Why should I read this ?: UK government bonds now offer far more income than they did for much of the past 15 years. Inflation has fallen and markets do not expect a near-term rise in Bank Rate, making Government Bonds an attractive lower risk investment.
Market figures in this article are correct at 5pm on 12 August 2026.
Why gilts look more attractive now
Government bonds issued by the UK are called gilts. During the years of very low interest rates, many offered little income. Today, investors receive a much higher yield.
These examples come from GiltsYield’s conventional gilt table, updated at 5pm on 12 August 2026:
| Approximate term | Example gilt | Clean price | Gross yield to maturity |
|---|---|---|---|
| 1 year | 1.25% Treasury Gilt 2027 | £97.35 | 4.20% |
| 5 years | 0.25% Treasury Gilt 2031 | £81.55 | 4.48% |
| 10 years | 4.875% Treasury Gilt 2036 | £98.69 | 5.11% |
| 30 years | 4.25% Treasury Gilt 2055 | £79.42 | 5.78% |
The clean price excludes interest built up since the last coupon and dealing costs. Prices change during the day. A known repayment date may suit planned pension withdrawals or a large expense, but a 5% yield does not remove the risk of selling early.
What is a government bond?
A gilt is an IOU from the UK Government. By buying one, you lend money for a set period.
Most gilts pay fixed interest, called the coupon, twice a year. The Government repays £100 for every £100 nominal at maturity. A 4% gilt pays £4 a year for each £100 nominal, whatever its purchase price.
The coupon is not the return. Pay £90 and hold to maturity, and you receive the interest plus a £10 uplift. Pay £110 and you lose £10 on repayment. The yield to maturity combines the price, coupons and £100 repayment into an estimated annual return, assuming coupons are reinvested.
Index-linked gilts work differently. Their interest and final repayment move in line with the Retail Prices Index, subject to a time lag. The UK Debt Management Office explains both types.
What affects the price of government bonds?
Bond prices and yields move in opposite directions. When the price falls, a buyer gets the same fixed payments for less money, so the yield rises. When the price rises, the yield falls.
Expected inflation, Bank Rate, economic growth, government borrowing and investor demand all affect the yield buyers require. Global bond markets matter too.
A Bank Rate cut does not guarantee a rise in long gilt prices. Long yields include a term premium for tying up money. Inflation or heavy government borrowing can keep this premium high while short rates fall.
Why inflation is important for bonds
Inflation reduces what a fixed amount of money can buy. A conventional gilt may keep paying £4 a year, but that £4 becomes less valuable when prices rise.
Rising inflation can also push a gilt’s price down. Investors may expect the Bank of England to raise rates, or keep them high for longer. New gilts and savings accounts may offer better rates, so an older bond’s price falls until its yield becomes competitive. Lower inflation expectations can reverse this process.
Recent figures give some support to gilts, although the position is not settled. CPI inflation fell to 2.6% in June, from 2.8% in May, while services inflation eased only slightly to 3.6%. It expects energy costs to push inflation to around 3.2% late in 2026 before it moves back towards 2%.
Inflation, like all things, is difficult to predict and understand but the outlook at the moment is favourable.
Deciding the date when the bond matures is really important.
This is important. You have two options when you buy a Government Bond, hold this until maturity, in that case you know what price you will get. So price changes in the market do not really affect you.
But if you sell before the maturity date another investor will buy this off you based on the market price. This price will depends on rates and inflation over the term left. As those expectations change, your bond’s price changes.
Example: Suppose a gilt which has a has a coupon or interest rate of 4%. After one year, interest rates rose to 5%, your gilt paying 4% would be less attractive to investors, so the price of your gilt will fall. How much it fell would be dependent on the view of where interest rates are heading next, and also the term of your gilt. Now, if you are holding the gilt to maturity you will still receive the proceeds in full, but if you are selling the gilt before that maturity date, the you will receive the market price, so understanding how gilt pricing works and the duration impact is very important.
There can also be tax benefits
An ISA or pension shelters gilt returns from UK tax. Outside them, coupons may face Income Tax, while gains on qualifying individual gilts are exempt from Capital Gains Tax.
Some higher-rate taxpayers may favour a low-coupon gilt bought below £100 because more return comes through the tax-free uplift. Compare the post-tax yield after costs using a tool such as GiltsYield.
An action plan
- Set the purpose. Is the gilt for income, planned spending or diversification?
- Match maturity to when the money is needed. This reduces the chance of having to sell the bond and being impacted by adverse price movements.
- Use yield to maturity, not the coupon to understand the returns. The coupon misleads when the price differs from £100.
- Check tax and costs. Compare the post-tax return with cash and NS&I products.
- Spread maturity dates if useful. A gilt ladder provides scheduled repayments without relying on one rate forecast.
Gilts offer useful income again, but maturity should drive the choice. Long gilts may gain if yields fall, but losses can be large when rate expectations rise. Choose the date first; consider the yield second.
This article is for education and is not personal financial advice. Investments can fall as well as rise, and you may get back less than you invested if you sell a gilt before maturity.
