You would be forgiven for thinking the only thing that matters about UK government bonds – or gilts – is their yield (the interest rate they offer measured as a percentage of their market price). Government borrowing overshoots City estimates = gilt yields rise; war in the Middle East intensifies = gilts yields rise; stubbornly high inflation nudges further upwards = gilt yields rise. Maybe it’s the media’s obsession, but it seems that UK government bonds are only ever mentioned in connection with their yield, and especially when it is rising, as it has been for much of the past three years, sometimes dramatically.
This is misleading, because rising yields are always supposed to be bad. In a sense, however, they sound as though they should be good, since increases basically mean the same as saying that the interest rate paid on a savings account is getting higher – and every saver wants that. Yet from the viewpoint of a saver who buys gilts, rising yields can’t be good. Yields only rise because gilts’ prices fall, and quite often in the past 12 months or so they have been dropping at a steeper rate than at any time in the past 40 years.
The two tables give a glimpse of this. Table 1 quantifies the miserable losses investors in various parts of the gilts market have had to sustain. It shows price changes between now and each of the past five years for a gilts fund, a short-dated stock and a long-dated one, each of which would be expected to respond differently to the bad news that interest rates were rising.