Fixed Income Investments

How do I buy UK government bonds?

You can buy UK Government bonds in three ways; buying directly, buying through an agent, or buying a share of an ETF that already owns bonds.

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How do I buy UK government bonds?
  • UK Government Bonds are investments usually considered safe since the government secures them.
  • You can directly buy bonds through the DMO, your broker, or your bank.
  • You can also invest in government bonds by buying shares of a fund or ETF.
  • When investing in bonds, you should consider the risks related to inflation, interest rates, and exchange rates.

UK Government bonds: FAQs

  • Are fixed-rate bonds better than variable rates bonds?

    It depends on your risk appetite. Fixed-rate bonds ensure predictable revenue streams, but you also lose out on more money if the interest rates rise.

  • What is the primary benefit of buying Premium Bonds?

    Although Premium Bonds do not offer any interest payments, they give you a chance to win upward of £1,000,000. However, the primary benefit of premium bonds is that your principal amount remains safe regardless of whether you win.

  • How are UK government bonds different from stocks?

    There are many differences between UK government bonds and stocks, the main one being that one is a loan while the other is a share, or part ownership, in a company. Sure, some stocks pay dividends similar to interest paid on bonds. But the way dividends are calculated differs from how the government calculates the interest it pays on

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We can buy UK government gilts directly from the HM Debt Management Office (DMO) and authorised agents. Alternatively, we can also buy through brokers and banks. Finally, we can invest in funds or ETFs that focus on UK government bonds.

Government bonds, or gilts, offer a debt-based investment opportunity that grants a government loan at a set interest rate. They offer the government a chance to raise funds domestically for national projects while delivering steady payments to investors.

These are different from corporate bonds, which companies issue to raise capital. Gilts are relatively free of risk if they come from a stable government, such as the UK.

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Why should you even buy government bonds?

Buying and trading government bonds offer many relatively reliable investment opportunities. It’s a terrific way to diversify your investment portfolio and spread the risk over several investments, especially as this is considered a safer investment. It simply offers a steady source of income from annual coupon payments or dividends paid by the issuer, in this case, the UK Government treasury.

Apart from buying bonds, trading on UK gilts allows speculation on interest rates and hedges against increases in existing bond investments. It also provides hedging against increasing inflation rates on fixed-income investments. However, trading bonds is usually more complex than simply holding a bond for interest payments. Find out more about bonds in our most recent piece.

Key terms to look out for when buying bonds

Entering the bond market for the first time can be tricky, and there’s something of a learning curve. It can help to familiarise yourself with some of the terms that most commonly come up, including:

Maturity: the period from when a bond is issued to its final payment. The maturity date is the date of expiry with the final price.

Gilt yields: this is the rate of interest the UK government bonds pay to bondholders. It is expressed as a percentage, calculated annually, and paid out at maturity.

Bond price: Offered as a percentage of face value or par, it is the amount investors are willing to pay for existing bonds.

Credit ratings: A credit scoring scheme calculates the bond quality, and credit Ratings range from “AAA” to “BBB-” from Standard & Poor’s and “Aaa” to “Baa” from Moody’s.

Coupon rate: The yield from a fixed-income investment is expressed in the annual coupon payments divided by the par value.

How does the UK government bond market work?

The UK Government usually issues bonds through a bond auction, bid on by banks and large financial institutions. They are then sold on a smaller scale - in the secondary market - to private investors, smaller banks, or funds. Many bonds are listed on the London Stock Exchange or the FTSE, but most are bought and sold directly between dealers.

In essence, the DMO recognises five major groups of investors who are interested in the buying and selling of gilts. These include:

  • Pension Funds
  • Insurance Companies
  • Investment Banks
  • Overseas Investors
  • Private Investors

The government bond market allows investments directly by buying actual bonds or indirectly through shares in bond ETF or funds. The DMO and authorised agents both deal in the direct sale of bonds. Private investors may directly buy gilts from the DMO's Purchase and Sale Service or indirectly via banks or brokers.

Buying government bonds

Buying bonds can sometimes be confusing due to each country's different names for them. It is vital to do research on local terms before making investments. In the United Kingdom, types of gilts include:

Conventional gilts

As the most common type of bond issued in the UK, the conventional guild has a fixed coupon yield paid out biannually until maturity. The issuer pays the final coupon payment and the invested capital on the maturity date. The name of the gilt indicates its maturity, such as a three-year gilt matures in three years.

Index-linked gilts

Unlike conventional gilts, index-linked gilts don't pay a fixed income. Instead, the coupon rate is variable and determined by the retail price index (RPI). This method offers better protection of capital against inflation fluctuations.

Bond ETFs

Bond ETFs use pooled investments to buy a more extensive selection of government bonds. Shares from this asset class pay out the dividends from the coupons. However, they may not be a good investment choice for beginners because the bonds can become very complex, with different coupon rates, maturities, and dates.

They also depend on the bondholder’s end goals, as ETFs never mature or pay a principal amount on the value of the investment. A good understanding of the bond’s characteristics is required to earn from this investment.

