What are UK gilts and how do you invest in them?
UK gilts are considered one of the safest government bonds in the world because the British government has never defaulted on bond repayments. Find out how gilts work and how you can add them to your investment portfolio.
What are UK government gilts?
UK gilts are British government bonds issued by HM Treasury, listed on the London Stock Exchange (LSE). They’re also known as ‘gilt-edged securities’ because of their reliability as an investment – the UK government has never defaulted on its coupon and principal payments, so UK gilts make for a secure investment.
All government bonds are debt-based investments, which means those who invest in them are essentially lending money to the government. In return, the government agrees to repay this loan with interest and return all of the invested capital at a specific date in the future, known as the maturity date. The interest is usually paid biannually and is known as the coupon.
UK gilts tend to mature five, ten or 30 years in the future. However, the British government has issued 50- and 55-year gilts in recent years.
How do UK gilts work?
Like all government bonds, UK gilts are issued with a maturity date, a coupon and a price. The maturity date and coupon are specified in the bond name, such as ‘4¼% Treasury Gilt 2055’. In this case, the gilt will mature in 2055 and the coupon pays 4.25% interest per annum, or 2.125% biannually.
How much in monetary figures the coupon pays depends on what the bond originally sells for. For example, if a bond sells for £100 and the coupon is 5% a year, this works out to £5 annually, or £2.50 every six months.
While the Treasury issues gilts at a certain price, once purchased, their value fluctuates due to multiple factors like interest rates, supply and demand, inflation, credit ratings and how close to maturity the bond is.
Of these, the inverse relationship between the interest rate and the bond value arguably has the greatest effect on gilt prices, because this affects the coupon rate. When newer gilts are issued with a higher interest rate, these gilts have a higher coupon rate, which makes the existing gilt less valuable because it pays out less than the newer bond.
Conversely, if interest rates go down, the value of existing bonds goes up as the coupon rate is more attractive to investors.
Why do people invest in UK gilts?
- Portfolio diversification: for most investors, gilts and other government bonds make up only a portion of their portfolio. Gilts offer another avenue for diversification, providing safer investments to balance out riskier ones such as share investments
- Low risk: because the UK has never defaulted on repayments of its bonds and is unlikely to go bankrupt, gilts are seen as a particularly safe investment
- Predictable income: gilts pay coupons twice a year, which gives investors a predictable income stream
How to trade or invest in UK gilts
Investing in UK gilts directly
Typically, when HM Treasury issues new gilts, banks and other large investors tend to buy up the majority of them. This means most individual investors must buy gilts on the open market. Gilts are listed on the LSE, so investors would purchase them in the same way they would stocks.
Investing in UK gilt ETFs
Bond exchange traded funds (ETFs) invest in multiple fixed-income corporate or government securities. This allows investors to spread their risk and, therefore, minimise it.
Gilt ETFs and funds are a common way to invest in UK gilts. Not only do you not need the larger capital required when investing directly in gilts, but bond ETFs are liquid and transparent, making them easy to buy and sell. They also pay regular dividends in the same way gilts pay coupons.
However, keep in mind that while most UK gilts have a maturity date, ETFs last indefinitely, so you won’t need to wait for a time where you’ll get your original investment paid back in full.
With us, you can invest in UK gilt ETFs such as:
- Lyxor Core UK Government Inflation-Linked Bond ETF (GILI). Just over 40% of this ETF tracks 25-year+ maturity gilts, while a quarter tracks 15 to 25-year maturity gilts
- SPDR Barclays 15+ Year Gilt UCITS ETF (GLTL). Just over 80% of this ETF tracks long-term UK gilts, with 42% in 20 to 30 year maturity bonds and 38% in bonds with a maturity over 30 years
- iShares Core UK Gilts UCITS ETF (IGLT). This offers diversified exposure to UK gilts, from ultra-short gilts to those with a maturity date greater than 20 years
You can find these in our share dealing platform.
Trading UK gilt futures
Bond futures are financial derivatives. So, unlike investing in gilts directly or through ETFs and funds, trading on UK gilt futures involves speculating on what the price of gilts is going to be.
This is done on a futures exchange through a broker or, as with us, through spread bets and CFDs based on the futures exchange’s prices. Spread bets and CFDs are complex, leveraged products, which means you can gain greater exposure to an underlying market while putting up a fraction of the full trade value. This can amplify profits but also magnify losses.
When bonds trading, you would buy (go long on) a bond if you thought its price would rise, or sell (go short on) a bond if you thought its price would fall.
Here are two reasons why you might want to trade UK gilt futures:
- Interest rate changes: government bonds and interest rates have an inverse relationship, where rising interest rates decrease the value of existing bonds, and vice versa. You could use this inverse relationship between bonds and interest rates to back your judgement on future changes in long-term interest rates
- Hedging to minimise risk: traders may use gilts to hedge against existing positions. In this case, you wouldn’t trade bond futures for profit or to receive a regular income, but only to minimise your risk
Learn everything you need to know about trading or investing in bonds
Why does the UK government sell gilts?
Governments issue gilts in order to raise funds where money might not otherwise be available. This could be for various projects such as infrastructure upgrades, community schemes and more recently, the response to the Covid-19 pandemic. Sometimes, governments may even raise money through bonds to pay off other debts.
What are the types of gilts issued by the Treasury?
- Conventional gilts: these make up about 75% of the UK’s gilt portfolio. They are standard government liabilities that pay a fixed coupon every six months until the bond matures, at which point the initial investment is repaid in full
- Index-linked gilts: these make up around a quarter of the British gilt portfolio. Unlike conventional gilts, coupon payments and principal repayments are not fixed, but are instead linked to the UK retail prices index (RPI), adjusted for accrued inflation, meaning they aren’t affected by inflation
- Gilt STRIPS: a Separate Trading of Registered and Interest Principal Securities (STRIPS) occurs when a gilt is broken down into separate coupons and the principal payment, and sold in these individual parts, essentially traded as zero-coupon gilts
UK gilts summed up
- UK gilts are debt-based investments issued by HM Treasury that pay coupons twice a year and repay the initial capital on a set date in the future
- Governments sell bonds to fund various projects or repay debt
- People invest in UK gilts to diversify their portfolio, to receive a steady income and because they are seen as particularly safe investments
- You can invest in gilts directly, via gilt-based ETFs or trade them using financial derivatives
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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