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Over the past 20 years, low yields have meant that bonds have proved unappealing to income-seeking investors. “Low yield” is another way to describe an asset that pays a relatively small amount of income.
More recently, however, a combination of factors has forced these investments, such as UK government bonds, into the spotlight. This is potentially of interest to investors looking to boost their income – retirees, for example, with spare cash to invest and who are willing to accept some risk.
We look at what’s brought about this change and ask whether bonds should feature in your investment plans.
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Most of us are familiar with the idea of borrowing money. Asking for a loan from the bank to buy a car, for example.
Bonds are just another form of borrowing. Essentially, they are IOUs on a grand scale issued by both governments and companies worldwide.
Bonds have their own nomenclature. For example, UK government bonds are known as ‘gilts’. For centuries, the UK government has issued gilts when it wants to raise money from investors via the financial markets.
This might be for a variety of purposes, from financing the national debt to funding government expenditure and paying for infrastructure projects such as new roads and hospitals.
Find out more here about how to buy gilts and how they are taxed.
In the US, government bonds are called ‘Treasuries’. In the business world, companies looking to borrow money might do so by issuing a ‘corporate bond’.
Bonds are also referred to as fixed-interest securities. The bond market is enormous, easily on a par with the one for global stocks and shares. In 2026, the bond market was estimated to be worth about £110 trillion worldwide.
When you buy a bond, you’re effectively loaning money to a government or business for a certain length of time defined at the outset. At the end of that period, the bond matures and repays your initial loan. In addition, the borrower also pays you interest along the way.
Jason Hollands, managing director at Bestinvest by Evelyn Partners, says: “There are various types but, typically, a bond will mature at a known future date when investors receive back the amount originally loaned. In the meantime, the bondholder receives a fixed amount of interest, known as the ‘coupon’.
“The time horizons over which a bond will mature can vary greatly, ranging from one to 30 years. Once issued, conventional bonds are traded on the markets, with prices rising or falling, largely driven by a combination of expectations about inflation and interest rates, as well as sentiment.”
Bonds worldwide have come under renewed pressure as investors reassess inflation risks against a backdrop of geo-political uncertainty, rising energy prices, and concern about elevated government borrowing.
James Flintoft, head of investment solutions at AJ Bell, says: “The latest moves have been driven in part by escalating tensions between the US and Iran, which has increased concern about energy supply and the risk that inflation remains stickier than central banks would like.”
Hollands says: “Notably, the yield on gilts is the highest among the G7 group of leading economies. This is partly because the UK is seen as especially vulnerable to higher energy prices, but also because of uncertainty around the new Chancellor’s plans ahead of his first Budget later this October.
Rising bond yields are a challenge for governments, making it more expensive to borrow new money and refinance maturing debt. The markets are, in effect, demanding more reward given the potential for inflation to remain elevated and other risks.
But, as Hollands points out, there is a silver lining to this cloud. “What is clearly an unwelcome situation for governments, also presents an opportunity for investors who can take advantage of yields that are at levels last seen before the global financial crisis of 2008.
“At the time of writing [September 2026], gilts issued by the UK government with 10-years left until maturity are yielding 5.14%. The last time 10-year gilts were yielding over 5% was back in 2007.”
Bonds occupy a less risky part of the investment spectrum compared with, say, stocks and shares (equities). But there are no guarantees with any form of investing, so it’s still possible to lose money from investing in bonds.
Oliver Faizallah, head of fixed income research at Raymond James, says: “Bonds can serve different purposes in a portfolio, from generating income to preserving capital, so whether you should hold them depends on your goals.”
Hollands says that for cautious investors and income seekers with cash to invest, including many retirees, higher bond yields provide opportunities to diversify beyond equity markets.
“While equities offer greater long-term potential, share prices can be very volatile, and the dividend yield from the FTSE 100 Index is currently around three percentage points lower than the yields now available in parts of the bond market.”
Hollands acknowledges this his firm still has a preference for shares over bonds over the medium to long-term. But he adds: “It is wise to hold a mixture of different types of investments and some exposure to bonds makes sense if you currently have none or very little.”
Faizallah says: “Different bonds come with different risks, and whether you should hold bonds depends on your objectives. “Risks include credit risk, where the borrower may not repay you; interest rate risk, where bond prices fall when interest rates rise; inflation risk where rising prices reduce the value of future payments; and currency risk when investing overseas.”
Faizallah says: “Unlike corporate bonds, gilts carry very little risk of default. But they are not risk-free. Their main risk is interest rate risk, often referred to as duration risk. Put simply, when interest rates rise, the value of existing bonds falls. The longer a gilt has until maturity, the more sensitive it is to changes in interest rates.
Faizallah points out that this can result in “surprisingly large” price swings. “In 2022 [because of then prime minister Liz Truss’s ‘mini-budget’], some long-dated gilts lost more than 40% of their value as interest rates rose sharply, demonstrating that even government bonds can experience losses comparable to those often associated with equities.
“Short-dated gilts may appeal to those seeking greater certainty. Longer-dated gilts carry more interest rate risk but may benefit if rates fall. Index-linked gilts can help protect against inflation.”
For those who are comfortable choosing and managing their own investments – via an online DIY trading platform, for example – there’s a wide variety of funds investing in different parts of the bond market.
Hollands says: “Some funds focus on bonds due to mature over the next five years as these tend to be less volatile.”
Meanwhile, so-called ‘strategic bond funds’ offer a one-stop shop with the flexibility to invest in different parts of the market based on where the manager sees the best risk and reward opportunities.
For people with substantial cash savings not required immediately but held in a taxable environment – in other words sitting outside of tax-free ISAs and pension funds – owning gilts direct and not via a fund offers the opportunity for both higher returns than cash and increased tax efficiency.
Hollands says: “This is because many gilts already issued can currently be bought at prices well below the value they will mature at, meaning most of the return will come from a capital gain rather than the level of fixed income paid.”
“Importantly, gains made on gilts are exempt from tax and it is only the fixed income element, the coupon, which is potentially subject to income tax.
“You can currently get post-tax ‘yields to maturity’ for higher rate taxpayers that would be equivalent to finding a cash savings account with an interest rate of about 6.5 to 7% before tax.”
To demonstrate the potential returns available from buying gilts, Jason Hollands produced the following example.
“There is a gilt due to mature on 31 January 2028, which was originally issued in June 2020 when interest rates were close to rock bottom during the pandemic.
“It therefore pays a very low fixed coupon of just 0.125%. However, with the gilt currently trading at around £94.63 per £100 nominal value [September 2026], an investor holding it to maturity would receive £100. The combination of the price gain and the coupon equate to a “yield to maturity” of approximately 4.12%.
“But because most of that return will come from the tax-exempt capital gain rather than taxable interest on the tiny coupon, the post-tax return is particularly attractive for a higher-rate taxpayer.
“On the stated assumptions, a 4.053% post-tax yield for a 40% taxpayer would be equivalent to finding a taxable cash account paying roughly 6.755% interest before tax – a cash savings rate that is nigh-on impossible to find.”
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