• Gilts are UK government debt: bonds issued by HM Treasury & listed on the London Stock Exchange.
• Gilts are secure, defensive assets but have recently suffered due to the conflict in Iran.
• Bowmore have managed to largely mitigate these losses by being underweight duration (explained within).

What are gilts?

Gilts are UK government debt whereby an investor is compensated by the government with interest payments, paid in the form of a ‘coupon’ for buying its debt. They are known for their low-risk status, since the UK Government has never failed to make payments on gilts as and when they are due.¹ These ‘coupon’ payments tend to be bi-annual, with the initial investment repaid at the end of the gilt’s period, as it reaches ‘maturity’. There are two kinds of gilts.

The first, conventional, are the largest proportion of gilts issued. The customer purchases a bond, denoted by its coupon rate and maturity (e.g. 1½% Treasury Gilt 2047). The fixed coupon rate is the percentage of the bond paid back at each instalment, ordinarily reflecting the market’s interest rate when the gilt was first issued.

The second, index-linked gilts, are denoted in the same way, (i.e. 0⅛% Index-linked Treasury Gilt 2039). However, here the coupon payments and repayment at maturity are adjusted in line with the UK RPI, meaning they are adjusted to take account of any inflation.

The repayment at maturity is where your gilt will redeem for £100, no matter what you purchased it for. One could buy a gilt for £80 and make a £20 tax-free capital gain if held to maturity.

Market changes & the recent yield spike

Gilts are primarily influenced by interest rate movements and inflation. When interest rates increase – or are expected to because of rising inflation – yields follow and prices fall. Imagine your gilt yields 3%, reflective of the current interest rate, and rates rise to 4%. Now investors can buy gilts yielding 4%, your 3% gilt is less valuable i.e. the price falls. The impact of these movements is mitigated by how long the bond has to run until maturity, with shorter duration (i.e. 2 years until maturity) being less sensitive, and longer (i.e. 30 years) having the potential to shift much more.

Being a nation dependent on imported energy means that the recent conflict has affected the UK markets specifically. Rising inflation risks have seen interest rate expectations surge and gilt yields have followed. This week, the 10-year borrowing rate, or yield, reached the highest it has been since 2008.² This pushes up the cost of borrowing for a government that already has elevated debt levels.

Source: BBC, UK borrowing costs hit highest since 2008 financial crisis

How does this affect our portfolios?

Gilts have the added benefit for private clients of being exempt from capital gains tax (CGT) when held directly. Lower coupon gilts pay less income, but they compensate for this by having a low price at purchase but still a value of £100 at maturity. Over time, the value of a gilt will tend towards the £100 maturity value, and whilst inflation spikes can cause short-term drawdowns, the longer term upward trend is inevitable as long as the government doesn’t default.

We have also deliberately taken the decision to hold, on average, shorter maturity gilts. This stems from our concern that the risk to the 2026 consensus was a spike in inflation. Something that the broader market is now acutely concerned of. The benefits of holding shorter-dated gilts during March 2026 is illustrated by comparing our shortest dated gilt, a 0½% gilt maturing in 2029, to the 0½% gilt maturing in 2061. The price of the 2029 gilt fell by 2% during March, however the 2061 gilt price fell by a whopping 12%.³

Our view on gilts recently has centred around the idea that we should not be tempted into buying long-dated maturities to get a slightly better return. This is equivalent to picking up pennies in front of a steam roller. We have been able to secure satisfactory returns in gilts at the shorter end whilst also insulating our clients from short-term volatility.

Source: AlphaTerminal, data as at 25/03/2026

 

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Sources:

1. UK Debt management office
2. BBC, UK borrowing costs hit highest since 2008 financial crisis
3.  Alpha Terminal