Comprehensive Guide to Treasury Bonds

We cover how treasury bonds work from top to bottom…

Updated: December 29, 2023
Matt Crabtree

Written By

Matt Crabtree

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Treasury bonds, in the UK, are also called “gilts”…

You may remember the BoE buying out £154m of UK gilts in Q4, 2022. When diversifying your portfolio with low-risk assets, UK Treasury bonds, often known as “gilts”, might be a wonderful option. But, what precisely are gilts? Where can I purchase them, or how can I buy government bonds online?

All you need to know, and more, I've laid out in detail in this comprehensive guide to treasury bonds.

Comprehensive Guide to Treasury Bonds — At a Glance… 

People seek bonds for stability and liquidity…

  • Treasury bonds are state-issued debt “instruments” that function similarly to loans made to the issuing government, from you.
  • You will get a coupon payment (a periodic income stream) and your principal when the bond matures. 
  • Conventional gilts, index-linked gilts, and perpetual gilts are only a few of the varieties of government bonds available.
  • Government bonds have coupon rates that may change for a variety of reasons.
  • Foreign government bonds may also be purchased, albeit they may involve higher levels of risk.

What benefits to investment portfolios are two of the main reasons why investors seek out Treasury bonds? People seek bonds for stability and liquidity. For retirees, bonds are frequently considered a secure investment, but not all bonds are created equal.

But what are they? In this comprehensive guide to treasury bonds, we cover things beginners should know before withdrawing investment money from their online bank account

What Treasury Bonds are

You are lending money to the government.

Investing in a government bond is, in essence, lending money to the government of the United Kingdom at a predetermined interest rate.

Bonds are a way for a government, in this example the UK government, to generate money for projects like new infrastructure, and for investors to collect interest payments consistently. This is why bonds issued by the government are classified as fixed-income securities.

In Britain, government bonds are known as gilts. When you invest in a government bond, you agree to lend the government money for a certain time. Coupon payments are the interest that investors get for their money. Because of this, they are classified as fixed-income assets.

At the end of the bond's specified maturity time, the bond will automatically expire and the investor will get a full refund of their principal. This is the bond's maturity date, which might vary from bond to bond.

Comprehensive Guide to Treasury Bonds — Buying Bonds

The UK issues bonds to raise money. 

When a government needs to generate money, it often issues bonds and auctions them off to financial organisations like banks. The bonds will be resold by the banks and financial institutions to other investors, such as mutual fund pools or private retailers.

Method 1 ✔️: Invest Directly

Naturally, you may purchase government bonds from the government itself. Most often, this entails acquiring them from the HM Debt Management Office or its authorised representatives. Bonds may still be bought and sold on the LSE like stocks.

Method 2 ✔️: Use a Fund

Bond funds are an alternative to investing directly in individual bonds. They are generally ETFs (exchange-traded funds) that invest in bonds issued by the government. You won't be assigned a maturity date or get interest payments from the government, but you will receive dividends consistently.

Government bond exchange-traded funds are similar to index-linked gilts. Government bond ETFs are similar to FTSE 100 funds in that they both monitor the value of the underlying index and provide dividends based on that index's performance.

You may have to pay management fees to the ETF's administrators, but you won't have to worry about missing any coupon payments or having your bond mature early when you invest in government bonds via an ETF. Like individual bonds or stocks, these funds may be acquired through trading accounts.

Treasury Bond Types…

Gilts are the standard government bond issued by the United Kingdom.

What kinds of bonds does the United Kingdom's government offer?

A comprehensive guide to treasury bonds wouldn’t be complete without going through the types available. To invest in the government, you may choose from various bonds, each with advantages. Please read on to learn more about the various bond types.

1. Gilts 

This is the standard government bond issued by the United Kingdom. These are the kinds of ties I've covered in my prior writing. When the government needs to generate funds, it often sells standard gilts to the public. These are investments that provide a regular interest payment. 

This kind of investment is retained until its maturity date, at which point its value may rise or fall based on the prevailing interest rate. When the maturity date arrives, you'll get your money back.

