The 10-year gilt yield has soared from 4.22% at the end of February to 4.63% at market close on 11 March. Why is this happening and what role can gilts play in an investment portfolio?
This article isn’t personal advice. Remember, investments and any income from them can rise and fall in value, so you could get back less than you invest. Yields are variable and past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
Why are gilt yields rising?
The conflict in the Middle East has caused significant uncertainty around oil production and supply, which in turn has caused a huge spike in prices.
Brent Crude (the UK benchmark for oil prices) was trading at around $72 per barrel at the end of February. In early trading on 9 March it hit around $115 per barrel. That’s nearly a 60% increase. It’s since fallen back but remained volatile and is around $98 per barrel at the time of writing.
The potential impact on inflation is huge. While it’ll increase energy prices, the bigger issue is the impact on transportation costs. All physical goods need to be transported, and higher oil prices increase this cost.
Trying to predict the impact on future inflation is difficult but the general view is that it’s going to be higher compared to what was expected before the conflict.
Higher inflation likely means higher interest rates, or at the very least, fewer or no interest rate cuts. Gilt yields tend to be highly correlated to rate expectations. So, it’s the uncertainty around interest rates which has caused gilt yields to increase.
What does it mean for investors?
Well firstly, investors who own gilts will likely have experienced losses since the start of the month. But remember, if an investor owns a specific gilt directly and holds it to maturity, these fluctuations in price are just that, fluctuations.
The return over the period from purchase to maturity will remain the same – assuming the UK government doesn’t default on their bond payments, which is unlikely.
It’s this fixed return aspect for gilts that make them attractive during times of market volatility. Locking in a 4% return over three or five years might seem low during periods of relatively calm markets where stocks keep trending upwards. But in an uncertain geopolitical environment with the potential for big, unknown, consequences, simply locking in any positive return has its appeal.
And markets were nervous for a variety of reasons linked to valuations and artificial intelligence even before the start of the Iran conflict. These issues haven’t gone away.
Do these factors make gilts a more attractive investment?
Potentially. But of course, it depends on your portfolio and investment goals. Everyone’s circumstances are different. And gilts can still lose value, meaning that if they’re sold before maturity investors could get back less than they paid for them.
However, we think the relative security of buying some gilts as part of a diversified portfolio, to effectively lock in some shorter-term returns, is definitely worth considering.
And don’t forget the tax benefits
If individual gilts are owned directly, no capital gains tax is payable on any of the return that comes from a price increase. While this doesn’t matter if holding them in a tax efficient wrapper like a Stocks & Shares ISA or Self-Invest Personal Pension (SIPP), it can be an added benefit for investors holding them outside of such wrappers. Note that tax policy can change over time and benefits depends on personal circumstances.
More about investing in gilts and bonds directly.
How much of my portfolio should I invest in gilts?
Determining how much to invest in gilts as part of a portfolio can be challenging. For example, having a portfolio of only gilts is unlikely to be the best approach for most investors. Equally, only having 5% invested in gilts probably does not make a huge difference to overall portfolio volatility and downside risk.
Multi-asset managers running funds with an aim of protecting capital tend to have a bias towards bonds within their portfolio. But there’s a lot of variation in the amount of bonds owned, depending on their specific aims and objectives.
A starting point for cautious investors to consider could be a 40:60 portfolio, where 40% is invested in riskier, growth seeking assets like shares, and 60% in more defensive assets like bonds and gilts.
The long-term returns of this type of portfolio are likely to be meaningfully lower than purely investing in shares, but the journey is likely to be smoother too. This return profile could suit investors worried about the value of their portfolio falling like those near or in retirement.
For investors who aren’t as cautious but don’t want to be fully invested in shares, a 60:40 or 80:20 portfolio could be a good starting point.
What about other defensive assets?
Corporate bonds are another asset class to consider, particularly those with higher credit ratings within the investment grade classification.