How to buy UK government bonds?

Primarily, there are three main ways to buy UK Government bonds. The method you choose depends on the kind of investor you are, your risk profile, and whether you want to own the bond directly.

Buying bonds through stockbrokers and banks

Much like how stocks are bought and sold on the stock market, bonds have their own market that functions quite similarly. You can access the bond market via a broker, dealer, or a Bank that acts on our behalf to purchase and sell gilts.

The broker strives to:

  • seek out the best prices of the required gilt for the client
  • take care of all necessary paperwork
  • and carries out the actual buying and selling of the bonds

Brokers usually charge a commission for the services rendered.

Famous brokers include Hargreaves Lansdown and IG. In the UK, almost all big banks, such as Barclays and HSBC, offer you to buy UK Government bonds. They work similarly to a broker in how they allow you to purchase bonds. It’s important to remember that the Financial Conduct Authority must accredit the broker you choose.

Buying bonds through the DMO

To use the DMO’s Purchase and Sale Service, we need to register ourselves as members of the DMO's Approved Group of Investors. To become a member, we need to fulfil the eligibility criteria set out by the Registrar and the DMO to meet their respective and collective anti-money laundering obligations.

These criteria include disclosing information about the identity and source of funds. Finally, an application form needs to be filled in and sent out to the address of Computershare - an agent of the DMO. Once a member of the DMO's Approved Group of Investors, we can buy and sell gilts on our own. 

This is accomplished by completing the relevant Stock Dealing Form on the Computershare website and sending it via post accompanied by the full and appropriate payment in the form of a cheque or gift certificate. Once the form has been received and the payment has cleared, the gilt certificate is issued and dispatched to the given return address.

Investing in government bond ETFs and funds

Bond ETFs and funds can be invested in through the stock market, similar to how you would buy a bond. The only difference would be that you would buy a share of the fund instead of the actual bond.

Funds offer the additional benefit of diversifying exposure and portfolio from a single investment and provide regular income from dividends. This is because they invest in a variety of bonds to maximise returns.

Factors to consider when trading bonds

Trading bonds is not a financial activity that occurs in isolation. Many factors can affect how a trade happens, which you should consider before making trades or investments into equities.

Interest rates

Fluctuating interest rates offer bonds as a better or worse-off investment. Demand can vary based on the relationship with the coupon rate- if it is higher than the interest rate, it makes for a better investment, and the market is likely to rise. Similarly, if the coupon rate is lower, it represents a greater risk.

Maturity date

An essential factor in how close a bond is to maturity. Newly issued bonds are priced with current interest rates, so they largely trade close to par value. Maturity is indicated by a payout of the original investment, meaning they move back to the par value as they move towards expiry.

Credit ratings

Gilts are primarily considered a low-risk investment, as the government is unlikely to default on its interest payments. This is not to say that it is impossible, and bonds with greater risk often trade at a lower price than other lower-risk bonds of the same interest rate. It would be best if you made investments after reviewing credit ratings that can indicate the risk, such as Moody’s.


Fixed-income bonds do not respond well to high rates of inflation. With a fixed rate, the buying power of the coupon amount declines in the event of inflation, making the investment less valuable to bondholders. The increase in inflation rates comes from central financial authorities, like the central bank and Bank of England, and signifies an inverse relationship with bond prices. Hence, a high rate of inflation means low bond prices.

Risks to consider when buying bonds

While gilts are a relatively low-risk investment, they are not entirely risk-free. The argument for bond investments is that the government is less likely to default on its payments. Therefore, the government ensures a return on your treasury bonds investment upon maturity. Even if you trade them on the secondary market, other investors will immediately buy the bonds from you due to the government’s integrity.

High-risk investments can occur when the government may not be able to produce more capital or may default on payments regardless of the availability of capital. This general risk runs with every such investment and should not be ignored even if the issuer is the government. There are a few other risk factors also involved.

Interest rate risk

Fluctuations in the rate of interest pose a risk to the bond value. High-interest rates, for example, may cause the value to fall when other, better investment opportunities with higher returns present themselves. The decrease in demand can tank the bond investment value resulting in a lower return.

Inflation risk

Given the inverse relationship between inflation rates and the bond price, high inflation risks lowering the bond's market price. Due to lower purchasing power, inflation rates rising above the coupon rate reduce the value of the investments. This risk is more prominent in fixed-income investments. If there is too high a risk of inflation rate fluctuations, index-linked investments might be a better idea, as they are designed to benefit from interest fluctuations.

Exchange rate risk

Buying in a currency that is not the same as the reference currency can open some avenues of risk. While the payout would still be the same, fluctuations in the exchange rate can reduce the investment value and result in lower returns.

How does buying bonds work in the UK?

Whether you want to buy and hold the bond directly, you can buy UK Government bonds through brokers, banks, and the DMO. However, another option is to invest in funds that specifically target government bonds to simplify your investment in bonds.

Government bonds are considered a safe investment in the UK and can provide a steady stream of income that can be especially beneficial when you are nearing retirement.

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