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Buying Gilts: Top 6 Ways to Get Started

Buying gilts holds significant importance for individuals seeking to diversify their investment portfolio and explore fixed-income options. 

Whether you’re a seasoned investor or new to the world of bonds and government securities, understanding the intricacies of buying gilts is crucial to making informed financial decisions and maximizing your investment potential.

The purpose of this blog is to provide you with comprehensive insights into buying gilts as an individual investor. 

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

What are gilts, and how do they differ from other types of bonds?

Gilts, also known as gilt-edged securities or UK government bonds, are fixed-income investments issued by the British government to raise funds. They are considered one of the safest investments available as they are backed by the creditworthiness of the UK government.

Here are some key ways in which gilts differ from other types of bonds:

Issuer

Gilts are specifically issued by the UK government, whereas other types of bonds can be issued by various entities such as corporations, municipalities, or government agencies.

Credit Risk

Since gilts are issued by the UK government, they are generally considered to have low credit risk. The UK government has a strong credit rating and a long history of honoring its debt obligations. Other bonds may carry higher credit risk depending on the financial health and creditworthiness of the issuer.

Coupon Payments

Gilts typically pay periodic coupon payments to investors at fixed interest rates. The coupon payments on gilts are usually considered reliable and consistent. In contrast, other types of bonds may have variable or floating interest rates, and the payment reliability may depend on the issuer’s financial performance.

Maturity Periods

Gilts have various maturity periods, ranging from short-term to long-term. Some gilts have a fixed maturity date, while others may be index-linked or perpetual. Other types of bonds may also have varying maturity periods, but they may differ from gilts in terms of duration and specific features.

Liquidity and Trading

Gilts are generally considered highly liquid securities and actively traded in the financial markets. They have well-established secondary markets, allowing investors to buy and sell them with ease. Other bonds may have varying levels of liquidity depending on the specific issuer and market demand.

Tax Treatment

Gilts are exempt from UK income tax, making them particularly attractive to UK investors seeking tax-efficient investments. Other types of bonds may have different tax implications depending on the jurisdiction and applicable tax laws.

Market Influence

The gilt market is influenced by factors such as economic conditions, monetary policy decisions, and investor sentiment. The dynamics of the gilt market may differ from other bond markets, which can be influenced by different factors or market participants.

Can individuals buy gilts directly from the government?

Yes, individuals can buy gilts directly from the UK government through a program called the UK Debt Management Office‘s (DMO) retail bonds and savings products. This program allows individual investors to purchase gilts in small denominations.

There are two primary channels through which individuals can buy gilts from the government:

National Savings and Investments (NS&I)

NS&I offers a range of savings products, including government bonds, known as Premium Bonds. While Premium Bonds do not pay regular interest, they offer the chance to win tax-free prizes in monthly draws. NS&I also offers other savings products, such as fixed-term savings bonds, which provide a fixed interest rate over a specific period.

Direct Gilt-Edged Market (GEM)

EM is an online service provided by the UK DMO that allows individual investors to buy gilts directly. Through GEM, investors can purchase gilts in small denominations, starting from £1,000. GEM offers a range of gilts with different maturities, coupon rates, and features.

It’s important to note that while individuals can buy gilts directly from the government, investing in gilts may have specific requirements and considerations. The minimum investment amounts, available options, and procedures may vary, and investors should carefully review the terms and conditions provided by NS&I and the UK DMO.

Alternatively, investors can also gain exposure to gilts indirectly through investment funds or exchange-traded funds (ETFs) that focus on government bonds. These funds pool investors’ money to invest in a diversified portfolio of gilts, providing access to the government bond market without the need to buy gilts individually.

Before making any investment decisions, it is advisable to conduct thorough research, evaluate your investment goals, and consider consulting with a financial advisor who can provide guidance based on your individual circumstances and objectives.

buying gilts

Look for brokers with expertise in fixed-income investments and a platform that provides access to trading gilts.

How can I buy gilts in the secondary market?

To buy gilts in the secondary market, where previously issued gilts are bought and sold, you can follow these general steps:

Choose a Broker

Find a reputable broker or financial institution that offers access to the bond market. Look for brokers with expertise in fixed-income investments and a platform that provides access to trading gilts.

Open an Account

Open an investment or trading account with the chosen broker. This may involve providing identification, completing necessary forms, and funding the account with the desired investment amount.

