Gilts – The Complete Beginner’s Guide

Gilts – What are they? How can you invest using them, and where? On this page, we explore the little known area of investing that is gilts. So read on for the ultimate guide on how to trade and invest in this asset class:

With interest rates at record lows, the average cash savings or cash ISA account in the UK currently offers less than 0.5%, and inflation rising towards close to 3% recently, savers are currently being obliged to assess their options. Even those least inclined towards risk-based investments understand that seeing the real value of cash savings significantly eroded by inflation year on year is not sustainable and are looking towards low-risk investments. Gilts, the term used to refer to UK-government issued bonds, are arguably the lowest risk form of investment asset class.

While they don’t provide strong returns, they are at least superior to the current interest rates given on cash savings. As such they are a popular choice for those not naturally inclined towards risk-based investment in the current poor cash interest rates/inflation ratio climate. Bonds more generally, and Gilts as the lowest risk bonds, also usually form part of a diversified investment portfolio alongside equities.

We’ll explain here exactly what gilts are, the different gilt options available to retail investors, their pluses and minuses as an investment asset class and how retail investors can go about buying them. But before we dive into gilts, we quickly cover off an alternative financial instrument growing in popularity.

Bond CFDs: An Alternative To Gilts

For savvy investors, one appealing alternative to traditional gilts is CFD bonds. Where holdings in standard government bonds typically result in only losses should the bond price fall, leveraged CFDs offer a straightforward means to speculate on both price rises and downswings. As a result, bond CFDs are often favoured by UK traders looking to take a mix of leveraged positions on government-issued bonds. Admiral Markets and CMC Markets are just some of the leading FCA-regulated brokers now offering competitive CFD bonds.

Another option is ETFs tracking UK gilts. Typically a less-involved investment approach, exchange traded funds are available at several top UK brokers, including IG and Freetrade. Fees at both are low and a straightforward trading platform is offered to track performance and make buy and sell decisions.

Gilts and How They Work

Gilts are a kind of bond and a bond is debt issued by a government, company or organisation against interest, referred to as the bond’s ‘coupon’. Bonds work in a similar way to a bank loan. When a loan is taken from a bank there is an agreed date by which point it must be repaid. Interest is applied to the outstanding balance in the meanwhile. Bond debt is not paid back in installments like a loan. Rather, there will be an agreed repayment date which can be anything from 2-3 years to 20 or longer in rarer cases. At the agreed date, the initial purchase price of the bond is returned in full. Over the course of the bond’s lifetime, interest payments are made to the holder. This is usually quarterly or bi-annually and the interest rate paid is referred to as the bond’s ‘coupon’.

Bonds differ from equities (company shares) as an investment class in that equity is an ownership stake in the company. As a shareholder, the investment is made against the future success of the company. If the company does well the share price rises and the company might also pay out part of its profits to shareholders in the form of dividends. The size of dividends vary and while numerous factors influence them they are closely linked to how profitable the company has been over a given period.

Bonds are different in the sense that the issuer is obliged to honour the bond and its coupon regardless of its general financial health in the same way as a bank will expect you to make your mortgage repayment and is not particularly interested in whether you have had an expensive month or not. Of course, there is still a degree of risk that the bond issuer simply does not have the cash flow to honour its debt commitments. However, bond holders, as creditors, take priority and not meeting bond obligations has a severe effect on the issuer’s credit rating which they will not want to compromise other than as a last resort.

A gilt is UK Government-issued bond. Almost every government in the world issues bonds, which are popular low-risk investments as they are backed by a national government. While they are not without any risk, there have been a handful of historical cases of governments defaulting on their debt, that risk is considered low within the context of risk-based investments. It happens very rarely.

Also, like companies, states have a credit rating assigned by international ratings agencies such as Moody’s and S&P. They assess a country’s current and forecast ability to service its debt and assign a rating. The better the rating, the lower the perceived default risk, and the lower the interest rate the country needs to offer on its bonds to attract investors.

Those who follow current affairs may be familiar with recent statements issued by top ratings agency Moody’s that the UK’s credit rating may come under pressure if Brexit talks continue to stall. The uncertainty this brings over the UK’s economic future is considered a threat to overall political and economic stability and has an influence on the country’s credit rating. Nonetheless, the UK still has one of the strongest credit ratings in the world and gilts are considered as one of the safest government bonds to invest in.

Bonds are usually invested in as part of a wider investment portfolio. Equities are usually considered, within a range, the riskier element, there to provide growth, and bonds as a stabiliser against potential stock market volatility or downturns and to provide income. It’s possible to invest only in equities or bonds but historical data demonstrates that over medium to longer term timeframes a diversified mix of different equities and bonds of varying return and risk categories produces the best investment results. Gilts would be at the lowest end of the risk spectrum even for bonds and form the ‘safe haven’ section of an investment portfolio.

Kinds of Gilts

There is not only one kind of gilt but a range of options available to investors who wish to invest in them. Bonds generally, and also gilts, are defined by two main criteria:

  • Maturity date
  • Coupon

A particular gilt will be referred to by its maturity date (when the original purchase price should be repaid to the holder) and its coupon. For example, 5% Treasury Gilt 2022 will be a gilt that pays an annual coupon of 5% interest and reaches maturity in 2022.

