Government bonds, often called gilts, are not traditionally investments that garner a lot of media attention. However, as recent events highlighted, they are an important part of the financial landscape.

Gilt-edged securities (gilts) earned their name in a bygone, pre-electronic era, when they were issued as certificates literally edged in gold.

Filling the Government gap

While now merely electronic records, gilts are also the main way in which the government raises money to fill the gap between what it spends and what it collects in taxes and other revenues.

However, the pile of debt has built up over the years as outgoings have regularly exceeded income: the last year the government was in the black was 2000/01.

Annual government borrowing surged during the global financial crisis and had been gently declining until the pandemic, and the almost immediately ensuing energy crisis, caused it to increase once more.

The result is that the value of gilts outstanding – government debt – reached over £2,200 billion (£2,200,000,000,000) by mid-October 2022.

Less attention

Gilts are traded in much the same way as shares, but, despite its size, the gilts market generally attracts much less attention than the share markets.

This is partly because over 60% of gilts are owned by the Bank of England, insurance companies and pension funds, all of which tend to be long-term holders.

The Bank of England features prominently because until recently it had been the largest buyer of gilts under its quantitative easing (QE) programme, which it is now beginning slowly to unwind.

Selling snowballed

In late September, gilts hit the headlines when the market became spooked by the level of fresh borrowing implied by the former Chancellor Kwasi Kwarteng’s mini-Budget.

The concerns prompted gilt prices to fall and gilt interest yields to rise and the selling snowballed. Suddenly there were many sellers of gilts but no buyers, a situation which forced the Bank of England to intervene and start buying gilts once again.

The Bank’s actions, combined with the reversal of several contentious aspects of the mini-Budget, eventually stabilised the market. However, gilt yields settled at higher levels than had been seen for over a decade.

Pros and cons

The bad news is that government borrowing now costs more, which could lead to higher taxes (or yet more borrowing…).

The good news is that higher gilt yields mean improved annuity rates and could make investment in gilts and other fixed interest bond funds potentially more attractive for income seekers.

If you would like to discuss your investment plans in the current economic climate, please get in touch, we’d love to help.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Craig Melling

Craig Melling

Director of Investment

Craig joined Progeny Asset Management as a founding member in 2016.

Learn more about Craig Melling