What are gilts and should you invest in them?
Gilts play an important role in the economy and many aspects of your finances, but do they make a good investment?
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 from her position early in 2025.
“Gilt” is shorthand for a bond issued by the UK government. In other words, gilts are units of government debt.
“They're essentially loans to the UK government,” said Sarah Coles, head of personal finance at AJ Bell. “You lend them money for a specific number of years, in return for a regular payment known as a coupon.”
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This coupon payment is fixed and is often expressed as a percentage of what you paid for the gilt. This is known as the ‘yield’ – exactly the same as the yield on other forms of bond.
“When they mature, the government repays the full face value (known as par value and usually £100) to whoever holds the bond,” Coles added.
“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,” said Rob Morgan, chief investment analyst at Charles Stanley.
Because the coupon payment is a fixed amount, the yield (which is a percentage of the price of the bond or gilt) moves in an inverse direction to the price. So in the chart above, which shows price, points where the line is lowest means that the yield is highest, and vice versa.
This matters for the UK economy because the yield on a gilt is effectively the interest that the government pays on its debt. The lower gilt prices go, the more expensive it is for the government to raise money.
How do gilts work?
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 exchange-traded fund (ETF) that tracks the performance of government bonds or gilts.
“[Gilts] can either be bought at issue or in the secondary market,” said 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 is defined as the face value of the bond – i.e. the amount the borrower is required to repay on the maturity date.
The DMO determines the price of new gilts issued based on market conditions, and yields are one of the key variables that are considered when pricing them.
The question of whether or not gilts are a good investment depends largely on market conditions, as well as your individual circumstances and the role they are likely to play in your portfolio.
Should you buy gilts?
The key advantage of gilts, like other forms of government bond, is that they are a safe investment. The UK government has never defaulted on its debt, and it is hugely unlikely that it ever would.
Rather than default, the government would be more likely to take actions that devalue the value of the pound (in which all gilt coupons are paid), which would diminish the real returns that the gilt holder received over time.
For that reason, two key variables that impact gilts are interest rates and inflation.
You are paid the same amount of money on your gilt regardless of what is happening with inflation: rising costs eat into the real value of this yield. So inflation makes gilts less appealing.
Inflation also tends to lead to higher interest rates, which makes it more likely that investors can find a superior return elsewhere.
“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,” said Morgan.
For this reason, gilt prices tend to fall, and yields rise, when interest rates go up, and vice versa.
So the ideal time to buy gilts is one where yields are high, but where interest rates and inflation are expected to fall in future.
Yields on ten-year gilts fell to 4.37% – their lowest level since 2024 – on 12 January, and continued to fall further over the following weeks. But when the war in the Middle East started in late February, fears of inflation rose. That raised expectations of higher interest rates, which saw a fall in gilt prices – and, as such, a rise in gilt yields.
Ten-year gilts currently yield around 4.76% (as of 15 April), but they yielded as high as 4.95% in late March.
The latest UK inflation data showed that CPI rose by 3% in the year to February. That means that gilts are currently yielding around 1.78% in real terms (adjusted for the impact of inflation). However, inflation data always comes with a lag – the next UK inflation release date is 22 April, and this will cover March data, which is likely to come in higher thanks to the impact of the conflict.
What are the tax advantages of gilts?
Another reason to consider investing in gilts is that they are tax-efficient.
“Frozen tax thresholds and the looming cut to the cash ISA allowance mean it’s getting harder to keep your savings interest out of the clutches of the taxman,” said Coles.
Coles believes that now is an opportune time to buy certain gilts.
“Gilts with low coupons, issued during the pandemic and set to mature soon, tend to be priced below their par value,” she said. “At the time of writing, for example, there’s one due to mature in January 2028 with a coupon of just 0.125%, priced at £93.20. On its maturity date you’ll get £100 for every £93.20 you put in. The monthly payment is small, so the lion’s share of the gain is the difference between what you pay for it and what you get back when it matures.”
The coupon is taxed as income – but that is a small part of the return on these gilts.
“The rest is the rise in the value of the gilt between when you buy and when you are repaid, and this is free of capital gains tax. It means most of your gain is tax-free.”
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.
The UK has around £2.9 trillion of gilts outstanding. While many of these have fixed interest rates over several decades, it’s easy to see how even a small increase in gilt yields 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 had 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,” said 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.”
