Gilt yields have hit multi-decade highs as the Bank of England signals caution over rates. With the autumn Budget adding uncertainty, Hargreaves Lansdown’s Kate Marshall outlines how to invest and three bond fund ideas for diversification.
Kate Marshall, Lead Investment Analyst, Hargreaves Lansdown:
“UK government bond yields have reached new highs as we head into this year’s autumn Budget. Borrowing costs spiked higher after the Bank of England (BOE) kept interest rates on hold at 4% and expressed caution around future rate cuts. The yield on 30-year gilts reached 5.7%, a 27-year high, and the BOE has slowed its quantitative tightening (bond sales) programme in an effort to soothe markets.
As we approach this year’s Budget, markets are watching closely – not just for the Chancellor’s announcements, but for what they could mean for borrowing, inflation and interest rates. So, after a choppy year for the bond market, what’s the case for gilts now?
In addition to the highs seen in 30-year yields, the 10-year gilt yield currently sits at 4.73%, near their highest levels in over 15 years. These yields are down to a few things – rising inflation, uncertainty around government borrowing, and expectations that interest rates could stay higher for longer than previously thought.
However, high yields mean gilts are generating an attractive income and, potentially, even offering growth potential if rates fall in future. That’s because gilt prices typically move in the opposite direction to rates, so, when interest rates fall, yields should also fall, and gilt prices rise.
What does the Budget mean for gilts?
The government is currently under pressure to borrow more, and we could see spending promises in areas like energy and infrastructure. This could mean more gilts being issued in the years ahead.
Meanwhile, economic growth is stagnating and inflation, currently at 3.8%, is still above the BOE’s 2% target. This makes life harder for both the government and BOE. Cutting interest rates or increasing spending could help stimulate the economy, but risk fuelling inflation. And holding back could keep inflation in check, but stifle growth.
This uncertainty could create market volatility around the Budget, but that could also create opportunities for investors.
Why gilts now?
With yields where they are, gilts could appeal to income seeking investors. They’re currently higher than what’s available from many UK stocks, with the FTSE All Share yielding 3.35% as at the end of August 2025.
Additionally, while rates are unlikely to drop quickly in the short term, eventually, a cut is more likely than an increase. In this instance gilt prices should rise, providing a boost to returns as well as income.
As with any investment, there are risks. If inflation stays stubborn or the BOE delays further rate cuts, gilt yields could rise again, which would push prices lower. And any higher-than-expected borrowing in the Autumn Budget could also put upward pressure on yields.
Looking at the long term, future yields will likely be lower than where they are today. That means investing now offers the potential for capital gains as well as income.
How to invest
Investors can buy gilts directly in an HL investment account. And there are tax benefits too. Any capital gains are tax free. You also don’t pay any stamp duty or stamp duty reserve tax when you buy a gilt. Interest paid by a gilt is taxed as income, though there is no income tax to pay on gilts held in an HL ISA or SIPP.
For investors who prefer a professional to make the asset allocation decisions on their behalf and make the choice of when to invest in different types of bonds such as gilts, we’ve chosen three fund ideas.
3 bond fund ideas
Legal & General All Stocks Gilt Index Trust
Legal & General All Stocks Gilt Index Trust aims to track the broad movement in prices of all gilts currently in issue. It’s a low cost and easy way to invest in lots of different gilts and a great option for portfolios looking specifically for exposure to gilts. However, funds that invest in only one type of investment can increase concentration risk. So, they should only form a small part of a well-diversified portfolio.
Invesco Tactical Bond
Managers Stuart Edwards and Julien Eberhardt invest flexibly in all types of bonds, including government and corporate bonds. They aim to provide some income and growth over the long term, with a focus on keeping losses during periods of market stress to a minimum. The fund is highly diversified, and we think this is a great option to invest in a fund with experienced managers who can take advantage of the opportunities that come from market volatility.
Royal London Corporate Bond
Shalin Shah and Matthew Franklin, the fund’s managers, focus on corporate bonds – those issued by companies. This provides diversification alongside government bonds. Their edge comes from deep analysis of individual bonds, looking for those that offer higher returns. This means there’s also some high yield bonds in the fund which can carry greater risks. We think this is also a great option to diversify an investment portfolio focused on shares.”
Percentage growth
| 1 year 31/08/2024 to 31/08/2025 | 3 year31/08/2022 to 31/08/2025 | 5 year 31/08/2020 to 31/08/2025 | |
| Legal & General All Stocks Gilt Index | -2.17 | -4.97 | -24.56 |
| FTSE Actuaries UK Conventional Gilts All Stocks | -1.87 | -5.10 | -25.14 |
| Invesco Tactical Bond | 3.39 | 13.15 | 14.13 |
| IA Sterling Strategic Bond | 4.94 | 16.16 | 8.77 |
| Royal London Corporate Bond | 5.03 | 17.78 | 8.02 |
| IA Sterling Corporate Bond | 3.72 | 13.53 | -0.66 |
