Explain Gilts/Bonds to me like I am 5 years old please?

Linton

In my view:

Gilts and corporate bonds are very different:

1) corporate bond prices tend to move in line with equity because of the risk of failure as well as reacting to interest rate changes so they are less useful than gilts as a relatively safe diversifier. Corporate bonds are more appropriate for income investors seeking high yields with less concern about capital values.
2) individual gilts are increasingly available to the private investor trading in small quantities. This is not true for most corporate bonds which are mainly traded in large deals between institutions. 

3) as government bonds are bought for security there seems little point in looking beyond UK gilts. On the other hand income investors can benefit from corporate bond global diversification.

For these reasons corporate bonds are best bought through funds whereas the benefits of gilts are best gained by buying individual gilts.

GenX0212

QrizB said:

GenX0212 said:

At the basic level though, and correct me if I am wrong, a bond is pretty much a 'promise to pay' right?

Yes.

GenX0212 said:

 and barring a major financial event is about as good a guarantee that you can get.

No.

The promise is only as good as the organisation that has made it.

Businesses go into administration all the time, and when they do their bondholders are amongst the losers. Or businesses might restructure their debts to avoid administration, again at the cost of their bondholders.

GenX0212 said:

As I said I'm interested in the 'safe' returns aspect. I know for instance that there is very little likelihood of UKPN or UU going to the wall in the next 5 years.

Lots of things might happen in the next five years to result in UU or UKPN being unable to pay their debts. That's one of the reasons their bonds give higher yields than UK Government debt (gilts) do.

Assigning relative risk ratings to bonds is a business in itself. See for example:

https://ratings.moodys.io/ratings

Interesting, thank you. I'm starting to see some of the complexity of the bonds.

I see for instance that Thames Water's parent company Kemble Water defaulted on a bond issue in 2024 and subsequently Thames itself recently had a new £3billion loan approved following a challenge through the courts. I believe the Kemble Water debt default still remains unresolved though.

Equally I can see that Thames Water is and has been a very different animal to the debt strategy of UU and LPN/UKPN and that the latter are considered very much more stable so I guess it would be very much a case of needing a lot more research to understand each individual bond issue, structure and financial health of the companies before making any decisions.

Although I think UU and UKPN are both good, viable businesses the risk/reward of an additional 1.5% vs Gilts probably doesn't meet my objective of a guaranteed safe return. Maybe one for the future when I'm actually retired and have the time to educate myself and do the necessary research.

Many thanks for everyone's input.

Mr_Benn

Very informative thread, as Im also a complete newbie to Bonds, but keep reading about as Im 3.5 years from retiring, how I should be moving from 100% Equity Funds, to a greater percentage of Bonds.  For me , I will probably the go the easier route of choosing Fund, either 60% equity /40% Bonds or even a 100% Bond Fund if they exist ? 

Mr_Benn

If anybody would like to offer their thoughts on going for a 60/40 Fund, or even better recommend one, Id be most grateful.

Hoenir

Mr_Benn said:

If anybody would like to offer their thoughts on going for a 60/40 Fund, or even better recommend one, Id be most grateful.

A guide

https://monevator.com/passive-fund-of-funds-the-rivals/

kempiejon

Mr_Benn said:

Very informative thread, as Im also a complete newbie to Bonds, but keep reading about as Im 3.5 years from retiring, how I should be moving from 100% Equity Funds, to a greater percentage of Bonds.  For me , I will probably the go the easier route of choosing Fund, either 60% equity /40% Bonds or even a 100% Bond Fund if they exist ? 

Personally I buy individual bonds/gilts and other fixed interest though I have a small holding in each of Vanguard UK and Global etfs. I have staggered maturity over the next few years and some perpetual high yielders. I'm around 20% cash/bonds now and that's the most it's ever been. Some of my equity investments have fallen a bit recently, I live off my investments.