Gilts Explained

The Prime Minister, Rishi Sunak is one of the richest people in the UK.

He is certainly not personally in need of handout. But at Continuum we are looking at why you might want to lend him – or at least his government – some money.

Gilts and the government

Lending to the government could actually be a worthwhile investment.

Investors have been lending money to governments since 1694 when King William III borrowed £1,200,000 through the Bank of England. He needed to fund a war with France, and wisely saw that a loan might be more popular than a tax – particularly if it paid interest to lenders.

Governments since have borrowed to fund peacetime projects, budget deficits and the general operating costs of the country as well as wars, and Mr. Sunak’s government is no different.

Governments use bonds to make their borrowing needs attractive to lenders. Like other bonds, these pay interest, known as a coupon, twice a year and repay the initial capital on a set date in the future.

The Bank of England’s debt securities were published as certificates with gilded edges, which gave rise to the term “gilt” or “gilt-edged security”. This has come to be a reference to the primary characteristic of gilts: their security.

The UK government has never defaulted on its coupon and principal payments, so UK gilts make for a secure investment. These bonds are considered one of the safest investment options available.

Advantages of Gilts

Safety and Stability: Gilts are one of the safest investment options due to the UK government’s strong creditworthiness, which is backed by its ability to raise tax and create currency. This makes them suitable for risk-averse investors seeking dependable regular income, while keeping capital safe.

Diversification: Adding Gilts to an investment portfolio can increase diversification while reducing overall risk exposure. 

Liquidity: You can simply buy Gilts and watch the money come in, but they  are also traded actively in the secondary market, ensuring that investors can buy or sell them relatively easily. Putting your money into a long term investment like a gilt does not mean tying it up for 10 or more years, however long it is set to run. You can sell on the gilt at any time.

Disadvantages of Gilts

Lower Returns: While Gilts offer safety, they often provide lower yields compared to riskier assets like stocks. Having all your holdings in gilts can mean a reduced income. Choosing to invest in Gilts might mean missing out on potentially higher returns from other riskier investments during periods of economic growth.

Inflation Risk: Inflation erodes the purchasing power of future interest and principal payments, potentially impacting the real return of Gilts.

Interest Rate Sensitivity: The value of existing Gilts can fluctuate with changes in interest rates. When rates rise, the market value of existing bonds may decrease.

How do you buy Gilts?

There are several ways to buy. You can buy Gilts directly from the UK Debt Management Office (DMO) through the government’s online “Purchase and Sale Service”. This lets you buy Gilts when they are first issued.

Many brokerage firms offer platforms that allow investors to buy and sell Gilts in the secondary market. This provides flexibility, allowing you to buy Gilts from other investors rather than directly from the government. It is also possible to buy Gilts through mutual or exchange-traded funds.

Are gilts right for you?

Gilts can offer stability, regular income, and a level of diversification that can mitigate risk when the economic environment is unsettled. But they can mean reduced returns. Striking the right balance between Gilts and other investment options is key to achieving a well-rounded portfolio that meets your long-term financial goals.

To understand whether Gilts are appropriate for you, and discuss your investment strategy, simply give us a call at Continuum.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

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