How to buy bonds

Lonodn: Purchasing gilts is a straightforward process, either directly from the government’s Debt Management Office when new securities are issued, or on the secondary market through a stockbroker.

Unlike shares, gilts do not incur stamp duty reserve tax and there is no capital gains tax to pay on any profit at maturity. Unlike corporate bonds, there is ample liquidity in gilts and transactions can be executed online at low cost.

Gilts offer lower returns than shares (see chart) but certainty over capital and interest payments. They reduce overall volatility in a portfolio. But even so, many advisers believe they are too expensive at current levels. Index-linked gilts, which offer inflation protection, are even pricier.

Rod Davidson, a bond fund manager at Alliance Trust Investments, said although gilts look expensive, compared to German Bunds — which saw yields recently drop below 1 per cent — they are “very cheap”.

Although buying gilts direct is easy, many investors prefer to use a fund. A manager will structure the portfolio and replace holdings as they mature. For bonds issued by other governments, such as Bunds or Treasuries, a fund is the obvious choice.

Ben Willis, head of research at Whitechurch Securities, tips the Jupiter Strategic Bond fund managed by Ariel Bezalel. “We’re negative on bond markets in terms of the risks associated with rising interest rates, but some investors want holdings for diversification and income,” he said. “The flexibility of his mandate allows him to invest across the bond spectrum. There are still opportunities.”

There are also passive alternatives. Willis recommends the L&G All Stocks Index-Linked Gilts tracker, which serves as an inflation hedge but has also delivered a strong performance over the past year. Vanguard, iShares, HSBC and Deutsche Bank all offer exchange traded funds that invest in government bonds.

Financial Times