Want to Buy UK Government Bonds? Be Careful

Setting
aside
the
moral
issue
of
whether
it
would
spend
the
money
wisely,
it’s
never
been
easier
to
do
so.
Until
recently,
you
had
to

post
a

paper

application
to
the
Debt
Management
Office,
including
a

cheque,
and
you
would
find
out
in
due
course
whether
you
had
been
successful. My
italics
indicate
just
how
exasperating
this
is!

Now
you
can
buy
UK
government
bonds
(or
gilts)
through
certain
UK
online
investment
platforms.
With
some
above-inflation
yields
on
offer
after
years
of
minuscule
yields,
this
once-“boring”
asset
class
is
attracting
a
new
wave
of
buyers.
Handily,
the
UK
government
is
planning
to
issue
more
debt
in
the
next
financial
year
than
the
current
one
to
fund
public
spending,

as
confirmed
in
the
March
6
Budget.

Key
Things
You
Need
to
Know
About
Gilts

Are
gilts
a
“buy-and-forget”
asset
class
like
cash?

Not
exactly.
Here
are
some
things
you
need
to
know
before
buying
your
first.

Check
When
it
Matures!

Government
bonds
generally
have
the
“expiry
date”
in
their
description:
if
you
hold
it
until
maturity,
you
(should)
get
your
money
or
“principal”
back.
This
is
less
of
an
issue
for
bonds
expiring
in
2025,
and
more
so
for
the
bond
expiring
in
2073.
If
you’re
over
50,
this
is
a

long
time
to
wait.
The
longer
the
date,
the
more
sensitive
it
will
be
to
interest
rate
changes.

Sam
Benstead,
fixed
income
specialist
at
interactive
investor
(ii),
says
the
most
popular
direct
bonds
among
ii
customers
are
gilts
maturing
within
the
next
four
years,
“most
likely
because
investors
are
holding
the
bonds
until
maturity
to
pick
up
a
fixed
return
from
the
UK
government.”
Likewise,
AJ
Bell’s
most
popular
gilt
(at
the
beginning
of
March)
was
one
maturing
at
the
end
of
January
2025,
the
company
says.

Check
The
Coupon
AND
The
Yield!

The
“fixed”
part
of
fixed
income
refers
to
the
coupon.
10-year
gilts
offer
a
coupon
of
4.38,
so
for
every
£100
invested
you
get
£4.38
every
year
for
10
years.
The
yield
itself
is
more
fluid
and
depends
on
Bank
of
England
interest
rates
(currently
5.25%),
along
with
inflation
expectations.

Is
it
Trading
at
Par,
Discount
or
Premium?

To
stick
with
this
example,
the
10-year
gilt
is
currently
trading
at
a
premium;
this
means
you
pay
over
the
odds
for
that
£100.
This
means
that,
come
maturity,
you
still
get
the
£100
back,
not
the
extra
you
had
to
pay
initially.
So
you’ve
locked
in
a
capital
loss.
Some
investors
are
happy
to
do
this
to
get
access
to
the
yield
on
offer,
plus
the
perceived
safety
of
lending
to
a
sovereign
government
like
the
UK.

Conversely,
if
you
buy
a
bond
trading
at
a
discount,
there’s
a
“double
whammy”
effect
–
if
you
are
buying
below
par,
say
at
£96
rather
than
£100,
you
are
getting
that
bond
cheaply
BUT
you
get
the
£100
“face
value”
back
at
maturity
–
and
collect
the
coupons
along
the
way.

If you
plan
to
sell
the
bond
before
the
maturity
date,
this
will
affect
both
your
capital
gain
AND
the
yield
you
get.
This
brings
into
play
“yield
to
maturity”,
which
will
be
explained
in
the
next
article
in
this
series.

Sometimes
this
is
a
profitable
move,
other
times
not.
But
you
may
know
in
advance
whether
you
need
the
money,
so
a
cash
account
could
offer
greater
liquidity
in
this
case.
Buying
a
2073
gilt
is
probably
not
sensible
if
you
plan
to
use
that
money
for
a
loft
conversion
in
2025.

Remember:
There’s
an
ETF
For
Everything
These
Days

In
addition,
ask
yourself:
can
I
get
this
exposure
elsewhere,
and
more
cheaply?
Vanguard,
iShares,
and
others
all
offer
UK
gilt
exchange-traded
funds
with
a
basket
of
government
bonds.
These
can
offer
different
yields
and
different
maturity
dates.

Finally,
check
the
access
levels
–
not
all
investment
platforms
offer
the
ability
to
buy
gilts
online.
Hargreaves
Lansdown,
AJ
Bell
and
Interactive
Investor
offer
this
service.
But
check
whether
you
can
buy
index-linked
gilts
online
too.

Do
I
Pay
Tax
on
Bonds?

