The UK government owes investors nearly £3 trillion, and the bill is growing fast. Chancellor John Healey is expected to borrow around £115 billion this financial year alone, two and a half times the amount the Exchequer sought a decade ago.
The government raises this money through the gilts market, where loans are packaged into bonds and sold to investors ranging from pension funds to individual savers. The bonds are called gilts because the original paper certificates were edged with gold. They vary in maturity from a few months to more than 50 years, are typically issued at a par value of £100, and pay interest, known as the coupon, twice a year.
The UK government has never failed to repay a gilt, so the bonds are considered extremely safe. But major investors are increasingly nervous about how much the government is borrowing now and how much it may need in future.
Why yields are rising
Prime Minister Andy Burnham is untested and has been making rash promises, according to the article's analysis of the market mood. Global unrest means defence spending needs to rise, and inflation is making everything more expensive, not just for consumers but for government departments too. The more anxious investors become, the more return they demand for lending their cash.
Five years ago the government was paying less than 1 per cent annual interest on 30-year gilts. Today that rate is more than 5.9 per cent, the highest level since 1998. Ten-year money now costs the Exchequer around 5.3 per cent, more than during the global financial crisis.
How gilt pricing and tax breaks work
While a gilt's coupon stays fixed from issue to maturity, the bonds are traded daily like shares, and prices move with demand. That changes the yield, calculated by dividing the coupon by the price. As yields rise, prices fall, and vice versa.
A gilt issued in 2025 and maturing in 2056 pays annual interest of 5.375 per cent, generous a year ago but not enough to satisfy today's investors. They have driven the price down to £92.60, creating an annual yield of just over 5.8 per cent. Because gilts are exempt from capital gains tax, anyone buying this gilt today for £93.80 would also collect a tax-free gain when it repays £100 in 30 years, pushing the gross yield above 5.9 per cent. Brokers including AJ Bell, Hargreaves Lansdown and Interactive Investor offer a wide range of gilts to buy.
Short-dated and long-dated options
Vast quantities of gilts were issued during the Covid years, when interest rates were near zero, leaving many bonds with coupons of 0.5 per cent or less trading at steep discounts. Ryan Hughes of AJ Bell said short-dated gilts look "pretty appealing" for higher-rate taxpayers, with "some really high rates on offer when you compare them to cash in the bank."
A 0.125 per cent gilt issued in June 2020 and maturing in January 2028 is priced at £94.40, offering a tax-free gain of £5.60 at maturity. Hughes said the gross equivalent yield on this gilt is 6.8 per cent for a higher-rate taxpayer, comparing "very favourably with a fixed-rate cash account."
At the extreme end, a gilt issued in May 2020 and maturing in 2061 carries a coupon of just 0.5 per cent but is priced at £21.90, implying an interest rate of almost 3 per cent plus a tax-free capital gain of £88.10 at maturity. Adrian Bell of bond specialists Allia C&C compared this to the old War Loan bonds, saying such undated, low-coupon debt "gave investors an open opportunity to make substantial untaxable gains in an improving interest rate environment."
Weighing the risks
Hal Cook of Hargreaves Lansdown said yields are higher than they have been for a long time, making it a good time to buy, but warned they "could go higher from here, which would mean the price of gilts falling." For long-dated bonds, inflation matters too, since £100 may buy far less by 2061 than it does today. The government also offers index-linked gilts with maturities running from 2028 to 2073, alongside plenty of shorter gilts maturing within one, three or five years.
Treasury bills for short-term investors
The Exchequer also issues Treasury bills, mainly maturing in one, three or six months, to cover short-term needs. These carry no coupon but are sold at a discount. A recent six-month bill was issued at just over £98 and pays £100 on maturity in March, a yield of just over 4 per cent. A three-month bill maturing in December was issued at £99 for an underlying yield of almost 3.9 per cent. Interest on these bills is taxable unless held in an Isa or Sipp.
Corporate and charity bonds
Companies, charities and non-profits also raise money through bonds, with the same £100 issue price and twice-yearly coupons as gilts, but unlike the government they can default, so they pay higher rates to compensate investors.
Tesco has a bond in the market issued in 1999, maturing in three years, paying 6 per cent interest. Having traded as low as £97 and as high as £135, it is now priced at £103, a yield to maturity of 5.23 per cent. Mortgage lender LendInvest has a bond maturing in 2032 with an 8 per cent coupon, priced at £101, for a yield to maturity of 7.8 per cent.
Care home operator Belong issued a bond in June this year maturing in 2033 with a 7.5 per cent coupon, and its price has risen above £106. The Charities Aid Foundation's ten-year bond, issued in 2021 with a 3.5 per cent coupon, has fallen to £87, giving a yield to maturity of almost 6.5 per cent; the foundation suffered a data breach over the summer, though the article notes the chance of default is negligible. Alex Watts of Interactive Investor said a bond allocation "can add a degree of stability to a portfolio, as well as a potentially consistent stream of income."
Funds and how to buy gilts
Investors who prefer funds over individual bonds can choose gilt index trackers such as the Fidelity UK Gilt Index Fund, the Vanguard UK Gilt Index Fund and iShares Core UK Gilts, or actively managed funds such as the HSBC Gilt & Fixed Interest fund and the Royal London Short Duration Gilts Fund. Corporate bond funds include the Royal London Corporate Bond Fund, Schroder Sterling Corporate Bond Fund and Quilter Investors Corporate Bond Fund, while the PIMCO GIS Global Investment Grade Credit Fund offers global exposure.
Gilts are named starting with "Treasury," followed by the interest rate, maturity date and price. Deals can be as small as a penny or run into thousands of pounds, and dealing works much like buying shares. Platforms display a "running yield" based on daily prices, but investors wanting the yield to maturity, how much a bond will return over its full life, may need to check online or ask their broker directly.