Research and Select Gilts

Conduct thorough research on the available gilts in the secondary market. Consider factors such as the maturity date, coupon rate, yield, credit rating, and any specific features or terms associated with each gilt. Determine which gilts align with your investment goals and risk tolerance.

Place an Order

Once you have selected the desired gilts, place an order with your broker. Specify the quantity, maturity, and other relevant details for the gilts you wish to purchase. You can typically place orders through the broker’s online trading platform, over the phone, or via other designated channels.

Review and Confirm

Carefully review the order details provided by your broker before confirming the purchase. Verify that the information is accurate, including the gilt name, ISIN (International Securities Identification Number), price, and transaction fees.

Settlement

After executing the trade, the settlement process begins. Settlement involves the exchange of funds for the purchased gilts. The settlement period may vary, but it typically takes a few days to complete.

Custody and Holding

Once the settlement is complete, the gilts you purchased will be held in your investment account or custody account provided by your broker. You will receive documentation confirming your ownership of the gilts, such as trade confirmations and account statements.

Monitor and Manage

Keep track of your gilt investments and monitor their performance. Stay informed about any news or updates that may impact the gilts you hold. If needed, you can manage your gilt holdings by selling them in the secondary market or adjusting your investment strategy.

Are gilts considered safe investments?

Gilts, also known as UK government bonds, are generally considered safe investments due to their low credit risk. They are backed by the creditworthiness of the UK government, which is known for its stability and historically strong ability to honor its debt obligations.

Here are some factors that contribute to the perception of gilts as safe investments:

  • Government Backing: Gilts are issued by the UK government, which is considered one of the most creditworthy sovereign entities globally. The government has the power to tax and has a long history of meeting its financial obligations, providing confidence to investors.
  • Low Default Risk: The risk of default on gilts is considered extremely low. The UK government has not defaulted on its debt in modern history, and the probability of default is considered minimal due to its stable economy and fiscal management.
  • Credit Rating: The UK government typically holds high credit ratings from major rating agencies, reflecting its financial strength and ability to repay its debts. The high ratings further support the perception of gilts as safe investments.
  • Liquidity: Gilts are highly liquid securities, meaning they can be easily bought or sold in the secondary market. This liquidity provides investors with flexibility to manage their investments and exit positions when desired, enhancing the perceived safety of gilts.
  • Income Payments: Gilts typically pay periodic coupon payments at fixed interest rates. These coupon payments provide investors with a predictable income stream, enhancing the attractiveness of gilts as safe investments for income-focused investors.

While gilts are generally considered safe, it’s important to note that they are not entirely risk-free. Here are a few considerations:

  • Interest Rate Risk: The prices of fixed-income securities, including gilts, are sensitive to changes in interest rates. When interest rates rise, the market value of existing bonds may decline. However, if held until maturity, gilts will still provide the promised principal repayment.
  • Inflation Risk: Gilts may be exposed to inflation risk, meaning that the purchasing power of future interest and principal payments can be eroded if inflation exceeds the fixed interest rate on the gilt. However, certain gilts, such as index-linked gilts, offer inflation protection by adjusting their value based on changes in the consumer price index.
  • Market Conditions: The prices of gilts can be influenced by market conditions, economic factors, and investor sentiment. Fluctuations in the bond market may impact the market value of gilts before maturity.

It’s crucial to consider your investment goals, risk tolerance, and overall investment strategy when deciding to invest in gilts or any other asset class. Diversification and consulting with a financial advisor can help ensure that your investment portfolio aligns with your individual circumstances and objectives.

What factors should I consider when selecting specific gilts to invest in?

When selecting specific gilts to invest in, there are several factors to consider that can help you make informed decisions aligned with your investment goals and risk tolerance. Here are some key factors to consider:

Maturity Date

Gilts have different maturity dates, ranging from short-term to long-term. Consider your investment horizon and financial goals to determine whether you prefer shorter-term gilts for more immediate liquidity or longer-term gilts for potential higher yields over an extended period.

Coupon Rate

The coupon rate is the fixed interest rate that gilts pay. Compare the coupon rates of different gilts to assess the income you can expect from each investment. Higher coupon rates generally provide higher regular income, but they may be accompanied by higher prices and lower yields.

Yield

Yield is an important measure of the return on a gilt, taking into account its price, coupon rate, and time to maturity. Compare yields across different gilts to evaluate their relative attractiveness. Higher yields may indicate higher potential returns but can be associated with higher risk or longer maturities.

Credit Rating

Review the credit rating assigned to the gilt by rating agencies. Credit ratings assess the issuer’s creditworthiness and the likelihood of default. Higher-rated gilts generally carry lower credit risk, but they may offer lower yields compared to lower-rated gilts.

Inflation Protection

Consider whether you want exposure to inflation-protected gilts. Index-linked gilts adjust their value based on changes in the consumer price index, offering protection against inflation. If inflation is a concern, index-linked gilts can help preserve the purchasing power of your investment.

Diversification

Diversify your gilt holdings by considering a mix of gilts with different maturities, coupon rates, and features. Diversification helps spread risk and reduces exposure to any single gilt or interest rate movements.

Market Conditions

Stay informed about market conditions, economic indicators, and interest rate trends. Market factors can impact gilt prices, yields, and overall market sentiment. Consider the current economic environment and its potential implications for the gilt market.

Economic and Political Factors

Assess economic and political factors that may affect the UK government’s ability to meet its debt obligations. Stay informed about economic indicators, fiscal policies, and political developments that could impact the creditworthiness of the UK government.

Professional Advice

Consider seeking guidance from a financial advisor or investment professional who specializes in fixed-income investments. They can provide insights into market conditions, assess your risk tolerance, and help you navigate the complexities of selecting specific gilts.

What are the best ways to get started buying gilts?

To get started buying gilts, here are six key steps you can follow:

Educate Yourself

Start by learning about gilts and the fixed-income market. Understand the basics of how gilts work, their features, risks, and potential benefits. This knowledge will help you make informed investment decisions.

Determine Your Investment Goals

Clarify your investment objectives, such as income generation, capital preservation, or long-term growth. Define your risk tolerance and time horizon, as these factors will influence the types of gilts that align with your goals.

Research Available Gilts

Explore the range of gilts available in the market. Consider factors such as maturity dates, coupon rates, yields, and specific features of each gilt. Review credit ratings and assess the economic and market conditions that may impact their performance.

Select a Method to Buy Gilts

Choose a method to purchase gilts that suits your preferences and circumstances. You can buy gilts directly from the UK government through the National Savings and Investments (NS&I) or the UK Debt Management Office’s (DMO) Direct Gilt-Edged Market (GEM) service. Alternatively, you can invest in gilts indirectly through bond funds or exchange-traded funds (ETFs) focused on government bonds.

Open an Account

If you opt for purchasing gilts directly, open an account with the chosen provider. This may involve completing forms, providing identification, and funding the account with the desired investment amount. If you prefer investing through funds or ETFs, open an account with a reputable brokerage or financial institution.

Execute Your Investment

Once you have chosen the method and opened the necessary account, proceed with executing your investment. Follow the instructions provided by the chosen platform or provider to select the specific gilts or investment products and complete the purchase. Ensure that you review and confirm the details before finalizing the transaction.

Remember to regularly review your investment portfolio, stay informed about market conditions, and consider consulting with a financial advisor or investment professional who can provide guidance tailored to your specific circumstances and goals.

Keep in mind that investing in gilts involves risks, including interest rate fluctuations, inflation, and credit risk. It’s important to conduct thorough research, evaluate your investment objectives and risk tolerance, and make investment decisions aligned with your individual circumstances and goals.

buying gilts

Investing in gilts can have tax implications that vary depending on the specific circumstances and jurisdiction.

How are gilt prices determined, and what factors influence their yields?

Gilt prices are primarily determined by the interplay between supply and demand in the bond market. The price of a gilt is influenced by several factors, including the prevailing interest rates, the creditworthiness of the issuer, and market expectations.

Here are key factors that influence gilt prices and yields:

Interest Rates

Gilt prices are inversely related to interest rates. When interest rates rise, the prices of existing gilts in the market tend to decline because new bonds with higher yields become more attractive to investors. Conversely, when interest rates fall, gilt prices generally rise as the fixed interest payments of existing bonds become more valuable.

Economic Conditions

Economic factors such as inflation, GDP growth, employment data, and monetary policy decisions by central banks can impact gilt prices. For instance, if there are concerns of higher inflation, gilt prices may decline as investors demand higher yields to compensate for the eroding value of fixed coupon payments.

Supply and Demand

Supply and demand dynamics in the bond market play a significant role in determining gilt prices. Factors that affect demand include investor sentiment, risk appetite, and preferences for safe-haven assets. In times of economic uncertainty or market volatility, demand for gilts tends to increase, pushing prices up. Conversely, if demand weakens or supply increases, gilt prices may decline.

Credit Ratings

The creditworthiness of the issuer, in this case, the UK government, influences gilt prices. Higher-rated gilts, associated with lower default risk, tend to have higher prices and lower yields compared to lower-rated gilts. Credit rating agencies assess the financial health and creditworthiness of governments and assign ratings that impact investor perceptions and pricing.

Inflation Expectations

Inflation expectations can affect gilt prices and yields, especially for index-linked gilts. If investors anticipate higher inflation, index-linked gilt prices may rise as the value of future cash flows adjusts to inflation. Conversely, if inflation expectations decline, prices may fall.

Monetary Policy

Decisions and communication from central banks, such as the Bank of England, regarding interest rates and quantitative easing programs, can impact gilt prices. Changes in monetary policy can influence market expectations for future interest rate movements, which, in turn, affect gilt prices and yields.

What are the tax implications of investing in gilts?

Investing in gilts can have tax implications that vary depending on the specific circumstances and jurisdiction. Here are some general considerations regarding the tax treatment of investing in gilts:

Interest Income

The interest income received from gilts is generally subject to income tax. In the United Kingdom, interest income from gilts is typically paid gross (without tax deducted at source) and should be declared on your annual tax return. The income tax rate applied to the interest income depends on your overall income and tax bracket.

Tax-Exempt Gilts

Certain gilts, such as those issued by the UK government’s National Savings and Investments (NS&I), may be available in tax-exempt forms. For example, Individual Savings Accounts (ISAs) offered by NS&I can provide tax-free interest income on eligible gilts held within the ISA. It’s essential to review the specific rules and limits for tax-exempt gilts in your jurisdiction.

Capital Gains Tax

If you sell gilts for a profit, you may be subject to capital gains tax on the realized gains. Capital gains tax is typically applicable when the gains exceed the annual tax-free allowance (known as the capital gains tax allowance or exemption limit). The tax rate applied to capital gains can vary depending on your jurisdiction and your overall taxable income.

Inheritance Tax

In some jurisdictions, including the United Kingdom, gilts held in an individual’s estate at the time of death may be subject to inheritance tax. The tax treatment of gilts within an estate depends on various factors, including the value of the estate and applicable inheritance tax rules and exemptions.

Tax-Efficient Accounts

Some jurisdictions offer tax-efficient accounts, such as ISAs or equivalent accounts, where you can hold gilts and other investments. These accounts may provide tax advantages, such as tax-free interest income or capital gains, within certain limits. It’s important to understand the specific rules and limits of these accounts in your jurisdiction.

Tax Treaty Considerations

If you are a non-resident investor investing in gilts in a different jurisdiction, tax treaty provisions between your country of residence and the issuing country may affect the tax treatment of your gilt investments. Tax treaties can impact matters such as withholding tax on interest income or capital gains tax liabilities.

Can I sell my gilts before they mature? Are there any penalties?

Yes, you can sell your gilts before they mature in the secondary market. Gilts are highly liquid securities, which means they can be bought and sold by investors before their maturity date.

When selling gilts before maturity, it’s important to consider the following factors:

Market Conditions

The price at which you can sell your gilts in the secondary market will depend on prevailing market conditions, including interest rates, demand for gilts, and general investor sentiment. These factors can influence the market price of gilts and potentially impact the amount you receive when selling.

Price Fluctuations

Gilt prices can fluctuate in response to changes in interest rates, economic conditions, and market factors. The market price of gilts may be different from their face value (the value at which they were originally issued). As a result, you may sell your gilts at a premium (higher than face value) or a discount (lower than face value) depending on prevailing market conditions.

Transaction Costs

When selling gilts, you may incur transaction costs, such as brokerage fees or commissions, depending on the platform or broker you use to facilitate the sale. These costs can vary and may impact the overall return you receive from selling your gilts.

Early Redemption Penalties

Some gilts may have early redemption penalties or call provisions that apply if the issuer decides to redeem the bonds before their scheduled maturity date. These provisions can result in a reduction of the amount you receive upon early sale. However, it’s important to note that not all gilts have early redemption penalties, and the specific terms and conditions vary for each gilt issuance.