2. Conventional Gilts 

While conventional gilts are quite similar to regular government bonds, they contain an additional provision called “calls” that permits the government to repay the debt before the maturity date. 

A traditional gilt may have variable coupon payments, but it more often than not pays a set coupon, once or twice yearly.

3. Bonds Tied to an Index

An index-linked gilt is a form of gilt that pays interest based on changes in the UK Retail Price Index rather than a set coupon rate (RPI). These stocks will always accrue interest for their holders.

As inflation rises, the Bank of England often responds by raising interest rates, which reduces the value of government bonds. As a result, index-linked gilts may be preferable during periods of high inflation.

4. Perpetuals

Bonds with no expiration date are often called perpetual gilts. These gilts do not have a fixed maturity date and may be repaid at any time the government chooses. Investors in undated or perpetual gilts attempt to profit rather than collect regular interest payments. Hence, they tend to be more unstable than regular gilts.

What Treasury Bonds to Buy and Why

What are The Top-Rated Government Bonds?

The answer to this question relies on your motivations for making the investment. That’s too much to cover even in this comprehensive guide to treasury bonds. But the Standard or conventional gilts may be preferable if you're seeking a long-term investment with reduced risk and regular coupon payments.

Updated or perpetual gilts, on the other hand, could be a better fit for those who are OK with a higher level of risk in exchange for the possibility of greater reward.

Conventional gilts may be preferable for long-term investment. 

The Rationale for Purchasing Government Bonds

Government bonds are valuable fixed-income assets with their own merits, despite their superficial similarity to purchasing shares in a publicly traded firm. Government bonds are a potentially reliable and low-risk investment option since nations and their governments are often relatively stable. After all, you wouldn't lose your money until the whole country collapsed.

Even so, it's important to remember that even so, this is still possible. As an example, consider the Greek economic collapse in late 2009. Despite appearances, the Greek government debt crisis would have wiped out the value of many government bonds, even if the nation itself was stable.

That being said, it's not impossible. 

Government bonds are a potential asset class for portfolio diversification. Bonds issued by the government may hold their value better than other investments during market downturns because of their association with the government.

Pricing and Factors Affecting Treasury Bonds… 

What Rate of Interest Do Government Bonds Now Offer?

The rate of return you get from buying government bonds is determined by the bond's maturity date and the length of time you hold it. According to data collected by Sharing Pensions in May 2022, the average return rate for a 15-year gilt was 2.23%.

In April 2020, for instance, the yield on a 15-year gilt was 0.16%, illustrating that gilt returns are still susceptible to economic fluctuations. Government bond yields are subject to frequent changes, therefore research is required before investing.

Prices mainly rely on the maturity, length held, and stability. 

What are The Highest-Yielding Government Bonds?

As I've said throughout this manual, the interest rates offered by various bonds might vary widely. 

As of 10 May 2022, according to Hargreaves Lansdown, the greatest yield could be found in the Treasury 6% government bond with a maturity date of 7 December 2028. I was wondering what factors go into determining the price of government fixed-rate bonds. If you want to know why bond prices fluctuate, you should keep reading.

Funds-on-Call Ratios

Interest rates have a significant impact on a government bond's market value. Bond prices tend to climb as interest rates decrease and fall as bond prices rise. This is due to the correlation between the coupon rate a bond offers and the current UK interest rate.

For instance, a bond's price would rise due to increased demand if interest rates were lower than the bond's coupon rate. Therefore, demand and bond prices would fall if interest rates climb above the coupon rate.

Rates on Coupons

As the coupon rate on a government bond goes higher, the bond's value generally follows suit. This is because investors are more willing to pay a premium for bonds that provide larger coupons.

Periods of Maturity

Government bonds are generally priced initially at the time of purchase based on interest rates. But, as the maturity date approaches, the value of the bond often begins to revert back to the amount you originally paid for it. This is because after the maturity date has passed, you will get a full refund of your initial investment.