One
of
the
advantages
of
ISAs
is
they
shield
investors
from
capital
gains
tax.
But
gilts
are
CGT
free,
which
is
considered
an
advantage
by
tax
planners
and
IFAs,
particularly
if
you’ve
maxed
out
your
£20,000
ISA
allowance.

You
can
also
hold
gilts
in
ISAs
and
Sipps,
which
shields
the

income
from
tax.
But
outside
of
an
ISA,
coupons
can
be
subject
to
income
tax.
There
are
different
inheritance
tax
rules
associated
with
holding
gilts
in
your
ISA
or
Sipp.

Ask
yourself:
how
much
have
I
got
to
spend?
As
they
often
trade
in
“lots”,
gilts
may
be
more
suitable
for
those
able
to
make
lump
sum
investments
rather
than
via
a
monthly
payment.
It’s
not
the
same
as
buying
shares
in
a
fund
or
trust
that
offers
exposure
via
fractional
ownership.
There
are
investment
minimums
that
need
to
be
taken
into
account.
Again,
ETFs
can
bridge
that
gap,
if
you
do
indeed
want
bond
exposure
with
smaller
amounts
of
money.
Again,
check
with
your
IFA
if
these
are
suitable
routes
for
you.

Next,
keep
an
eye
on
external
events. You
may
have
noticed
an
election
is
in
the
offing,
most
likely
in
2024,
which
could
see
a
change
in
government
after
14
years.
Labour
has
some
ambitious
spending
plans,
and
they
will
be
funded
by
debt
as
well
as
taxes.
What
kind
of
returns
investors
can
expect
on
buying
this
debt
always
has
some
risk
attached
to
it.

“With
Labour
near-certain
to
take
the
reins
in
government
in
November,
we
sense
there
will
be
increased
scrutiny
on
the
UK’s
fiscal
plans
in
the
months
ahead.
This
is
a
factor
that
could
see
a
rise
in
the
risk
premium
attached
to
UK
fixed
income
assets,
and
we
continue
to
look
for gilts to
underperform
on
a
medium-term
basis,”
says
RBC
BlueBay
chief
investment
officer
Mark
Dowding.
Gilt
yields
spiked
after
the
2022
Mini
Budget,
so
volatility
can
rear
its
head
quickly,
even
with
a
usually-tame
asset
class.

When
Will
The
Bank
of
England
Cut
Rates?

Ah,
the
big
question.

It’s
important
to
keep
an
eye
on
the
Bank
of
England.
Firstly,
it
is

selling government
bonds
into
the
market,
in
a
reversal
of
Quantitative
Easing.
More
bonds
in
the
market
reduces
scarcity
and
keeps
a
lid
on
prices.
And
the
Bank
is
also
expected
to
cut
rates
this
year.

But
Killik
&
Co
partner
Rachel
Winter
cautions
that
yields
may
look
less
attractive
in
this
environment.
“With
interest
rates
poised
to
start
falling,
the
great
rates
we
saw
offered
on
new
fixed
income
products
last
year
will
likely
not
be
available
this
year,”
she
says.

“That
said,
there
are
still
attractive
investment
opportunities
available
in
the
bond
market
for
investors
seeking
more
predictable
returns.”

When
interest
rates
fall,
bond
yields
follow,
and
that
means
that
bond
prices

rise,
a
key
part
of
total
return.
The
Bank
of
England
doesn’t
appear
to
be
in
a
massive
hurry
to
cut
rates
but,
across
the
world,
central
banks
are
expected
to
make
the
cost
of
borrowing
cheaper
this
year,
and
the
BoE
will
no
doubt
follow.

With
inflation
proving
stickier
than
forecast
in
the
US,
Eurozone
and
UK,
the
timing
of
the
first
interest
rate
cuts
is
being
deferred –
a
factor
which
is
supporting
bond
yields.
When
rates
do
start
to
fall,
the
bond
market
will
adjust
too,
changing
the
market
dynamics
again.

UK
inflation
is
also
a
key
factor.
The
chancellor
says
inflation
will
hit
2%
this
year,
so
plenty
of
UK
gilts
currently
offer
yields
above
this.
But
so
too
do
cash
savings
rates,
with
the
best
Cash
ISA
offering
over
5%
interest.

James
Gard
is
senior
editor
at
Morningstar
and
holds
the
Level
4
Diploma
in
investment
advice
from
the
Chartered
Institute
of
Securities
&
Investment.
The
above
article
does
not
constitute
financial
advice
and
investors
should
seek
professional
support
before
they
make
big
decisions
with
their
money

In
later
articles,
James
will
look
at
the
mechanics
of
bonds
and
whether UK
fixed
income
is
actually
an
atractive
asset
class.
He’ll
also
consider
the
options
available
to
investors
when
they
buy
corporate
bonds,
which
tend
to
offer
even
higher
yields
than
government
bonds
because
they
are
more
risky.

SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk