What a gilt is
A conventional gilt is a promise from the UK government to pay a fixed sum twice a year (the coupon) and £100 at a stated maturity date. A gilt called "4% Treasury Gilt 2034" pays £2 every six months per £100 nominal and repays £100 in 2034.
You do not pay £100 for it. You pay whatever the market currently charges for that stream of payments, which moves inversely to interest rates. If rates rise after issue, the fixed 4% looks less attractive and the price falls until the yield matches what is available elsewhere.
Price, yield and duration
Two yields matter. Running yield is the coupon divided by the price. Yield to maturity accounts for the capital gain or loss to redemption, and is the number that means something.
Duration measures how far the price moves for a 1% change in yields. A long gilt maturing in 2061 has duration around 20, meaning a 1% rise in yields costs roughly 20% of its value. This is why "safe" government bonds delivered double-digit losses in 2022 — the credit risk was nil, the interest rate risk was enormous, and the two are not the same thing.
The 2022 LDI episode
UK pension schemes had used leveraged liability-driven investment strategies to match long-dated liabilities with a modest capital outlay. When gilt yields spiked after the September 2022 mini-budget, those positions generated collateral calls; meeting them meant selling gilts, which pushed yields higher, which generated more calls.
The Bank of England intervened with temporary purchases to break the loop. It is the clearest recent demonstration that liquidity, not credit, is what usually breaks government bond markets.
The UK tax quirk worth knowing
For UK individuals, capital gains on gilts are exempt from capital gains tax. Coupons are taxable as income. That combination makes low-coupon gilts trading well below par unusually attractive to higher-rate taxpayers holding outside an ISA: most of the return arrives as a tax-free capital gain at redemption rather than as taxable income. It is a genuine, legal, and frequently overlooked structural advantage.
How you would actually trade it
Buy individual gilts through most investment platforms — search by ISIN or by name. The DMO also operates a purchase and sale service for individual investors through an approved agent.
Holding to maturity means the return is known at purchase, whatever happens to price in between, provided the government pays. Selling early means taking the market price on that day.
The alternative is a gilt fund or ETF, which never matures. A fund maintains a target duration by continuously rolling holdings, so it has no fixed redemption date and no guaranteed return of capital. For matching a known future liability, individual gilts do something a fund structurally cannot.
What goes wrong
- Interest rate risk is the main event. Long gilts fell around 40% from their 2020 peak through 2023.
- Inflation erodes fixed coupons. A 4% nominal return with 6% inflation is a real loss.
- Funds do not mature. Understand the difference between a bond and a bond fund before relying on one for a dated liability.
- Liquidity in stress. Even the gilt market can gap, as 2022 showed.
- Credit risk is very low, not zero. The UK has never defaulted on a gilt.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.