UK Government Bonds: Are Gilts Worth Considering Now?

Nick Investing reviews, savings, events 0 Comments

UK government bonds – better known as gilts – have been attracting renewed attention from investors.

That is hardly surprising. After years when interest rates and bond yields were unusually low, gilt yields have risen substantially. In September 2026, the yield on 10-year UK government bonds recently climbed above 5.3%, its highest level since 2007. Even more strikingly, yields on 20- and 30-year gilts have reached their highest levels since 1998.

For investors looking for a relatively low-risk home for some of their money, this may look attractive.

But there is more to gilts than simply seeing a headline yield of 5% or more. Bond prices can fall as well as rise, and the return you actually receive depends on which gilt you buy, the price you pay and how long you hold it.

So, are gilts worth considering now – and what are the best ways for private investors to buy them?

What exactly is a gilt?

A gilt is essentially a loan to the UK Government.

When you buy a gilt, you are lending money to the government. In return, the government normally pays you interest (known as the coupon) twice a year and repays the face value of the gilt when it matures.

For example, suppose you buy a gilt with a nominal value of £1,000 and a 4% coupon.

You would normally receive £40 a year in interest, paid in two instalments of £20.

At maturity, assuming the gilt is held to redemption, you receive the £1,000 face value back.

Gilts are issued by HM Treasury and the UK Debt Management Office (DMO) manages the gilt issuance programme.

There are also index-linked gilts, where both the interest payments and redemption value are linked to inflation. These work somewhat differently from conventional gilts and can potentially provide useful protection against inflation.

Why have gilt yields risen so much?

Bond yields move around for several reasons, but interest-rate and inflation expectations are particularly important.

The recent rise has been driven by a combination of factors, including concerns about inflation, higher oil prices, expectations about future Bank of England interest rates and worries about government borrowing.

The latest move has been particularly pronounced at the long end of the market. On 8 September, for example, the UK Government sold 30-year gilts at a yield of 5.82%, the highest borrowing cost for a comparable issue since 1998.

This matters to investors because higher gilt yields generally mean lower gilt prices.

That may sound counter-intuitive. After all, wouldn’t a higher yield be good news?

It is – if you are buying the bond now.

But existing bonds have to adjust in price to compete with newly issued bonds offering higher yields.

Coupon versus yield – an important distinction

One of the easiest mistakes to make with gilts is to confuse the coupon with the yield.

Suppose a gilt has a 3% coupon but can currently be bought for £90 for every £100 of face value.

You still receive the coupon based on the £100 face value. But because you only paid £90, your overall return if you hold the gilt to maturity is higher than 3%.

This is where the yield to maturity comes in.

The yield to maturity takes account of:

• the purchase price
• the coupon payments
• the time remaining until maturity
• the £100 redemption value.

The DMO gives a useful example of this. A gilt bought for £90 and held to maturity can produce a yield significantly above its coupon because the investor also receives a £10 capital uplift when the government redeems it at £100.

This is why investors should generally compare gilts using their yield to maturity, rather than simply looking at the coupon.

The big attraction: relatively low credit risk

One of the main reasons people buy gilts is security.

The borrower is the UK Government, rather than a company or individual. Provided the gilt is held until maturity and the UK Government meets its obligations, the investor receives the promised interest and redemption payment.

That makes gilts considerably less risky from a credit perspective than shares or corporate bonds.

However, “low risk” does not mean “no risk”.

There are two particularly important risks to understand.

Risk 1: Gilt prices can fall

If you buy an individual gilt and hold it until maturity, short-term movements in its market price may not matter much.

But if you need to sell before maturity, they certainly do.

Suppose you buy a 20-year gilt paying a relatively attractive yield today. If interest rates subsequently rise further, newly issued bonds may offer higher yields.

Your gilt therefore becomes less attractive and its market price can fall.

The longer the maturity, the more sensitive a conventional gilt tends to be to changes in interest rates. A 20- or 30-year gilt can therefore experience quite substantial price movements.

The DMO itself warns that the market value of gilts can go down as well as up, potentially resulting in a loss if you sell before redemption.

This is one reason why investors approaching or in retirement should be cautious about automatically choosing the longest-dated gilt simply because it offers the highest yield.

Risk 2: Inflation

A gilt paying 5% might sound very attractive.

