UK Gilts and Government Bonds Explained

What Are Gilts?

Gilts are bonds issued by the UK government to raise money. The name comes from the original certificates, which had gilded edges. When you buy a gilt, you are effectively lending money to the UK government in exchange for regular interest payments — called the coupon — and the return of your original investment — the principal — on a specified maturity date. Gilts are considered among the safest investments available to UK investors because the UK government has never defaulted on its debt.

How Gilts Work

Each gilt has three key characteristics. The coupon rate is the fixed annual interest payment expressed as a percentage of the face value. A gilt with a face value of £100 and a 3 per cent coupon pays £3 per year in interest, typically in two semi-annual instalments. The maturity date is when the government repays the face value. Gilts range from very short-dated — maturing in less than a year — to ultra-long — 30 or even 50-year gilts are available. The price fluctuates in the secondary market based on prevailing interest rates and inflation expectations.

Gilt Yield vs Coupon Rate

This distinction confuses many beginners. The coupon rate is fixed at issuance. But if you buy a gilt on the secondary market at a price above or below face value, your actual return — the yield — will differ from the coupon. If you pay £110 for a gilt with a £100 face value and a 3 per cent coupon, your yield will be lower than 3 per cent because you paid a premium. Yield moves inversely to price: when gilt prices rise, yields fall, and vice versa.

Index-Linked Gilts

As well as conventional gilts with fixed coupon payments, the UK government also issues index-linked gilts. These pay interest and principal that are linked to the Retail Prices Index — a measure of UK inflation. Index-linked gilts protect investors against inflation eroding the real value of their returns. They are particularly valued by pension funds and investors seeking inflation protection, though they typically offer lower initial yields than conventional gilts.

Why Gilts Matter for Investors

Gilts serve several important functions in a diversified investment portfolio. They provide stability — gilt prices tend to move differently from equity prices, providing a cushion during stock market downturns. They generate income through predictable coupon payments. They preserve capital for investors who cannot afford significant short-term losses. And they provide a safe harbour for capital that might be needed in the medium term.

The Inverse Relationship Between Gilts and Equities

Historically, gilt prices and stock market prices have tended to move in opposite directions during periods of economic stress. When investors fear a recession and sell equities, they often buy gilts as a safe haven, pushing gilt prices up. This negative correlation made gilts an excellent portfolio diversifier. However, this relationship broke down notably in 2022 when both equities and bonds fell sharply due to surging inflation, reminding investors that no historical relationship is guaranteed.

How to Invest in Gilts as a UK Retail Investor

Most retail investors access gilts through bond index funds or ETFs rather than buying individual gilts. The Vanguard UK Government Bond Index Fund and iShares UK Gilts All Stocks ETF (IGLT) provide broad exposure to the entire gilt market at low cost. For a specific maturity range, gilt ETFs targeting short-dated gilts — under five years — provide interest rate sensitivity without the volatility of longer-dated bonds. All these instruments are available in Stocks and Shares ISAs on major UK platforms.