Why it's a good time to buy gilts
Now is the moment to break the investment rule of a lifetime.
I have broken the investment rule of my lifetime, which was never lend money to the government. We all do, of course, whenever we are waiting for a tax rebate (those were the days) or simply keeping banknotes in our wallets, but I mean deliberately buying a tiny slice of the government’s vast debt. The gilts market, as this pile is colloquially called, has had a terrible start to 2025. Prices have trembled so yields, the mathematically converse of prices, have risen sharply.
In the old days, the falls were painfully apparent because actual stock prices were quoted, so you could see the loss of capital. This meant added drama, but was frequently slightly inaccurate. Gilts are government IOUs, usually with a fixed repayment date, so every day that date, with its fixed-price redemption, gets a tiny bit closer. One day’s unchanged price means a tiny increase in the yield to that redemption date.
Today’s computers can deal with this mathematics without even warming up, and yield calculations that took hours to make can be done instantly. Quoting the yield allows better comparison between stocks that may have different coupons (interest rates) and redemption dates. So the drama is replaced by what looks like little changes in yields.
This month, those little changes have added up to a desperate problem for Rachel Reeves. The yield on the 30-year stock, for example, has gone from 4.75 per cent to 5.25 per cent in six weeks. This extra cost of money the government must borrow has effectively taken all the margin for error in her Budget forecasts. The Bond Vigilantes, a self-defined crew who worry about the size of the debt burden, can sense blood. They will keep selling until they are thrown a bone big enough to change their calculations.
So why am I breaking the investment rule of a lifetime? Partly because a guaranteed yield of over 5 per cent (tax-free in an ISA) provides quite a bit of protection against future inflation, and partly because after such a precipitous decline in price, there will be many on the sidelines looking to time the inevitable bounce, assuming they are thrown a couple of bones.
The bones available are pretty obvious, but are all politically painful. A reverse of just some of the more damaging aspects of the Budget would transform sentiment. Even a meaningful signal that the private sector is more than a cow to be endlessly milked would help. Postponing the implementation of some of the extra costs on employers might avoid too much loss of political face. An acknowledgment that not every business has hundreds or thousands of employees, a vast HR machine and deep profit margins would go down well.
Reeves’ instinct will be to soldier on, especially now the boss has extended her sentence to the end of this parliament, but, at some point, the economic cost of sticking to a policy outweighs the political one of changing it. We are very close to that now.
Prices have “trembled”. Tumbled ?
Any others? Bring back proofreading please.