Investor Confidence

Investors may learn something about the safety of a government bond – and other bonds – by looking at its credit rating. Standard & Poor's assigns the following grades:

  • A bond grade of AAA represents the greatest quality and lowest default risk.
  • Bonds with an AA rating nevertheless has a low probability of defaulting.
  • BBB bonds have a moderate chance of defaulting on their payments and are hence a middle-tier investment option.
  • Speculative bonds with a high probability of default are rated BB and B.
  • Bonds rated CCC, CC, or C still have a very high chance of default and are considered very risky.
  • The issuer of D bonds have failed to make interest or principal payments.

Bonds with a credit grade of BB or below often provide greater interest rates to entice investors. The term “junk bonds” is occasionally used to describe them. The value of bonds issued by a nation that has had its credit rating lowered will also fall.

Price Levels

If inflation is high, then the buying power of fixed coupon payments will decrease and the coupon payments will be worth less. When inflation is strong, the central bank (in the UK's instance, the Bank of England) normally raises interest rates, which reduces the value of the gilt.

Comparison of Corporate vs Government Bonds

Businesses also use bonds to raise money. 

When you invest in a company rather than a government, you purchase a corporate bond. A corporation may use this method to get funding for initiatives, and it may even help them get more money than they could get through banks. It's similar to buying shares of stock in a firm, except that bonds issued by corporations pay interest.

Until its maturity date, you may sit on your corporate bond and collect interest payments. You may either collect the interest over time, or you can attempt to sell it on the secondary market for a profit.

Remember that a company's performance may be less steady than a government's and that a company's failure may affect both price and interest rate fluctuations. Hence, corporate bonds may provide a greater-risk investment opportunity with potentially better growth than government bonds.

Overseas bonds 

Can I purchase bonds issued by foreign governments?

Yes. Bonds issued by governments in other countries are an option. Foreign government bonds (or “gilts”) may be purchased via a trading account in the same manner that British government bonds (or “gilts”) are purchased. In the United States, bonds are often known as “Treasuries”, and are known for their consistency.

A bond's face value is often determined by the creditworthiness of a nation and the stability of its government. Bond purchases denominated in a foreign currency have the additional potential for loss due to fluctuations in exchange rates.


While investing in government bonds, what dangers should you be aware of? Government bonds are most vulnerable to interest rate fluctuations. If interest rates were to increase, the value of your bond would fall because of this factor alone.

The value of your bond will fall even more when inflation rates rise and the Bank of England raises interest rates, which is a direct result of inflation. To mitigate this risk, though, you may purchase an interest-linked bond whose value rises in tandem with inflation.

Best Places to Buy UK Treasury Bonds (GILTS)

Where can you get platform information on how to invest in bonds issued by the government? 

If you wish to invest in government bonds, you must first choose a nation and a government to invest in. You may acquire them from the government, via retail investor accounts on the secondary market, or as a fund after you've made your mind up. When you are ready to make a purchase, go ahead. Here are a few recommended platforms: 

1. Debt Management Office

The UK’s Debt Management Office (DMO) in the United Kingdom is the government's executive department in charge of handling its debt and cash flow, making loans to local governments, and overseeing the administration of some public sector institutions.


The Debt Management Office (DMO) oversees the daily operations of the UK government's debt

It is responsible for managing the aggregate cash requirements of the Exchequer most cost-effectively and minimising long-term financing costs while taking risk into account, all while remaining compatible with the aims of monetary and any broader policy concerns.

Both the Public Works Loan Board and the Commission for the Reduction of the National Debt are within their purview.


Depending on your financial goals, you may want to check into purchasing bonds issued by governments worldwide. Your analysis should assess the creditworthiness of the governments in question. As the yield on non-index-linked bonds is set, your investment plan should consider the likelihood that inflation will be greater or lower than projected.

Specialist organisations like Standard & Poor's provide reports that may be used as a basis for research. These firms analyse the underlying health of an economy and the amounts of government borrowing in a certain nation. The assistance provided by various brokers may be compared using a broker comparison.


When determining how to trade government bonds, those same brokers are a no-brainer. A reliable broker will provide access to several foreign government bond markets and reasonable pricing structures to protect their customers' profits from being eaten up by excessive administrative charges.