Gold might also be of interest. Historically it’s been seen as a portfolio diversifier. Mainly because in turbulent markets, it’s tended to perform well. Though, that might not always be true.
Right now, the price is off the all-time high we saw earlier this year, but it’s up near 20% since the start of the year. And this is building on two strong years of performance starting in 2024, driven higher as global central banks built up allocations – favouring the precious metal over the US dollar reserves.
This trend is likely to continue to provide a tailwind for gold, or at the very least, a floor. The difference with gold though is that, unlike gilts and bonds, there aren’t any fixed returns. So, while the price might go up in future, it could also fall. And remember that unlike bonds, gold doesn’t pay any income.
Funds are another option, particularly those that have a focus on capital preservation. This could be a way of accessing a wider variety of individual bonds and shares deemed less volatile than the wider market.
Overall, we think the most important thing for investors to do in uncomfortable market environments is to not rush and make informed and considered decisions about what to do with their investment portfolio. If investors are unsure, they should seek financial advice.
For investors looking to buy gilts directly, those available on the HL platform can be found here.
Two defensive fund ideas to consider
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more detail on each fund, it's charges and specific risks, please see the links to their factsheets and key investor information below.
For investors who are interested in gilts but want a more diversified approach instead of buying individual gilts, a bond fund could be a good option.
The biggest difference between investing in gilts directly and bond funds is that because funds are invested in a number of different bonds at any point in time, the overall returns that might be achieved are unknown. There are also no capital gains tax benefits if investing via a fund.
Invesco Tactical Bond
Invesco Tactical Bond is co-managed by Stuart Edwards and Julien Eberhardt who have been part of the fixed income team at Invesco for well over a decade.
Over the long term it aims to deliver a total return, through the combination of growing capital and income, rather than focusing purely on generating a high income.
The managers can invest in all types of bonds, with few constraints. This includes high yield bonds, emerging markets and derivatives, all of which can add risk if used. This means that the amount invested in gilts varies over time and could be small, depending on where the managers see most value in global bond markets.
Investors should note that, as of 31 December 2025, this fund invests 15.54% in bonds issued by companies involved with the extraction of oil, gas or coal. This could leave the fund vulnerable to fluctuations in commodity prices, regulatory changes aimed at reducing carbon emissions, and potential shifts in consumer preferences towards sustainable alternatives.
We think this is a good fund for exposure to the wider bond market. It takes away the hassle of deciding which type of bonds to invest in, and when, because the managers are given the discretion to make these decisions for you.
Pyrford Global Total Return
Pyrford Global Total Return could work for investors who don’t just want to invest in bonds but are still looking to shelter their capital.
The fund aims to deliver stable returns ahead of inflation over the long term and provide some shelter for investors’ money in times of hardship. While it won't shoot the lights out, the managers try to grow investors' wealth modestly over the long run, without all the significant ups and downs of investing fully in the stock market.
Since 2009, the managers have only lost money in one calendar year – 2018. This is an impressive achievement, though it's a reminder that even conservative funds can lose money. Past performance isn’t a guide to the future. The fund can invest in emerging markets, which adds risk.
We believe this fund could be a good option for a more conservative portfolio, or a way to bring some stability to a broader investment portfolio.
Please note as this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.
Annual percentage growth
Feb 2021 to Feb 2022 | Feb 2022 to Feb 2023 | Feb 2023 to Feb 2024 | Feb 2024 to Feb 2025 | Feb 2025 to Feb 2026 | |
|---|---|---|---|---|---|
Invesco Tactical Bond | 0.11% | -2.53% | 4.12% | 5.54% | 6.89% |
IA Sterling Strategic Bond | -1.70% | -7.05% | 6.03% | 7.36% | 6.82% |
Pyrford Global Total Return | 4.48% | 2.34% | 3.55% | 7.32% | 12.44% |
UK Retail Price Index | 8.18% | 13.84% | 4.53% | 3.41% | 3.15%* |