How to buy gilts

Ed Bowsher looks at how you can purchase gilts and whether they're a sensible investment. He also looks at index-linked gilts.

Controversy

Well, that’s a controversial issue. Here are four possible explanations:

1. The UK is a safe haven thanks to George Osborne’s austerity policy

Many people believe that George Osborne’s commitment to cut Government spending has reassured the markets that the UK won’t default. So UK gilts are seen as a safe bet during turbulent times. As the value of Greek Government bonds has tumbled, gilts have become ever more expensive.

2. The UK is a safe haven for other reasons

The UK Government is lucky in that it doesn’t face a massive volume of gilts maturing in the next few years on which it will have to pay out. That reduces the chance of default.

What’s more, the UK has its own currency. That means if the Government is struggling to borrow enough cash, it can always persuade the Bank of England to print extra cash and buy some gilts. This option isn’t available to governments in the eurozone.

3. Inflation will stay low

The UK economy looks weak and that means inflation may stay low. We might even have deflation where prices fall. If you expect inflation to be low, you’d normally expect gilt prices to rise and yields to fall.

4. The stock market has had a rotten decade

Share prices have performed very badly since 2000. Some investors have taken money out of equities in despair and gone for bonds instead. Especially pension funds. Pension funds have also been under pressure from regulators to move money from the stock market and into gilts.

So should you invest in gilts now?

Well, they’re normally seen as a relatively low risk investment, but there’s a danger. If inflation takes off, gilt prices will fall and you could lose money.

If you’re worried about that risk, you might prefer to go for index-linked gilts, known as ‘linkers.’ With linkers, the coupon (or dividend) you receive rises in line with inflation. So does the principal (or repayment) value that you’ll receive when the gilt matures. However, the yield on linkers tends to be low and they won’t be a great investment if inflation falls to a very low rate or we end up with deflation.

Personally, I’m not going near gilts, index-linked or conventional. I can’t see much upside and I’d rather take the risk of investing in the stock market and hope for a better return. After a rotten decade, prospects for the stock market over the next ten years look better. But if you’re more risk averse than me, some index-linked gilts might make sense.

More: How Britain beat the world in 2012  A great way to invest