursue once he re-enters the White House, particularly steep import tariffs.
Inflation notwithstanding, gilts are considered a very safe investment. The UK government has never defaulted on its debt, and there are all sorts of levers it could (and almost certainly would) pull to avoid ever doing so. There’s no such thing as a risk-free investment, but gilts (as well as equivalents from other large economies, like Treasuries or bunds) are pretty close to it.
If you bought a 10-year gilt today, it would yield roughly 4.67%. This is 2.17% above the current rate of inflation. The yield is more or less guaranteed, and if you held the gilt to maturity, you’d get your initial investment back in ten years’ time, plus the yields in the interim.
Of course, gilt yields being relatively high means gilt prices are currently fairly low. Should this change in future and prices increase, you might consider selling the gilt on to bank your profits sooner. Gilts are traded on secondary markets, and their prices fluctuate based on supply, demand and the macroeconomic environment, just like any other investment.
“The price of a gilt tends to change over time, mostly in reaction to interest rate and inflation expectations,” says Morgan.
The only real risk you take in buying a highly creditworthy bond, like a gilt, and holding it to maturity is that soaring inflation could erode the value of its payments. Remember that these are fixed – if inflation suddenly jumped to 5%, your increased costs would completely eradicate their value.
“Investors don’t wish to see a below-inflation return on their money, so they want compensation for the risk of inflation being higher than expected – and this ‘term premium’ particularly affects longer term gilt prices,” says Morgan.
In an environment like that, you’d want to invest in an asset like gold, which generally tends to increase in value during inflationary periods.
That’s a roundabout way of saying that, provided inflation doesn’t suddenly soar – and there are some reasons to think it could, which is why gilt yields rose in late 2024 and early 2025 – now (January 2025) is near enough as good a time as ever to buy gilts.
How do gilts affect your finances?
The interest rates on gilts set prices for things like mortgages, financial derivatives and can dictate government budgets. They are essentially the foundations of the country’s financial system.
When gilt yields increase, the government pays more interest on its debt. This eats into its budget, meaning less money available for tax cuts or public spending, assuming everything else remains constant.
While an increase from 1% to 1.1% might not seem like much, it is a 10% increase in the cost of borrowing. The UK has over £2.5 trillion of gilts outstanding. While many of these have fixed interest rates over several decades, it’s easy to see how a 10% increase in borrowing can have a huge impact on the country’s financial position.
They are also a significant driver of borrowing costs. For instance, in late 2024 and early 2025, some mortgage lenders increased their rates as gilt yields rose, even though interest rates have been trending downwards.
However, higher gilt yields tend to be good news for annuities.
“The higher the gilt yield the bigger the potential regular retirement income,” says Morgan. “If you have been contemplating buying an annuity with your personal pension pot, it might be an opportune time to take a fresh look at available rates.”
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