A beginner’s guide to government bonds (gilts)

What is a gilt?

A gilt is a type of bond representing a loan to the UK government. You hand over some cash, they drip-feed you interest and one day, they hand you the money back.

It's less 'get rich quick' and more 'don't lose sleep'.

Here are the three key terms to understand gilts:

• Principal: The face value of the bond. Usually £100. You get this back when the bond matures.
• Coupon: For a conventional gilt, this is a fixed interest rate (meaning it doesn't change) set when the bond is issued and paid every six months. If the coupon's four percent, that means £2 twice a year on a £100 bond. (Index-linked gilts tweak the coupon and principal in line with inflation; more on that in the next section.)
• Maturity: The length of the loan. Could be five years. Could be fifty. You get your money back at the end, assuming you're still alive or someone's keeping tabs on your portfolio.

For example: the Treasury might issue a 10-year gilt, £100 face value, 4 percent coupon. That means you lend the government £100. They pay you £4 a year for ten years, then return your £100.

They're called 'gilts' because in the past, the paper certificates had golden edges. Because after all, nothing says "trust us, we're the government" like a bit of bling.

Why gilts matter in the UK financial system

Gilts are how the UK government borrows money to fund public spending.

Think schools, hospitals, IT systems that crash the moment you actually need them, and overspent mega-projects that get cancelled before they even reach the halfway line.

As of late 2024, around £2.6 trillion worth of gilts were knocking about. That's most of the government's total debt. It's a huge market, and because gilts are seen as ultra-reliable, they set the tone for interest rates across the country.

When gilt yields (the annual returns) move, mortgage rates and loan costs tend to move too. If yields drop, borrowing gets cheaper. If they spike, you might want to reconsider that second home in Cornwall.

Banks, pension funds, and insurers hoard gilts as a 'safe' asset.

When markets get twitchy, money piles into gilts like pensioners heading for a garden centre café during a thunderstorm. And unlike stocks that slash dividends the moment things get a bit iffy, the UK government has never missed a repayment.

The UK has one of the longest average maturity profiles among major economies at approximately 14 years, which demonstrates investors' willingness to lock up their money for the long haul with the UK Treasury.

That said, 'safe' isn't the same as 'immune to chaos'. Gilts wobble when interest rates, inflation, or market panic shows up uninvited.

Gilts are just one flavour of bond. Check out our beginner’s guide to bonds to learn about the full range.

Types of gilts: conventional vs. index linked

The UK government sells two main types of gilts: conventional and inflation-linked.

Conventional gilts

These are the most straightforward gilts you can buy.

Twice a year they drop some interest into your account. When the maturity date finally rolls around, the government gives you back what you lent them. For example, buy a gilt with a 1.5% coupon and a 20-year term, and you'll receive 75p every six months until your £100 is repaid at the end.

Boring, but in a comforting way, like the shipping forecast or rearranging your spice rack alphabetically.

Index-linked gilts

These, on the other hand, adjust for inflation.

Both the interest payments and the eventual repayment rise (or fall) with the Retail Prices Index - a monthly measure of the average change in prices of goods and services. If inflation shoots up, so do your payouts. If it tanks, so does your income.

These were first launched in 1981, possibly by someone who had just watched their savings get chewed up by 1970s inflation and decided everything in life should come with a safety net.

About a quarter of all gilts are now index-linked, with their total outstanding value at the end of 2024 standing at £619 billion.

Here's a comparison of conventional vs index-linked gilts:

Type of gilt	Key feature	Main drawback
Conventional gilts	Predictable income in pounds	Inflation quietly erodes their real value
Index-linked gilts	Protects your buying power by rising with inflation	Stingy during deflation and a headache to understand

How gilts actually work

We've gone over the basics: principal, coupon, maturity dates, and the two main gilt flavours (bog-standard conventional and inflation-proofed index-linked).

Now, let's go under the hood and see how a gilt actually runs.

How new gilts hit the market

When the government realises it's short on cash (again), it issues gilts.

These new gilts are auctioned off by the Debt Management Office (DMO), mostly snapped up by institutional investors (think banks, pension funds, and insurers). Each gilt arrives with its coupon rate and maturity stamped on it, ready to be traded on the open market.

Back in the day, you literally tore off little coupons to get your interest. These days it's digital, but the term 'coupon' stuck around like glitter after a kids' crafting session.

The Debt Management Office now issues well over £200 billion of gilts each year, with about 10 to 15 percent of them inflation-linked to keep pace with rising prices.