Maturity: Gilts are broken down in short, medium and long maturity date groupings. Short gilts would be expected to have a maturity date of between 1 and 7 years, medium between 7 and 15 and long between 15 and 25 years.

There are occasional exceptions such as gilts that have a maturity date within a range of years. For example, the government can decide when to redeem the guilt at whatever point it chooses between 5 and 10 years. ‘Perpetual gilts’ also exist and have no fixed maturity date. The government can choose to redeem or not redeem these gilts into perpetuity. There are a small number of perpetual gilts in existence that date as far back as the 19th Century! Because the coupon on these gilts is low, the government has little incentive to pay back the redemption cost.

However, these alternative gilts are rare and retail investors would be expected to stick to standard gilts with a fixed maturity date.

Coupon: Most gilts currently in issue are conventional gilts that have a fixed coupon and maturity date. The holder will receive a pre-agreed interest rate, the coupon, at set intervals until the gilt matures. Most retail investors will opt for this kind of gilt.

There are, however, also index-linked gilts that have a variable coupon. This kind of gilt’s coupon is tied to the Retail Prices Index (RPI) which provides the current UK inflation rate reading. The gilt will have a base coupon eg. 2.5%, but the payments received by the holder are tied to inflation and so move up and down with the inflation rate. This is an advantage during periods of higher inflation but a disadvantage when the inflation rate is low. Inflation-linked options are best for gilts with the longest maturity dates as they are most sensitive to changes in inflation rates.

Initial Auction and Aftermarket

Another important aspect to gilts is that it makes a difference to the coupon and redemption price if the holder buys them at the point they are issued or in the aftermarket, a kind of second-hand gilt market, where gilts are traded.

Gilts are issued by the UK government’s Debt Management Office (DMO), which is part of the civil service administration when the government decides that it wishes to raise money by issuing debt. If a gilt is bought at this point then the maturity date and coupon are guaranteed at their issued values. The holder of a 5% Treasury Gilt 2022, having bought the gilt at its initial auction, is guaranteed to receive a coupon of 5% of the purchase price per annum., with the initial price paid redeemed in 2022.

However, gilts bought on the aftermarket see their prices and coupons increase and decrease based upon supply and demand in the same way as equities and investment funds. If the market decides a particular gilt is more attractive in the context of the current wider market conditions, another investor will be prepared to pay more for it than its actual face value. The opposite can also be the case if the market considers conditions make the gilt a less attractive investment proposition.

Supply and demand on the gilt aftermarket might mean a gilt with an original face value of £100 and annual coupon of 5% is considered 10% more attractive when first issued due to changing market conditions. The original investor is able to sell the £100 gilt early, for example in 2019, for £110. The original holder has made a 10% profit on the redemption price but will no longer receive the coupon, which will now be paid to the new holder. Because the new holder has paid 10% more, the coupon the receive will be 10% less of the purchase price, so 4.5%. If the new holder keeps the bond until its maturity, they will also only receive the £100 face value back, losing £10.

Gilt Aftermarket Price Influences

If financial markets are volatile the new holder might consider the safety of the gilt as an investment as compensation for their loss on its face value. However, the main influence on the price of gilts in the aftermarket is interest rates. When interest rates rise gilt prices on the aftermarket generally fall as the coupon becomes less attractive compared to interest rates and alternatives such as cash holdings. The inverse is the case when interest rates fall, which is why gilts and bonds as a wider asset class have been particularly popular in recent years.

The government will also offer lower coupons during initial gilt auctions when interest rates are low and higher coupons when the interest rate is higher.

Gilt Strengths

  • Very low risk
  • Guaranteed return
  • Fixed maturity/redemption date
  • Liquidity provided by aftermarket
  • Effective portfolio hedge/balance qualities
  • Exempt of capital gains tax

Gilt Weaknesses

  • Slim chance of UK government default. It’s never happened but theoretically possible.
  • Par value not guaranteed if sold early. If a gilt holder wants to sell before maturity aftermarket conditions may mean a lower sale price than the gilt’s face value.
  • Exposed to inflation. Non-inflation index-linked gilts, especially those with longer maturity dates, could see the real value of their coupon suffer during periods of higher inflation.
  • Coupon income liable to income tax (though gilts with a maturity date of at least 5 years can avoid this by being held in an ISA or SIPP)
  • Returns are modest

How to Buy Gilts

Until the relatively recent past buying gilts was difficult for retail investors. However, that is no longer the case and gilts can now be easily bought either directly from the government’s Debt Management Office at the initial auction or via a stockbroker.

Gilts can also be invested in indirectly via ETFs and investment funds. The advantage of buying gilts via a fund is that the fund will hold a range of gilts with different maturity dates and coupons, reducing volatility that longer term gilts can be exposed to if inflation rises. ETFs are generally a cheaper option than investment funds as management fees are minimal.

Buying gilts directly without a stockbroking account means registering at Computershare, the government’s outsourced gilt agent. The Debt Management Office’s website ( publishes information on upcoming gilt auctions.

Before being able to buy UK government debt, would-be-investors must register with the Approved Group of Investors. This is a simple process that verifies identity and the source of funds. If you already have a stockbroking account you will have already been through a similar process with your stockbroker and this won’t need to be repeated. One advantage to buying gilts directly from the government is that there is no transaction fee applied though this will only be a significant percentage of the overall investment if you are buying a low value of gilts via a stockbroker.