Government bonds, known as gilts, are paying more than they’ve seen for years.
The benchmark 10-year gilt yield, which reflects the return investors currently demand for holding UK government debt, rose above 5.4% in early October, its highest since 2008.
Why it matters now
Gilt yields have climbed as the Iran war has driven oil prices sharply higher, fuelling inflation worries and leading markets to expect interest rates to stay higher for longer. Concerns about the scale of government borrowing have added to the pressure.
Issued in March 2021 when Bank Rate was 0.1%, the 0.375% Treasury Gilt 2026 matures on 22 October into a very different market. With yields now well above where they stood then, holders must decide what to do with the proceeds.
The Budget on 28 October could move yields too, if investors reassess government borrowing, spending or tax plans.
What gilts can offer
With a conventional gilt, you know the interest payments and the amount repaid at maturity in advance. Interest is taxed as income, but gains on gilts are free of Capital Gains Tax, according to GOV.UK, so low-interest gilts bought for less than they repay can suit higher-rate taxpayers. The benefit depends on your tax position, though, and tax rules can change.
What to weigh up
Gilt prices move the opposite way to yields, and longer-dated gilts swing more than shorter ones. So if you need to sell before maturity and yields have risen, you could take a loss. Holding to maturity removes that need, although you may miss out if yields are higher by then. Inflation can also erode a fixed return, and nobody can say whether today’s yields have peaked.
Our view
We wouldn’t treat gilts as a call on where yields go next. A more useful question than whether 5.4% becomes 5.5% or 4.8% is whether today’s return is enough for the job that part of your portfolio has to do. Gilts can suit money you need for known spending over the next few years, because you can pick one that matures when you need the cash.
We see them as a steadier counterweight to shares in a diversified portfolio, and today’s yields make that role more rewarding. Some of the same pressures lifting bond yields have also fed into fixed mortgage rates, so we see both sides with clients.
Gilts and bond funds aren’t the same thing: a gilt has a set maturity date and repayment value, while most bond funds don’t. For some investors either may deserve a bigger place, but for others the mix they hold already does the job, and the best move may be no move. A sensible first step is to compare what your cash earns after tax with what shorter-dated gilts offer, weighing access, dealing costs and whether you might need the money soon.
Talk to us
If you’re holding cash or have a gilt due to mature, we’d be happy to talk through where bonds might fit alongside the rest of your plan. Call 020 8366 4400 or email enquiries@cedarhfs.co.uk.