What you need to know about Government gilts
Government gilts are widely presented as a safe, sensible foundation for long‑term savings, especially pensions, but the reality is far less reassuring. Many UK savers are invested in gilts without realising it, yet gilts have failed to deliver the protection and stability they are meant to offer and have produced much lower long‑term returns than equities, leaving pension pots significantly smaller than they could be.
What is a Government gilt?
A Government gilt 1 is a loan made to the Government by Investors. PLEASE KEEP READING even if you do not typically consider yourself an “Investor”, because if you have a UK Pension fund you will almost certainly be an Investor by default – i.e. someone who has lent money to the government through their pension fund. We say this because, aside from the Bank of England, pension and insurance companies are historically the single biggest domestic buyer of government gilts. If you are in a collective pension scheme or have any multi-asset savings product, you are certain to have gilts.
What are the Perceived Benefits of Government gilts ?
The common reasons given for including Government gilts in savings is that they lower investment risks. They are supposed to do this in two ways; by remaining stable or even increasing at times when share prices are falling and by remaining less volatile than equity prices, which means they move around less. Adding gilts to an investment portfolio is supposed to reduce mark-to-market losses in an equity market downturn and generally reduce volatility (mark-to-market losses reflect a fall in market prices, these remain as "paper losses" unless a saver actually sells at those low prices). In general, the enormous reduction in returns created by adding gilts is never justified by these two claimed benefits – recent events have shown that gilts do not deliver either benefit.
1. Reducing losses in a downturn
A key justification for owning gilts is that they tend to reduce losses in an equity market decline because their prices are supposed to remain firm or even increase as stocks fall. In technical terms this means that gilts are supposed to have a negative correlation with equities (they go up when equities go down and vice versa).
In fact, the correlation between gilts and equities is not fixed and changes over time, whereas gilts did display negative correlation in the 1960s and the early 2000s they have not demonstrated this property in all other periods. In fact, in recent history, gilts have demonstrated the opposite characteristic namely positive correlation, meaning that gilts and equity prices move in tandem. Under these conditions gilts provide almost no diversification benefits. This was particularly evident in 2022 when gilts and equities both fell together.
As a separate issue, the price of gilts is increasingly determined by the actions of central banks who are engaged in so called “quantitative easing”, which is money printing. When gilt prices are largely determined by political decisions, it is not possible to talk about market prices or about a predictable relationship between gilt and equity prices.
2. Reducing volatility
Gilts are supposed to be less “risky” due to lower volatility, which means that gilt prices tend to move around in a range that is narrower than for equities. In our view the importance of volatility is itself hugely overstated. For a long-term investor volatility is almost irrelevant and should never trump the size of returns which drive the size on a saver’s pension pot; a long-term investor should be concerned with the endpoint of his or her journey, represented by investment returns and not on the twists in the path. Volatility should only be a key consideration for financial institutions who have to manage their balance sheets on a daily basis.
Be that as it may, volatility also changes over time, so again whilst gilt prices were relatively stable in the 1950s and 1960s gilt volatility has been increasing since then. In the recent past, gilt volatility has been approaching equity price volatility. At one point in 2022, the volatility of funds owning gilts was actually higher than funds owning equities. This reality negates the second argument for including gilts in an investment portfolio.
3. Depressed Returns
The key problem with owning government gilts or corporate bonds is the very low rates of return compared to owning equities. In general, the higher the share of bonds in a retirement portfolio, the lower will be the annual rate of return meaning that investors will have significantly less money with which to retire. The UBS Global Investment Returns Yearbook illustrates that £ 1 invested in equities in 1900 would be worth £53,980 in 2025 whereas the same £1 invested in government bonds (gilts) would be worth less than 1% of this amount at only £440 in 2025. 2
The case for including gilts in investment portfolios was always very weak and required sacrificing a very significant part of investment returns for the sake of transitory benefits associated with lower volatility. The theories underlying these policies do however benefit national governments by creating captive audiences as buyer of government bonds. There is no bona fide reason for any investor to hold government bonds in their portfolios other than in exceptional circumstances.
References
1. Also known as Government Bonds