The Boring Case for Bonds

gcwagner.com | November 2026 | G.C. Wagner

UK gilts now pay about what stocks have historically paid. The tax treatment of some gilts makes them look even better. Stocks still earn their place, but the gap is smaller than usual. Borrowing to buy property needs a lot to go right.

Bonds are boring. Right now, that's the point.

On 1 October the 30-year gilt yield went above 6% for the first time since 1998. On 7 October it peaked at 6.04%, and the 10-year was at 5.48%. Short bonds aren't left out either. Britain's 5-year auction on 27 October paid an average of 5.04%, the highest since 2008. Yields dipped slightly after the Budget, but they're still high.

For comparison, the Bank of England held Bank Rate at 3.75% in September, and inflation was 3.1% in August. So a 5% to 6% government yield is well ahead of both. A decade ago that would have sounded like a typo. This raises a fair question. Do you still need stocks?

I used to think UK stocks returned about 8% a year at best. The long-run data says a bit more.

Courtiers' 2026 Equity Gilt Study uses Barclays data back to 1899. It says £100 put into UK equities at the end of 1899 would be worth just under £5 million by the end of 2025. When I worked out the annual rate, that's about 9% a year. After inflation, £100 became £49,757, which is about 5% a year.

Here is the same maths for all three:

My calculations from the Courtiers figures. They use RPI, which runs hotter than CPI, so the real figures are on the harsh side.

The US did better. The UBS Global Investment Returns Yearbook has US equities at 9.8% a year before inflation and 6.6% after it, since 1900.

So stocks have beaten gilts by about 4 percentage points a year. That's the reward for taking the risk. Remember that number. It matters in a minute.

Here is where gilts get interesting.

Gains on gilts are exempt from Capital Gains Tax. That has been the rule since 1986. The interest (the coupon) is taxed as income. You can see the official list of exempt gilts on GOV.UK. Your Personal Savings Allowance covers £1,000 of interest for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers get none.

So the trick is to buy a low-coupon gilt that trades well below £100. Most of your return then comes as a price gain, and that gain is tax-free.

Here's an example. Say a 5-year gilt yields 5.04%, like the recent auction. The table shows what a 40% taxpayer keeps:

My calculation. It assumes the same 5.04% yield on both gilts and ignores the Personal Savings Allowance. Check live prices before you buy.

For a higher-rate taxpayer, that 4.8% is like a savings account paying about 8%. And the tax rates on savings income go up by two percentage points from April 2027. That makes the tax-free part more valuable.

One warning. Zero-coupon gilts don't work this way for individuals. HMRC treats gilt strips as "deeply discounted securities", so the profit is taxed as income. That wipes out the advantage. If you want the tax-free gain, buy a low-coupon gilt, not a strip.

Holding a gilt in an ISA or pension makes the most sense for high-coupon gilts, because the wrapper shelters the interest. Gilt funds and ETFs aren't gilts, so the CGT exemption doesn't apply to them.

Now compare buying a rental with a mortgage.

The average two-year fix is 5.97% and the five-year is 6.00%, according to Moneyfacts. House prices rose just 0.9% in the year to August, to an average of £273,000. Rents are doing better. They rose 3.5% to £1,381 a month in the year to April.

Rent divided by price gives a gross yield of about 6%. After costs, a landlord might keep about 4.5%. So you borrow at 6% to buy something that pays 4.5% in cash. That's negative leverage. Every borrowed pound costs more than it earns, unless prices rise.

Tax makes it worse, and it hits twice. From April 2027, property income will be taxed at 24%, 44% or 49%. When you sell, a higher-rate taxpayer also pays 24% Capital Gains Tax on residential property gains. Gilts avoid that second tax, as we saw above.

Here is my example, with a 75% mortgage at 6%:

My calculation. Assumptions: 6.07% gross yield, running costs of 25% of rent, 6% interest-only mortgage, higher-rate landlord on the 2027 rates, 20% tax credit for mortgage interest. The CGT is taken from the price gain at 24%. It ignores voids, repairs, stamp duty, selling costs and the annual CGT allowance, so real life is likely a bit worse.

Now compare that with a low-coupon gilt, which gives a higher-rate taxpayer about 4.7% after tax. To match it, the landlord needs prices to rise about 3% a year. At today's 0.9% growth, property is well short. And it comes with a risk gilts don't have. With a 75% mortgage, a 10% price fall wipes out 40% of your deposit.

This is where the maths gets fun.

Think of the cost of equity as the safe rate plus a premium for risk. The safe rate is the 10-year gilt at about 5.4%. If you want 3.5 to 5 points for the risk, which is my assumption, stocks need to return about 9% to 10.5% to be worth owning.

What do stocks offer? AJ Bell's Dividend Dashboard (mid-September data) has the FTSE 100 on a forecast dividend yield of 3.3%. Add buybacks and the total cash yield is 5.1%, just 0.3 points below the 5.40% gilt yield. The earnings yield is 7.4%.

If profits grow 3% a year, which is my assumption, stocks give about 8%. That's about 2.7 points over gilts. History gave about 4. So stocks are paying you a smaller premium than usual for the extra risk.

That is not a case for selling all your stocks. Equities have been the best asset class in every one of the 21 countries with a full history in the UBS data. Courtiers also found that, over 10-year periods, inflation-adjusted equity returns have on average been less volatile than gilt returns. Gilts are safe if you hold to maturity, but a long gilt can still fall by double digits when yields jump.

To beat a tax-efficient gilt at about 4.7%, a higher-rate landlord needs prices to rise about 2% a year, after tax. At today's 1% growth, property falls short. It also comes with a risk gilts don't have. With a 75% mortgage, a 10% price fall wipes out 40% of your deposit.

• Gilts deserve a real place in a UK portfolio. The yield is high, and the tax treatment of low-coupon gilts is hard to beat for higher-rate taxpayers.
• Stocks still earn a premium. It's thinner than usual, so the case is weaker but not gone.
• Borrowing to buy property needs sustained price growth to beat gilts. Today that growth isn't there.

None of this is advice. It's how I'm thinking about it. Check live gilt prices, your own tax position and your time horizon first.

Disclaimer: This content is intended for general informational and educational purposes only and does not constitute financial, investment, legal, tax or accounting advice. I make no representations or warranties about the accuracy, reliability, or completeness of the information provided. The author has a position in UK gilts. Please conduct your own research and/or consult with a qualified professional for advice tailored to your individual circumstances before making any investment decisions.