Is now a good time to buy government bonds?

January was a big month for government bonds (gilts).

Trading among HL clients was 75% higher than this time last year for a couple of reasons.

Firstly, global bond yields spiked half-way through the month, before settling back to around where they started. Stickier inflation, worries around global government debt and the impact of Trump’s potential tariffs all shook bond prices, sending yields soaring.

Secondly, a popular gilt matured with a low coupon, sparking investors to reinvest any tax-free gains.

Investors buying gilts directly, rather than through a fund, don’t have to pay capital gains tax on any increases in their capital value between buying and selling, or maturity.

How are gilts taxed?

Coupons (interest payments) paid by gilts are taxed as income, so gilts with a low coupon means most of their returns come from a capital gain, which isn’t taxed.

For some investors, particularly those paying higher rate tax, low coupon bonds are very appealing.

This is particularly true for those who might have used up all of their allowances in tax-efficient investment wrappers like Stocks & Shares ISAs or Self Invested Personal Pensions (SIPP).

Investors should know there are securities available called gilt strips where no interest payments are made but all capital returns are taxed as income.

This article isn’t personal advice. Remember, investments and any income from them can rise and fall in value, so you could get back less than you invest. Yields are variable and not a reliable indicator of future income. Tax rules can change and benefits depend on personal circumstances. Past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.

Do gilts offer an attractive return?

The exact answer will depend on the individual. However, at the time of writing, many gilts are offering annualised returns between now and maturity in the region of 4-4.5%. This is called the yield and is made up of a combination of income and capital gains (or losses).

If an investor buys a gilt and holds it to maturity, the returns are effectively fixed at the point you buy.

The coupon payment is fixed and usually paid every six months, the maturity date is fixed, and the investor will receive the maturity payment at that time. So, the investor knows how much income they will receive and how much capital gain they will make between the date of purchase and the maturity date.

Investors find this fixed nature very appealing. And remember that some gilts don’t mature for a long time into the future, so investors could be locking in these returns for 10 years or more.

What are the risks of gilts?

It’s important to remember that the price of the gilt will change after you buy it. Meaning the value of any gilts held will change.

This is why it’s important to hold the gilt until maturity, because if you have to sell before maturity, you could be selling at a loss if the price has gone down.

The other risk is the potential for the UK government to default on its bond payments. Now, this has never happened before, but it’s technically still possible.

If the government were to default, investors would get back less than expected. The amount they lose would be decided at the time of the default.

Want to invest in gilts?

Here are some gilts available, their coupons, maturity dates and prices at the time of writing.

The first four columns in the table below list details of the gilts, and the last two columns highlight the percentage of returns if held to the maturity date**.

*Gilt prices shown are the ‘clean’ prices, exclude accrued interest and are shown per £100 of nominal bonds.

**These are estimated returns based on the prices quoted in the table above. They do not allow for any potential transaction fees and should be considered as illustrative only.

To explore more gilts like these, explore the gilt section of our website. There’s lots of information to help you make the best choice for your circumstances.