Secondary market: buying, selling, and why gilt prices bounce around

Once gilts hit the secondary market (the London Stock Exchange), you can buy or sell them whenever you like. There's no need to wait around until maturity.

But, their prices aren't fixed at £100. Instead, gilt prices move up and down depending on what's happening in the wider world, which in turn affects their yield.

As a reference point, the yield on the 10-year gilt was around 4.5% as of early August 2025, up significantly from 0.7% at the start of the 2020s.

Three things mainly tug gilt prices around:

• Interest rates. If new bonds come with better rates, older, lower-paying gilts look as appealing as a three-day-old prawn sandwich. Prices fall accordingly
• Inflation expectations. If people panic about inflation, prices for conventional gilts usually take a knock because fixed interest payments seem stingy. Index-linked gilts become all the rage
• Investor mood swings. If markets get spooked, gilts suddenly don't seem so dull; everyone piles in, prices rise, and yields tumble. Conversely, when everyone's feeling bold (or what everyone will perceive in hindsight as recklessly exuberant), gilts become as popular as a wasp at a picnic.

The gilt price-yield seesaw

You might've heard something like, "bond prices and yields move in opposite directions." Here's what that actually means:

• Buy a gilt at exactly £100? Your yield equals the coupon rate. Nice and neat.
• Grab one for less (say £90)? Now you're getting a bargain, so your yield climbs higher.
• Pay more than £100 (let's say £110)? You're effectively overpaying, so your overall return shrinks. That means you get a lower yield.

Because remember, unlike the price, the interest payment is fixed. So, if the price rises the yield falls, and if the price drops the yield goes up.

For example, imagine a Treasury gilt with a 3.25% coupon maturing in ten years:

Price	Yield
£100	3.25% (straightforward, no surprises)
£90	About 4.5% (discount = higher yield)
£110	About 2.1% (premium = lower yield)

You can use online calculators like this one to work out exactly what you'll get when investing. You'll just need to input the bond's price, face value, coupon rate, and years left until maturity.

Why gilt yields are the metronome keeping UK finance in time

Gilt yields set what's known as the risk-free rate: the return on an investment that's about as close to guaranteed as finance ever gets.

You can think of it as the metronome a musician practises with.

It sets the tempo whether you notice it or not. In the same way, gilt yields feed into the interest rates charged on everything from mortgages to business loans, in turn affecting how much people spend and invest and how fast the economy, measured by Gross Domestic Product (GDP), grows.

Gilts hold this status because the UK government has never defaulted (at least, not in the "screw you, we're not paying" Argentinian or Greek sense). That said, there have been a few historical restructurings that some argue came close.

The UK government can tax, borrow, or - if it really has to - print money to make its payments. Companies can't do that.

When gilt yields fall, the tempo of economic activity picks up.

Cheaper borrowing fuels more activity: mortgages ease, companies take out loans, and spending accelerates. When yields rise, the tempo drags. Loans cost more, mortgage quotes jump, and your repayment amounts are enough to make you consider renting out half of your bedroom on Airbnb.

Why do investors buy gilts?

Why might an individual investor or institution choose gilts for their portfolio? They're not going to make anyone rich quickly, but there are sensible (if somewhat boring) reasons why people invest in them.

Safety

Gilts are about the safest pound-denominated investment you can buy, backed by the UK government's promise to repay you. Unless Westminster suddenly transforms into Athens or Buenos Aires overnight, your money's coming back. So gilts appeal to cautious investors who care less about betting on start-ups that promise to mine helium on Mars and more about keeping their savings intact over the long haul.

Steady income

Gilts offer steady, predictable interest payments. If you buy a £10,000 gilt paying 4%, you know exactly what you're getting. That predictability is reassuring, especially for pensioners or anyone else who values reliable income.

Index-linked gilts keep pace with inflation, so your income doesn't quietly shrink when prices go up. However, they do add a layer of complexity that feels a bit like teaching a cat to play the violin.

Diversification

When stocks fall because investors are scared, gilts often rally as money seeks safety (though, as 2022 proved with Liz Truss's infamous mini-budget, even gilts can sometimes wobble).

They're the financial equivalent of ducking into the Queen Vic for a quiet pint when the Slaters start kicking off in Albert Square.

Tax breaks

Any capital gains on gilts are completely free from capital gains tax. That is, if you buy a gilt cheaply and sell it later at a profit, HMRC lets you keep the lot.

However, the coupon payments aren't tax-free. You'll pay income tax on interest if outside an ISA or pension.

