Bond Watch: lock in inflation-adjusted returns with new gilt issue

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.         

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.              

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ii offers access to inflation-linked gilt auction 

The UK government issues two types of gilts: conventional and index linked. Most gilts (around 75%) are conventional, meaning that the coupon remains fixed for the duration of the bond, as well as the principal value that is returned when the gilt matures. 

For the other 25% of gilts in issue, two semi-annual coupons and the final principal on maturity are adjusted depending on the level of Retail Price Index (RPI) inflation over the gilt’s life. 

For the first time, we are offering auction access to an inflation-linked gilt: 1.875% Index-Linked Treasury Gilt 2049.  

This gilt will deliver 1.875% “real” annual returns, so the RPI index rate plus 1.875% over the life of the bond.  

• Invest in the index-linked gilt issue here
• How inflation-linked gilts work

Investors can invest a minimum of £1,000 in the issue, and up to £1 million. The offer is now open and closes at 2.30pm on Monday 10 March. The gilt will be issued and begin trading on Wednesday 12 March.  

Buying the gilt at issue means that there will be no difference between the “clean” and “dirty” price (which accounts for accrued interest) of the gilt, which makes for a simple return calculation. 

During the life of the gilt, the dirty price can differ greatly from the clean price due to the growth of the coupons and principal value due to inflation. 

Trump tariffs spook bond markets  

Bond markets fell this week, causing yields to rise, as investors worried that President Trump’s tariffs could spark a new inflationary wave.  

The 10-year gilt now yields 4.7%, up from 4.5% a week ago. Longer-dated bonds yield more, with the 20-year gilt at 5.2% and 30-year at 5.3%.  

But the bond sell-off was not just confined to the UK, German bond yields rose sharply following the government’s announcement that it would increase spending on defence and scrap strict fiscal rules.  

While generally bonds rise in value (causing yields to fall) during times of economic uncertainty, the threat of inflation is undermining their safe-haven status, as well as the need for governments to spend more on defence given the United States’ withdrawal of support for Ukraine.