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The stock market is home to a variety of securities for investors of all risk profiles. Investing in bonds is one of the most popular ways of securing and building wealth. Government bonds, in particular, are very popular for the stability and investor confidence they bring. Millions of individual and institutional investors flock to the market to buy up the treasury bonds issued by developed countries. The United Kingdom, which is a major global financial hub, is an attractive destination for foreign investors to tap into when considering fixed-income securities. But why?
To answer this question, it is important to consider the core purpose of investing in bonds and the added layers of security that come with government-backed securities, in the case of the UK:
UK government bonds, or gilts, are some of the most in-demand securities on the market. If you are considering investing in UK bonds, but don’t know where to start - this investfox guide is for you.
"Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation." - Suze Orman
Before diving deeper into the process of buying UK bonds, we must first understand what they are and why they exist. UK bonds, or any government securities in general, are issued by the national treasury to raise capital for the national budget, which will then be used to fund various activities and government programs.
Governments can issue debt securities for internal and external investors and the size of the issue, as well as maturity and other factors, can vary based on the purpose and market of the issue. Generally, governments issue bonds for a few different reasons, such as:
First-time investors may want to know the key concepts behind how bonds work to make the most of the offerings on the market. Some key concepts to consider when choosing which bonds to invest in include:
There are a few ways to gain exposure to the UK bonds market, which include direct ownership, as well as related securities trading and bond fund investments.
When the UK government issues bonds, it is done so using an auction. These auctions attract major institutions, such as banks, who then sell them on the secondary market, where anyone from individual investors to multinational corporations can invest in the bonds.
While a decent number of UK government securities can be bought on the London Stock Exchange (LSE), a majority of UK bonds are traded on OTC markets, which is done via registered brokers.
The HM Debt Management Office is the destination for investors who wish to directly invest in UK bonds. Otherwise, they can also invest in bond funds and ETFs, which are faster options for most investor types.
Investors who do not want to invest in individual bonds have the option to put their capital in bond funds and ETFs.
Bond ETFs are especially attractive to investors, as they offer low fees, are easy to buy and sell and charge low management fees.
One such popular UK bond ETF is BlackRock’s iShares Core UK Gilts UCITS ETF, which includes a few subset ETFs that invest in UK bonds of varying maturity dates.
Conversely, investors who wish to speculate and hedge against interest rates can buy bond futures. This can be done using CFDs and includes the ability to use leverage.
However, leveraged products, such as CFDs, can be very risky and are generally not advisable for beginner investors.
"Traditional investment vehicles such as IRAs, CDs, stocks and bonds do have their place, but for the rich, they are used more as temporary storage facilities rather than life-long homes." - Bo Bennett
Bond prices can fluctuate greatly on the secondary market and there are a few key factors that can affect this, such as:
Before investing in UK bonds, it is important to consider the major advantages and disadvantages associated with the investment to better manage expectations and make the most of your investment.
Investors looking for a stable investment with a modest and predictable annual return may choose to invest in UK government bonds. The UK has a robust economy and has very little risk of default, which can be a plus for investors.
The UK issues bonds for a variety of reasons, such as to raise funds for public spending and welfare programs, refinance prior borrowings, improve infrastructure, etc.
Investors seeking high returns may find themselves disappointed by UK government bonds, as they offer annual returns of between 3-4%, which can be an issue during periods of high inflation.