The capital gains exemption only really helps if you have a supercomputer that predicts interest rates better than the market, or you stumble into some dumb luck. Most people buy gilts for the income, not as a tax-free get-rich-quick scheme.

Risks and downsides of gilts

Gilts might be rock-solid when it comes to default risk, but that doesn't mean they can't lose you money. They're sneaky like that.

Interest rate risk

This is the big one. Gilts hate rising interest rates because newer bonds paying higher coupons make older gilts look as appealing as building a snowman without any gloves on.

If rates spike after you've bought a gilt, the price of your bond will tumble. The longer until the gilt matures, the more dramatic these price swings can be.

If you own a 30-year gilt at low rates, your portfolio will twitch every time the Bank of England even clears its throat. By contrast, shorter-term gilts barely flinch.

The good news is that if you hold the gilt until maturity, these price wobbles are no skin off your nose: you collect the coupons and get your money back at the end, exactly as advertised. They only matter if you were banking on flogging them off early.

Inflation risk

Inflation is the gilt investor's nemesis. Your interest payments might stay fixed, but rising prices chip away at their buying power. If inflation leaps to 5%, your 'slow and steady' 2% gilt suddenly looks more like a jelly bridge over a crocodile pit.

Opportunity cost

Gilts pay less than riskier investments. Over long periods, you might regret loading up on them, watching enviously as riskier assets deliver bigger returns.

It's like staying at home watching TV all weekend: you're a lot safer than someone out living it up on the town, but you're probably also halfway through a documentary about carpet manufacturing and wondering where your life went.

Occasional volatility

When stocks fall because investors are scared, gilts often rally as money seeks safety. However, as we mentioned earlier, that pattern broke spectacularly in late 2022 during Liz Truss's mini-Budget fiasco.

Markets panicked over the government's unfunded tax cuts, gilt prices collapsed, and yields went to the moon. Pension funds using leveraged gilt strategies were forced into a fire sale, and the Bank of England had to step in to stop the spiral.

It was a reminder that even gilts, usually the market's safe space, can sometimes get dragged into the chaos.

How to buy gilts: step-by-step guide with Hargreaves Lansdown

• Log into or create a Hargreaves Lansdown account
• If you want to be tax-efficient, consider investing either in an ISA or a SIPP
• Click 'Search' and 'view all results'
• Filter by 'shares, bonds and other stocks' and type in the name of the bond you're interested in

• Choose your gilt

If you want a UK government bond, type in "gilt" and you'll see a list like "Treasury 0.25% 31/07/2031". This means it's issued by the UK government ("Treasury"), pays a 0.25% interest annually (the coupon), and repays £100 on 31 July 2031.

• Check the details

Once you click on a gilt, you'll see a price chart; don't panic if it's dipped a bit, because if you hold the bond until its maturity date, you'll get back the full face value (so you won't lose unless you sell early). You'll also see a running yield (also known as the current yield), which tells you roughly how much income you'll earn each year based on the current price, handy for comparing different bonds.

However, the running yield can be misleading because it only looks at the annual coupon payments.

Yield ignores any capital gain or loss you'll make when the bond matures. For gilts trading below £100, like Treasury 0.25% 31/07/2031 in the screenshot, the real return is much higher than the running yield suggests because you'll also pocket the difference between the purchase price and the £100 repayment at maturity.

To get the full picture, you need the 'yield to maturity', which online calculators can work out easily. In the example in the screenshot below, the running yield is given as 0.315%, but the yield to maturity is much higher at around 4%.

• Place the order

If you're happy, click 'Deal' and HL will take you to a dealing page. If the market's open, you can buy instantly by entering how much you want to invest. If it's closed, you'll have to place a 'fill or kill' order: this tells the broker the maximum price you're willing to pay when the market opens. If that price isn't available, the order won't go through.

A note about fees: Watch out for the £11.95 dealing fee, which can eat into your returns, especially if you're buying a small amount. It probably only makes sense if you're investing at least a few thousand pounds.

Examples are not investment recommendations. All investments have risks.

Bottom line

Gilts are the metronome of the UK's financial system, influencing interest rates on everything from mortgages to Wonga payday loans and venture capital financing, thereby setting the pace of borrowing, investment, and spending.

They're ultra-safe loans to the government, offering steady (if modest) income, with some protection from inflation if you go the index-linked route.

But 'safe' is not synonymous with predictable: gilt yields jump with interest rate changes, inflation fears, or political meltdowns; just ask Liz Truss, who found that out the hard way during her short tenure (but don't mention the lettuce).

If stocks are a pub crawl, gilts are a quiet night in with a mug of tea and a repayment schedule.

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