Government bonds

There are different ways to buy government bonds, but while UK citizens can directly purchase UK government bonds, buying US government bonds in the UK requires using brokerage services or secondary markets, as direct purchase is not an option for non-US residents.

Let’s dive a little deeper into how to buy Government bonds in the UK.

Investing In Government Bonds and Gilts

Buying bonds isn’t quite as simple as buying stocks, but it’s not much harder. If you want to buy US bonds directly and are a US citizen, you can buy straight from the Treasury. UK citizens can similarly invest in auctions of UK government bonds, known as gilts, through the Debt Management Office.

To avoid any confusion that may be caused by terminology here is a short explanation of what are guilts and treasury bonds.

UK guilts are British government bonds, favored for their reliability and backed by the UK government. 

US treasuries, on the other hand, include Treasury Bills, Notes, and Bonds, each varying in maturity. 

The key differences between guilts and treasuries lie in their issuing governments, the currency of denomination, and market influences affecting their yields. This understanding is vital for investors aiming to diversify their bond portfolios and align their investments with their financial objectives.

How to Buy UK Government Bonds

There are 3 main methods to buy UK government bonds (gilts):

• Buying directly through the Debt Management Office (DMO): 

Private investors can purchase gilts directly from the DMO’s Purchase and Sale Service, operated by Computershare Investor Services PLC. To use this service, investors must register and meet certain eligibility criteria, including identity verification and source of funds disclosure.

The criteria need to be met are available at the DMO official website.

• Buying through stockbrokers and banks: 

Gilts can be purchased like stocks, via a broker, dealer, or bank. Brokers facilitate the process by finding the best prices, handling paperwork, and executing the buying and selling of bonds. They typically charge a commission for their services. In the UK, large banks like Barclays, as well as brokers like Hargreaves Lansdown and IG, offer services to purchase government bonds.

• Buying through National Savings & Investments (NS&I): 

NS&I, a state-owned savings bank in the UK, offers Premium Bonds and other savings and investments. These bonds can be purchased from NS&I’s website or through its agents.

These bonds appeal to a broad range of investors, particularly those seeking lower-risk investment options. The process of investing with NS&I is straightforward, making it a good choice for individuals new to bond investing.

For detailed information about NS&I’s offerings and how to invest in them, it’s best to consult their official website or seek financial advice.

Choosing between NS&I, the DMO, or brokers for buying bonds depends on factors like safety, convenience, investment goals, and fees. NS&I offers government-backed, accessible savings products suitable for lower-risk investments. The DMO and brokers provide gilts with potential specific investment strategies and market liquidity, but may involve additional fees. The decision should align with individual financial goals and risk tolerance.

Do you Pay Tax on UK Government Bonds?

In the UK, taxation on government bonds, or gilts, is subject to specific rules. Interest earned from these bonds is taxable and must be declared as income. This means it’s subject to Income Tax at your applicable rate, whether you’re a basic, higher, or additional rate taxpayer. However, the way tax is applied depends on how you hold these bonds. If held directly, the interest is paid gross, and you’re responsible for declaring it on your tax return. 

Alternatively, if your gilts are held in a tax-advantaged account like an ISA or a pension, the interest might be exempt from Income Tax. Additionally, any capital gains from selling gilts are generally exempt from Capital Gains Tax, making them a more tax-efficient investment option for long-term investors. As tax laws can change and vary based on individual circumstances, it’s advisable to consult a tax professional for personalized advice.

How to Buy US Government Bonds in UK

Unlike UK Government bonds, which can be purchased directly, UK citizens cannot buy US Treasury bonds directly from the US government. However, US government bonds are accessible to UK residents through the secondary market or via brokerage services.

An easy way to buy bond issuances, especially outside of your own country, is through your broker – and this is also the place to go for secondary market trading. Not all brokers offer bonds (Robinhood doesn’t, for example), but with those who do, you can buy and sell just like you do stocks.

Purchasing US government bonds in the UK typically involves a series of steps, primarily executed through brokerage platforms that facilitate access to these securities or through Exchange-Traded Funds (ETFs) that invest in them. 

The process begins with choosing a suitable trading platform or brokerage. It’s important to select one that offers access to US government bonds or bond ETFs. Popular choices include platforms like Saxo Markets, Interactive Brokers, and Hargreaves Lansdown known for their regulatory compliance and a wide range of investment options. Ensuring that the platform is regulated by the UK’s Financial Conduct Authority (FCA) is crucial for added security and trust. Once you have selected a platform, the next step is to open an account. This process generally involves providing personal information, proof of identity, and in some cases, financial information. These requirements are part of regulatory compliance measures.

How to Buy Bond ETFs

Buying Bond ETFs can be done through various online brokerage platforms like Wealthyhood, Hargreaves Lansdown, Interactive Investor, and AJ Bell. These platforms offer a wide range of Bond ETFs, allowing investors to choose based on their investment goals and risk tolerance. The process involves opening and funding a brokerage account, selecting the desired Bond ETFs, and executing the purchase through the platform. 

These ETFs offer diversification and can be bought in smaller increments, making them accessible to a broad range of investors. Additionally, investors have the flexibility to choose ETFs that focus on different types of bonds, including government, corporate, or a mix of both.

Best Governent Bond ETFs

Some of the best UK government bond ETFs as of 2023 include the Vanguard Total Bond Market ETF and the Lyxor Core UK Government Inflation-Linked Bond ETF. 

The Vanguard Total Bond Market ETF (BND) is a prominent choice, known for its extensive portfolio that includes a significant number of investment-grade government bonds. This fund is particularly noted for its substantial size and its focus on low-risk, high-credit rating bonds, primarily those backed by the US government.

