When a government needs money — to build infrastructure, fund public services, or cover a budget deficit — it can't just print cash without causing inflation. So it borrows. Government bonds are that borrowing, and they underpin the entire global financial system. They're also genuinely useful investments to understand, even if you never buy one directly.
US Treasuries are the world's most important financial instruments. Because the US government has never defaulted on its debt (and can print dollars), Treasuries are treated as essentially risk-free. Every other bond in the world is priced as a spread above Treasury yields. They come in three main types:
| Name | Maturity | Pays coupon? |
|---|---|---|
| T-Bills | 4 weeks to 1 year | No — sold at discount, redeemed at face value |
| T-Notes | 2 to 10 years | Yes — semi-annual coupon |
| T-Bonds | 20 to 30 years | Yes — semi-annual coupon |
UK government bonds are called gilts — named after the gilded edges of the original paper certificates. They work identically to US Treasuries in structure. The UK government issues them through the Debt Management Office (DMO). Conventional gilts pay a fixed semi-annual coupon. Index-linked gilts have their principal and coupons adjusted for inflation — we cover these in the Inflation-Linked Bonds lesson.
Gilt yields are watched closely by UK mortgage holders — fixed-rate mortgage pricing is heavily influenced by medium-term gilt yields. When gilt yields spiked dramatically in the September 2022 mini-budget crisis, UK mortgage rates jumped almost overnight, affecting millions of homeowners.
The yield curve plots yields across different maturities — from 3-month T-bills to 30-year bonds. Normally it slopes upward: longer maturities pay higher yields because investors demand compensation for tying up money longer and bearing more interest rate risk. This is called a normal yield curve.
When short-term yields rise above long-term yields, the curve inverts. An inverted yield curve has preceded every US recession since 1950. The mechanism: if investors expect rates to fall in the future (which happens when economic conditions deteriorate), they lock in long-term bonds at current rates, pushing long yields down below short ones.
The 2022–2023 inversion: the US yield curve inverted sharply as the Fed hiked rates to fight inflation. 2-year Treasuries briefly yielded over 1% more than 10-year Treasuries. The question investors debated: would recession follow as reliably as historical precedent suggested? It's a live question — the inverted curve is a signal, not a certainty, and lead times vary from 6 months to 2 years.
Even if you never buy a gilt or Treasury, their yields affect you directly. Mortgage rates, corporate borrowing costs, student loan rates, and credit card rates are all influenced by government bond yields. When the Bank of England raises the base rate, gilt yields move, and everything built on top of them moves too. Understanding government bonds is understanding the plumbing of the entire financial system.
Practical access for UK investors: you can buy gilts directly via the UK Debt Management Office or through a broker. More commonly, investors get exposure through bond ETFs — funds that hold a basket of gilts or global government bonds — which can be held in an ISA tax-free. iShares and Vanguard both offer low-cost gilt and global bond ETFs.
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