The best brokers eliminate excessive fees. 

There may be benefits to purchasing bonds directly from the issuer. Direct sales of government bonds to retail investors are offered by the Debt Management Office in the United Kingdom and Treasury Direct in the United States. As these are the exclusive services these organisations provide, a new account must be established.

2. eToro

Bond exchange-traded funds (ETFs) hold various bonds issued by corporations and governments. This disperses the risk among a larger number of investors. There are several exchange-traded funds and mutual funds that specialise in investing in UK gilts.

Unlike direct investments in gilts, which require a much greater initial investment, bond ETFs are readily available on the market and simple to trade due to their high liquidity and transparency. Like coupons on gilts, they offer periodic dividend payments.

Examples of Gilt ETFs

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Although most UK gilts have a maturity date, ETFs may be held forever, so there's no need to worry about when you'll be repaid in full. Investments in UK gilt exchange-traded funds via eToro trading include:

  • Lyxor UK Inflation-Linked Core Government Bond Exchange-Traded Fund (GILI). This ETF follows gilts with maturities of 15–25 years for a little over 40% of its holdings.
  • S&P/BARCLAYS 15+ YEAR GILTS UCITS ETF (GLTL). This ETF mirrors the performance of long-term UK gilts by a margin of just over 80%, with 42% invested in bonds with maturities between 20 and 30 years and 38% in bonds with maturities of more than 30 years.
  • The Core UK Gilts UCITS ETF (IGLT) exchange-traded fund invests primarily in UK government bonds issued by iShares. This provides a wide range of UK gilt exposure, from ultra-short to long-term bonds.

Comparison Guidelines

If you want to invest in bonds, what should you look for? Good inflation-neutral return, meaning that the principal is safe.

When inflation is above 10%, bond buyers are understandably wary. The reason for this is that over time, the actual buying power (return minus inflation rate) is gradually diminished. Simply said, ten pounds now won't purchase you ten pounds' worth of products tomorrow.


Moreover, many traders believe the bond market's extended bull run has finally finished. This chart shows the 10-year bond yield in the United States over several years. There has been a clear reversal of the lower-high trend. UK base rate will be heavily influenced by the policies of the US Federal Reserve. From this perspective, gilts are not an attractive option.

Some investors may find it advantageous to lock in specific returns for the portfolio in case of a substantial drop in bond prices (leading yields to reach certain thresholds, say, 6%). To implement this strategy, investors need to understand two things: (a) which bonds or gilts provide the best value, and (b) how many bonds to include in the portfolio.

Bond Pricing and Yield Relationship

How do bond yields and their associated prices work together?

iShares 7-10 Year Treasury Bond ETF

It's easy to understand the bond market by looking at the connection between yield and price: they always go in opposing directions. Have a look at the data in the table above. I'll illustrate using a US bond ETF.

The yield on the 10-year US bond climbed as its price fell during the last year (blue line) (orange line). A bond's price falls in relation to its yield.

The yield on government bonds with maturities of less than two years often follows the policy rate set by the central bank. In other words, when the policy rate is increased by the central bank, their yields will also increase. Nevertheless, longer-duration bonds may not follow the policy rate precisely for many reasons, one of which is inflation expectations.

Comprehensive Guide to Treasury Bonds: Summary

It's not fair to compare all sovereign borrowers. The interest rate, collateral, term length, and borrowing amounts are what set bonds apart from one another. Lenders prefer to credit sovereign nations with a solid track record of paying back debt. 

Sovereign credit ratings provide a rough proxy for this capacity to repay. Most government bond ratings are provided by independent rating organisations like Standard & Poor's (S&P), Fitch (Fitch), and Moody's (Moody's). In recent years, the United Kingdom has received high marks but these have dropped even more recently. The United Kingdom used to have an investment grade of AAA.

Find treasury bonds on eToro. Today, investors need to think outside of the box. Get bonds and other assets to trade, adding even more diversity like organic traffic (which is what eToro itself does!) to your growing portfolio.

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