But if inflation is running at 4%, your real return is much less impressive.

And if inflation were to remain high for several years, a fixed-interest gilt could lose purchasing power.

Index-linked gilts are designed to address this particular problem because their payments and redemption value are linked to an inflation index.

They have their own complexities, though, and aren’t necessarily suitable for everyone.

So why consider gilts now?

There are several reasons why gilts may be worth a look.

1. Yields are much more attractive than they used to be

For much of the 2010s and early 2020s, investors had to accept extremely low yields on government bonds.

That situation has changed.

With longer-term gilt yields now around 5% or more, bonds can potentially make a meaningful contribution to portfolio income.

2. You can lock in a return for a known period

With an individual gilt, you know the maturity date and the payments that are due under its terms.

If you choose a gilt maturing in, say, five years and hold it to redemption, you don’t have to worry about what the market price is doing in the meantime.

That can be particularly useful for someone who knows they will need a particular amount of money at a particular time.

3. Gilts can diversify a share portfolio

Shares and government bonds behave differently.

They can both fall in value, particularly during periods of financial stress, but they are driven by different factors.

Holding some gilts alongside equities can therefore reduce the overall volatility of an investment portfolio.

4. There is a valuable tax advantage

One particularly attractive feature for UK investors is that capital gains on UK government gilts are exempt from Capital Gains Tax. HMRC confirms that gains on qualifying UK government gilts are exempt from CGT.

This can make certain gilts particularly interesting to investors who hold investments outside an ISA or pension.

For example, if you buy a gilt below its £100 redemption value and hold it until maturity, the difference between what you paid and the £100 you receive at redemption is normally a capital gain. With qualifying gilts, that gain is not subject to CGT.

There is an important catch, however: the interest you receive is still taxable income when gilts are held outside a tax wrapper.

For that reason, gilts can also be worth considering inside an ISA or pension/SIPP, where the investment income receives the relevant tax advantages of the wrapper.

How can you invest in gilts?

There are several routes.

Option 1: Buy individual gilts through an investment platform

For many private investors, this is probably the most straightforward approach.

Platforms such as Hargreaves Lansdown, AJ Bell, Interactive Investor and others allow investors to buy individual gilts through their dealing services.

You can choose a particular gilt based on:

• its maturity date
• its current price
• its coupon
• its yield to maturity.

You can then hold it until maturity or sell it beforehand.

This approach gives you considerable control over exactly what you are investing in.

It can be especially useful if your objective is something like:

“I want to invest £20,000 and have it mature in approximately five years.”

You can select gilts with a suitable maturity date rather than leaving the timing to a bond fund manager.

Option 2: Buy gilts through the DMO’s retail service

The UK Debt Management Office also operates a Purchase and Sale Service for UK retail investors.

This provides access to gilts in the secondary market and is administered by Computershare.

However, it is an execution-only service and doesn’t offer the convenience or functionality of a modern investment platform.

For many investors, a mainstream investment platform will therefore be easier.

Option 3: Invest through a gilt fund or ETF

Instead of buying individual gilts, you can invest in a gilt fund or exchange-traded fund (ETF).

This has some important advantages.

A fund can hold dozens or even hundreds of government bonds, giving you diversification without having to select individual issues.

You also don’t have to worry about choosing a particular maturity date.

However, there is an important difference.

A gilt fund does not mature.

If you buy an individual gilt and hold it to maturity, you know that the government is scheduled to repay its face value at a specified date.

A bond fund continually buys and sells bonds as part of its management. Its value can therefore continue to rise and fall indefinitely.

This means a gilt fund can be more volatile than someone might expect from the phrase “government bonds”.

Funds and ETFs can nevertheless be an excellent choice for investors who want broad exposure to the UK government bond market rather than a specific maturity.

Which is better – individual gilts or a gilt fund?

It depends on what you are trying to achieve.

For someone in or approaching retirement, I think the individual gilt approach is particularly interesting when you have a known future spending requirement.

For example, if you know that £10,000 will be needed in four years’ time, buying a suitable gilt maturing around then can potentially be a useful way of matching an investment with that future liability.

What about ISAs and SIPPs?

Gilts can be held within tax-efficient wrappers such as Stocks and Shares ISAs and SIPPs, subject to the rules of the particular platform.

