Gilts are bonds issued by the UK government, and understanding three words – coupon, price and yield – explains most of what you read about them. This guide sets out how the pieces connect, why gilt prices and yields move in opposite directions, and what the Bank of England’s analysis of 2025 shows about long-term borrowing costs.
What exactly is a gilt?
The Bank of England describes gilts as UK government bonds and a form of government debt. When the government needs to borrow, it sells gilts to investors, promises to pay interest, and agrees to hand back the original sum on a set date.
The Bank’s technical notes draw a useful distinction between two main types. A conventional gilt is a guarantee by the government to pay the holder a fixed cash payment, known as the coupon, and then to repay the principal at maturity. An index-linked gilt is designed to protect the value of the investment from erosion by inflation, by adjusting coupon and principal payments to take account of accrued inflation.
That difference matters. A conventional gilt offers certainty about the pounds you will receive but not about what those pounds will buy. An index-linked gilt offers the reverse: the cash amounts vary, but they are tied to a measure of inflation.
What is a coupon, and why is it fixed?
The coupon is the fixed interest payment a bond makes. The Bank of England uses the same term in its explanation of quantitative easing, where it refers to this fixed interest payment as the bond’s “coupon”. On a conventional gilt, the coupon is set when the gilt is issued and does not change for the life of the bond.
This is the source of much confusion. The coupon is a feature of the bond, not a measure of what a buyer today will earn. A gilt with a £5 annual coupon pays £5 a year to whoever holds it, whether they bought it on the day it was issued or years later at a very different price. What the buyer actually earns depends on what they paid, and that brings us to yield.
Why do gilt prices and yields move in opposite directions?
Once issued, gilts trade in the market, and their prices rise and fall. The Bank of England sets out the relationship with a simple example. Suppose a bond is worth £100 and its coupon is £5 a year. The yield is 5 as a percentage of 100, or 5%. If the price rises from £100 to £120, the same £5 coupon now represents a yield of 5 as a percentage of 120, which is 4.2%.
The coupon has not changed; only the price a new buyer must pay has. As the Bank puts it, if the price of a bond goes up compared with its coupon, the yield goes down.
A worked example across three prices
The table below extends the Bank’s example, using illustrative arithmetic for a bond with a £5 annual coupon. The yield here is the simple version – coupon divided by price – and ignores the gain or loss a buyer would also see when the bond is repaid.
| Price paid | Coupon | Simple yield |
|---|---|---|
| £80 | £5 | 6.25% (5 ÷ 80) |
| £100 | £5 | 5.00% (5 ÷ 100) |
| £120 | £5 | 4.17% (5 ÷ 120), shown by the Bank as 4.2% |
The mechanism is why rising market interest rates are bad news for existing bondholders. If newly issued bonds offer more attractive terms, nobody will pay full price for an older bond with a lower coupon, so its price must drift down until its yield is competitive. The same logic works in reverse when rates fall.
What do the different yield measures mean?
Yield is not a single number. The simple version above is sometimes called a flat or running yield. A more complete measure is the gross redemption yield, which takes account of every future payment, including the repayment of principal at maturity.
In plain terms, the redemption yield is the single annual rate of return that would justify today’s price if the bond is held to maturity and the government pays as promised.
The distinction is practical. A gilt bought well below its £100 repayment value earns a capital gain on top of the coupon if held to maturity; one bought well above it suffers a capital loss. A flat yield alone hides both effects, which is why professional comparisons rely on the redemption yield.
What did 2025 show about long-term yields?
Gilt yields do not only reflect where the Bank of England sets its policy rate. The Bank’s own analysis of 2025, published in 2026, shows how much else can move them.
According to the Bank, long-term interest rates increased materially during the first three quarters of 2025. The 10-year gilt yield rose by around 20 basis points to 4.8% by early September, while the 30-year yield rose by about 50 basis points to 5.7%. Yields then fell back in the fourth quarter. By the end of the year, the 10-year yield was down about 12 basis points over the year at 4.5%, and the 30-year was up about 4 basis points at 5.2%. A basis point is one hundredth of a percentage point, so 50 basis points is half a percentage point.
The Bank’s assessment is that the main driver of the rise was higher term premia – the compensation investors require for holding long-term bonds instead of a series of short-term bonds. It linked those higher premia largely to geopolitical uncertainty and concerns about fiscal sustainability, and noted that supply and demand conditions in the gilt market amplified the move, with the supply effect easing later in the year.
The lesson is that a long-dated gilt carries more than one kind of risk. Its price responds to expectations for interest rates, and also to how much extra reward investors demand for lending for decades.
Are gilts really “risk-free”?
Gilts are often called risk-free, shorthand for the very low chance that the UK government fails to pay what it has promised. That is a statement about credit risk, not about price risk.
Price risk is the one the table above illustrates. A holder who needs to sell before maturity receives whatever the market is paying that day, which could be more or less than they paid. The 2025 figures show how large such swings can be at the long end of the curve, where a half-percentage-point change in yield translates into a much bigger change in price than at short maturities.
Held to maturity, a conventional gilt delivers the cash flows it promised. Inflation can still erode what those cash flows buy, which is the gap index-linked gilts are designed to address. Neither feature makes a gilt suitable or unsuitable for any individual; that depends on circumstances this article cannot know.
How are gilts treated for Capital Gains Tax?
One feature distinguishes gilts from many other investments. On its Capital Gains Tax guidance, GOV.UK lists UK government gilts, alongside Premium Bonds, among the things you do not pay Capital Gains Tax on. The same page explains that tax is otherwise due on gains above an annual tax-free allowance.
That exemption applies to gains, such as a price rise between buying and selling. It does not tell you how interest is taxed, and the rules on interest are covered separately; our guide to how tax on savings interest works explains the allowances that apply to savings income more generally. Tax rules can change and depend on personal circumstances.
Where gilts fit in the wider investing picture
Gilts are rarely discussed in isolation. Their yields act as a reference point for the returns investors expect from other assets, which is one reason shifts in the gilt market feed into mortgage pricing, corporate borrowing and equity valuations alike.
They also feature in the story of how British investors have changed their habits as rates have risen, which we examined in how UK investors are behaving in a higher-rate world. For readers interested in how government debt might be accessed in new ways, the digital gilt pilot is a separate development, and those thinking about balance across markets may also find UK investors looking beyond the FTSE useful context.
Reading a gilt headline with fewer surprises
Most gilt headlines reduce to a few questions. Is the story about a price or a yield? Is the yield for a short or a long maturity? Is the move being driven by expectations for the policy rate, or by the extra compensation investors want for holding long-dated debt?
Once those are clear, the apparently contradictory language – “gilts sold off” and “yields rose” describe the same event – becomes straightforward. A fixed coupon, a floating price and a yield that is the product of the two is all the machinery there is. The rest is the market’s changing view of risk, inflation and time.
This article is general information, not personalised financial advice. Tax rules, yields and rates change, and the value of investments can fall as well as rise.
Sources: Bank of England; GOV.UK