Capital Gains Tax

If you sell your gilts for a profit, you may be subject to capital gains tax on the realized gains. The tax implications of selling gilts before maturity will depend on your jurisdiction’s tax laws and your individual tax situation.

buying gilts

Inflation risk refers to the potential erosion of purchasing power over time due to rising prices.

What are the risks associated with investing in gilts?

While gilts are generally considered relatively safe investments, there are still certain risks associated with investing in gilts. It’s important to be aware of these risks before making investment decisions. Here are some key risks to consider:

Interest Rate Risk

One of the primary risks for gilt investors is interest rate risk. Gilt prices are inversely related to interest rates. If interest rates rise, the value of existing gilts in the market may decline, as newly issued bonds with higher yields become more attractive to investors. Conversely, if interest rates fall, the value of existing gilts may increase. Therefore, changes in interest rates can impact the market value of gilts before their maturity dates.

Inflation Risk

Inflation risk refers to the potential erosion of purchasing power over time due to rising prices. While gilts provide fixed interest payments, if inflation exceeds the fixed interest rate, the real value of those payments may decline. This can result in a reduction in the purchasing power of future income and principal payments from gilts.

Credit Risk

Although gilts are backed by the creditworthiness of the issuing government (e.g., the UK government), there is still a small degree of credit risk. In rare circumstances, there may be a risk of default if the government fails to honor its debt obligations. While this risk is generally considered minimal for highly rated government bonds, it’s important to stay informed about the creditworthiness of the issuer.

Market and Liquidity Risk

Gilt prices are influenced by supply and demand dynamics in the bond market. If demand for gilts weakens or supply increases, it can result in price declines.

Additionally, in times of market stress or economic uncertainty, gilt market liquidity can be affected. Reduced liquidity can impact the ease of buying or selling gilts, potentially leading to higher transaction costs or difficulty in executing trades.

Reinvestment Risk

If you plan to reinvest the interest payments from gilts, there is a risk that you may not be able to find comparable investments with the same yield or terms when the original gilt matures. This can result in lower yields or the need to take on additional risk to achieve desired returns.

Currency Risk (for international investors)

If you are an international investor investing in gilts denominated in a foreign currency, there is a currency risk. Fluctuations in exchange rates between your local currency and the gilt’s currency can impact the overall return on your investment.

How do gilts compare to other fixed-income investments in terms of risk and return?

When comparing gilts to other fixed-income investments in terms of risk and return, several factors come into play. Here are some key considerations:

Risk:

  • Credit Risk: Gilts issued by governments with strong credit ratings, such as those issued by the UK government, generally have low credit risk. In comparison, corporate bonds carry higher credit risk depending on the financial health and creditworthiness of the issuing company.
  • Interest Rate Risk: All fixed-income investments, including gilts, are subject to interest rate risk. When interest rates rise, bond prices tend to decline. Gilts may be less sensitive to interest rate fluctuations compared to corporate bonds or lower-rated securities due to their lower credit risk.

Return:

  • Yield: The yield on gilts represents the income an investor can expect to receive from the investment. Gilts with longer maturities and lower credit risk tend to offer lower yields compared to riskier fixed-income investments such as high-yield corporate bonds.
  • Income Stability: Gilts, especially those issued by highly rated governments, generally provide a stable income stream. This can be appealing to income-focused investors seeking reliable coupon payments.
  • Inflation Protection: Some gilts, known as index-linked gilts, provide inflation protection by adjusting their value based on changes in inflation. This feature can help preserve the purchasing power of income payments and principal.

Comparison to Other Fixed-Income Investments:

  • Corporate Bonds: Corporate bonds generally carry higher yields compared to gilts to compensate investors for the additional credit risk associated with the issuing company. Corporate bonds can offer higher potential returns but also come with higher default risk.
  • Municipal Bonds: Municipal bonds are issued by state and local governments to finance public projects. They offer tax advantages, such as exemption from federal income tax, which can enhance after-tax returns for certain investors.
  • High-Yield Bonds: High-yield bonds, also known as junk bonds, carry higher credit risk but offer higher yields to compensate investors. These bonds come with increased risk of default but can provide higher potential returns.

The risk and return profile of fixed-income investments can vary based on factors such as credit quality, duration, market conditions, and investor preferences. It’s important to assess your risk tolerance, investment goals, and time horizon when considering different fixed-income options.

Diversification across various fixed-income instruments can help manage risk and optimize returns. Consulting with a financial advisor or investment professional can provide personalized guidance based on your individual circumstances and goals.

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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