This can be attractive because the interest and investment gains then benefit from the tax advantages of the wrapper.

However, remember that gilts already have the unusual advantage of being exempt from CGT when held outside a wrapper.

Consequently, the tax calculation isn’t always as straightforward as it is with shares or funds.

For someone with substantial taxable investment income, keeping interest-generating investments inside an ISA or pension can still be valuable.

And for investors who have already used their ISA allowance, the CGT exemption on qualifying gilts can make them worth considering in a taxable investment account.

What about short-dated gilts?

Don’t assume that longer-dated gilts are necessarily better.

If your main objective is protecting your capital over a relatively short period, a short-dated gilt may be more appropriate.

Shorter-term bonds are generally less sensitive to changes in interest rates than long-dated ones.

There is also a growing UK Treasury-bill market. Treasury bills are very short-term government securities and are intended primarily as liquidity and cash-management instruments rather than long-term investments. The government is also expanding the range of Treasury-bill maturities available.

For an investor who simply wants somewhere relatively low-risk to park money for a year or two, these shorter-duration instruments may be worth investigating alongside conventional gilts.

Should you buy now?

This is the difficult question.

The fact that gilt yields have risen sharply doesn’t mean they cannot rise further.

Indeed, recent events demonstrate how quickly bond markets can move. On 10 September, for example, the 10-year gilt yield reached 5.378%, while 30-year yields approached 5.95%.

If inflation remains stubbornly high or interest rates rise further, gilt prices could fall and yields could rise again.

On the other hand, if inflation subsides and interest rates eventually fall, today’s relatively high yields could prove attractive. Bond prices would also tend to rise, particularly for longer-dated gilts.

In other words, nobody knows whether today’s gilt yields represent the top of the market or merely another stage in a longer-term rise.

This is why I would be wary of trying to call the exact bottom or top of the gilt market.

Instead, investors could consider spreading purchases over time, particularly if investing a substantial lump sum.

A simple gilt strategy

One approach I particularly like for cautious investors is a gilt ladder.

Rather than putting £50,000 into one long-dated gilt, for example, you might divide the money between several gilts maturing at different dates.

You could have gilts maturing in approximately:

• 2027
• 2028
• 2029
• 2030
• 2031

As each gilt matures, you receive the capital back and can decide what to do with it.

You could spend the money, reinvest it in another gilt, or use it for another investment.

This reduces the risk of having to make one big bet on where interest rates will be five, ten or twenty years from now.

Don’t confuse gilts with savings accounts

There is one final point worth stressing.

A gilt is not the same thing as a fixed-rate savings account.

With a savings account, you normally know exactly how much interest you will receive and how much money you will get back at the end of the fixed term.

With a gilt, you can lose money if you sell it before maturity.

For example, if you buy a long-dated gilt and interest rates subsequently rise sharply, its market value could fall considerably.

If you are certain you will need the money before maturity, this matters.

If you can hold the gilt until redemption, the interim price fluctuations are much less important.

My verdict

For many UK investors, particularly those approaching or in retirement, gilts are worth another look now that yields are substantially higher.

They can offer:

• relatively low credit risk
• a potentially attractive income
• known maturity dates
• portfolio diversification
• protection from CGT on qualifying gilts
• the ability to match investments with future spending needs.

But they are not risk-free.

The biggest danger is buying a long-dated gilt without appreciating how much its price can fall if interest rates rise further. And a 5% yield isn’t necessarily a 5% real return if inflation remains high.

For investors who want simplicity and diversification, a gilt fund or ETF may be the better choice.

For those who want to know exactly when their money will be returned, buying individual gilts and holding them to maturity can be particularly appealing.

With yields now at levels rarely seen in recent decades, I think gilts deserve a place on the shortlist of options for cautious investors. But, as ever, the right choice depends on your timescale, tax position, need for income and willingness to accept fluctuations in value.

And perhaps the most important lesson is this: Don’t buy a gilt simply because the headline yield looks attractive. Look at the yield to maturity, the maturity date and the risks involved before investing.

NOTE: This article is for information and education only and does not constitute personal financial advice. Investments can fall as well as rise and you may get back less than you invest. If you are in any doubt how best to proceed, I strongly recommend speaking to a professional financial adviser or financial planner.