Gilt funds and interest-rate risk

Gilt funds invest in government bonds — money lent to the government. Because the borrower is the sovereign, they carry almost no credit risk: a government is about as reliable a borrower as exists. That single fact leads a lot of people to a wrong conclusion, which is that a gilt fund must therefore be steady. It is not.

Almost no credit risk

The credit side is genuinely reassuring. Lending to the government means the risk of not being repaid is minimal, far lower than lending to any company. If credit risk were the only thing that moved a debt fund, a gilt fund would indeed be about as steady as debt gets.

Full interest-rate risk

But credit risk is only one of the two forces, and gilt funds carry the other one — interest-rate risk — in full. Government bonds often have long maturities, which means long duration, which means their prices move a great deal when interest rates move. When rates rise, a gilt fund can fall noticeably; when they fall, it can rise. The government backing does nothing to soften this, because it is about the price of the bonds, not the reliability of the borrower.

Both facts at once

The honest one-line description of a gilt fund is: almost no credit risk, and full interest-rate risk. Saying only the first half — “government-backed, so safe” — is how a gilt fund gets mis-sold to someone who then panics when it drops in a rate move. Sovereign-backed is not the same as steady, and the value is not fixed and can fall.

Where it sits

A gilt fund is the category that isolates interest-rate risk almost on its own, with the credit question taken off the table. That is a factual description of what the category is — not a view on whether it suits you, which depends on your horizon and your tolerance for those price swings, and is not something this article decides.