For most of the past fifteen years, gilts have been a peripheral instrument in our client portfolios. With base rates near zero and inflation muted, the yield available on UK government debt did not justify the duration risk. That picture has changed.
What we are seeing now
With ten-year gilt yields settled in the 4.2-4.6% range, the real return — once you net off realistic medium-term inflation expectations — has moved back into territory where gilts earn their place. For a retired client drawing income, a small allocation to UK government debt now offers something that has been hard to come by: a predictable, sterling-denominated nominal return that closely matches a known liability.
We are using gilts in two specific ways this year.
The first is short-dated nominal gilts as a cash alternative, in lieu of the cash that historically sat in money market funds. Yields are comparable, the credit risk is lower, and the tax treatment for higher-rate taxpayers can be more efficient (the coupon is taxable as income, but the capital uplift on a discount-bought gilt is tax-free).
The second is medium-dated index-linked gilts for clients with long retirement income needs. The real yields on linkers — positive for the first time in over a decade — make the maths work for liability-matching in a way it has not for many years.
What we are not doing
We are not chasing yield. We are not buying long-duration gilts (anything beyond 15 years) for clients in retirement, because the duration risk does not pay for itself when the goal is income stability. We are not using leveraged gilt funds. And we are not, despite the visible enthusiasm in the market, treating this as a "trade" — the allocation is structural, sized to the client's income needs, and reviewed annually like everything else.
Practical sizing
For a client drawing £40,000 a year with around £200,000 of cash needs over the next five years, we would typically place £30,000-50,000 in a short-dated gilt ladder, £50,000-80,000 in a medium-dated linker holding, and leave the rest in conventional cash and a diversified equity-heavy growth allocation. The exact figures depend entirely on the client's circumstances, tax position, and other income.
This is dull, well-understood work. It is also genuinely useful for the first time in fifteen years. We are pleased to have it back as a real lever.