Note two
Gilts: the yield is the price of time
A conventional gilt pays a fixed coupon and returns principal at maturity. If investors demand a higher yield, they will only buy that fixed coupon at a lower price. That inverse relationship is the entire reason a "rates up" headline can show a red number on a bond fund the same afternoon.
Duration, plainlyEducational description of UK government bonds. Not a suggestion to buy, hold or sell gilts, gilt funds or related derivatives. Capital values move. You can get back less than you put in.
Modified duration is a ruler, not a promise
Modified duration estimates how many percent the price of a bond changes for a one percentage point change in yield, holding other things still. A gilt with modified duration near 8 would, on that first-order arithmetic, fall about 4 percent in price if its yield rose by 0.50 percentage points, and rise about 4 percent if the yield fell by the same amount. Convexity means the real price change is not perfectly linear, and a fund of many bonds is a blend of durations, credit exposures if it is not a pure gilt fund, and ongoing coupon reinvestment.
Short-dated gilts have less price sensitivity and more of their return coming due soon. Long-dated gilts are a stronger view on the path of yields. A "UK government bond" label on a platform does not tell you which of those you hold. The factsheet's duration figure does.
If you hold an individual gilt to maturity and the UK government pays as agreed, the market price in between does not change the cash you receive on the coupon dates and at redemption. The mark-to-market loss is still real if you need to sell, or if you hold the gilt through a fund that must meet redemptions. Time horizon is the difference between those two sentences.
Conventional gilts
Fixed nominal coupons. Inflation risk sits with the holder: if prices rise faster than the market had priced, the real value of those fixed payments falls. The Debt Management Office publishes the auction calendar and the outstanding stock.
Index-linked gilts
Principal and coupons adjust with an inflation index, with an indexation lag. They are not a perfect inflation hedge over short windows. In 2022, rising real yields produced large price falls in long linkers even while inflation prints were high. The inflation linkage and the real-yield price are two different forces, and they can point opposite ways.
Autumn 2022, as history
After the 23 September 2022 fiscal statement, long gilt yields rose sharply. Liability-driven investment strategies used by defined-benefit pension schemes had matched long liabilities with leveraged gilt exposure. As prices fell, counterparties asked for more collateral. Some schemes sold gilts to raise that collateral, which pressed prices further. The Bank of England announced temporary gilt purchases on 28 September 2022 to restore market functioning, and later unwound that book.
The lesson for an individual investor is narrower than the political argument. Leverage turns a duration loss into a cash call. A pension fund with a multi-decade liability is not a retail ISA. A retail gilt fund that does not borrow can still fall in price, but it does not face the same margin spiral. Read the instrument, not the adjective "pension" or "safe".
Gilts are obligations of the UK government. Price volatility and credit risk are not the same sentence. A holder can lose money on the price and still be holding what is, in sterling credit terms, among the strongest domestic paper. Both facts fit in one paragraph.
Shares use a different discount, built from the same curve
Equity valuations borrow the government curve and then add a risk premium. The next note is about that step, and about why banks and property companies do not wear the same rate shock.
Read the equity note