On the other hand the Lyxor Core UK Government Inflation-Linked Bond ETF(DR) is geared towards investors who prefer investments that are generally considered lower in risk.

In addition to the previously mentioned government bond ETFs, there are several other notable options available:

• USD Treasury Bond UCITS ETF (VUTY): This ETF primarily involves directly acquiring securities with the aim of mirroring the performance of the Bloomberg Global Aggregate US Treasury Float Adjusted Index. 
• SPDR Bloomberg 1-3 Month T-Bill ETF (BIL): This ETF provides exposure to short-term U.S. government bonds, with a yield to maturity of 5.4%
• WisdomTree Floating Rate Treasury Fund (USFR): This ETF offers exposure to floating-rate Treasury bonds
• iShares 7-10 Year Treasury Bond ETF (IEF): This ETF focuses on medium- to long-term U.S. Treasury bonds, with a duration of 7 to 10 years

Investing via a bond ETF diversifies your portfolio and also lets you take a more hands-off approach to bond investing. But keep in mind that, compared to buying individual bonds, a fund or ETF has no maturity date, which means that some bonds that are held in the basket may be sold before maturity. 

It’s important to note that the suitability of a bond ETF depends on your individual investment goals, risk tolerance, and the market conditions. The performance of bond ETFs can vary, and like all investments, they carry risk. Investors should conduct thorough research and consider consulting a financial advisor before making investment decisions.

Are UK Government Bonds a Good Investment?

Whether UK Government Bonds are a good investment depends on your financial goals, risk tolerance, and market conditions. UK Governement Bonds (also called Gilts) are considered low-risk investments because they are backed by the UK government. This makes them a stable choice, particularly in volatile market environments. Gilts often offer lower returns compared to stocks or corporate bonds, but they provide a steady income stream and are less sensitive to market fluctuations.

For conservative investors or those looking to diversify their portfolio with a less risky asset, UK Government Bonds can be a good option. They are particularly appealing during times of economic uncertainty when investors seek safer investment havens. However, in a low-interest-rate environment, the returns on gilts can be modest, and inflation can erode the real value of the returns.

For investors seeking higher returns and willing to take on more risk, other asset classes like stocks or corporate bonds might be more suitable. It’s important to balance the safety and stability of government bonds with their lower growth potential.

Investors should also consider the current economic climate, including interest rates and inflation trends, as these factors can impact the performance of government bonds. As with any investment, it’s advisable to consult with a financial advisor to ensure your investment choices align with your overall financial strategy and goals.

Bonds for the masters 

Whatever you choose, many investors will find bonds to be a useful part of their portfolio.

Ray Dalio’s All-Weather Portfolio has around 40% in long-term US bonds and 15% in 3-to-7-year Treasuries. Warren Buffett’s family money, meanwhile, is in a 90/10 portfolio: 90% in an S&P 500 tracker and 10% in short-term government bonds.

Buffett’s portfolio is riskier but will grow more if stocks keep rising. If you’re younger and can afford to potentially suffer a setback on the road to retirement, that might be right for you; but as you get older, you might begin to favour the relative stability of bonds.

Thanks to this learning guide, you’re now well placed to invest in them smartly – and help your government repay its debts at the same time, too…

In this guide, you’ve learned:

• You can either buy bonds directly from their government issuers, trade them on the secondary market, or invest in bond ETFs. Either way, bonds’ potential percentage of your overall portfolio depends on individual circumstances.
• Buying UK Governement bonds can be achieved with several methods. The choice among NS&I, DMO, and brokerage services hinges on factors like safety, ease, investment goals, and associated fees. NS&I’s government-backed products are ideal for lower-risk investments, while DMO and brokers might offer more tailored strategies with potential for market liquidity but could involve extra fees. The right choice aligns with an investor’s financial objectives and risk tolerance. For a comprehensive understanding and personalized advice, it’s advisable to consult the respective websites or seek professional financial guidance.
• In the UK, interest earned from government bonds (gilts) is taxable and must be declared as income, subject to the individual’s Income Tax rate. However, if gilts are held in tax-advantaged accounts like ISAs or pensions, the interest may be exempt from Income Tax. While interest is subject to Income Tax, any capital gains from selling gilts are typically exempt from Capital Gains Tax, offering a tax-efficient investment for long-term investors.
• In the UK, purchasing US Treasury bonds isn’t direct like buying UK Government bonds; it requires accessing secondary markets or brokerage services. The process includes selecting a regulated brokerage platform, such as Saxo Markets or Interactive Brokers, and opening an account by providing personal and financial information for regulatory compliance. This approach offers UK residents a way to invest in US government bonds, similar to how they would trade stocks.
• Buying Bond ETFs can be easily accomplished through online brokerages offering a diverse array of Bond ETFs to suit different investment goals and risk preferences. The process includes setting up and funding an account, choosing the appropriate Bond ETFs, and completing the purchase. These ETFs provide portfolio diversification, are available in smaller investment sizes, and cater to a wide investor base with options in various bond categories, such as government and corporate bonds.
• Government bonds can offer security, diversification, and consistent returns – which is why they’re often seen as crucial to forming a balanced investment portfolio.
• UK Government Bonds, or gilts, are a low-risk investment option, suitable for conservative investors or those seeking stability, especially in uncertain economic times. However, they generally offer lower returns compared to higher-risk assets like stocks, and their performance can be influenced by factors like interest rates and inflation, making it crucial to consider your financial goals and market conditions before investing.

Keep in mind that when you invest, your capital is at risk. This learning guide and the examples used in it are for information purposes only and is not intended as investment advice.