Current UK bonds have nominal interest rates well below the current inflation rate, even the long-term ones. If we assume that, on average, the inflation rate remains the same or rises, and the bonds are held until maturity, is it correct to say that an investment into UK bonds will then have a negative return on investment?

In other words, is it fair to say that by setting the interest rates this low, the UK government claims that purchasing its bonds is such a low-risk investment that it's worth paying for?


No it has a positive return on investment, but a likely negative real return on investment, i.e. return after adjusting for inflation rate, since the return underperforms inflation.

Of course it depends on the path of inflation to maturity, but even the index linked gilts (those which pay inflation adjusted yields) have negative real yields and these factor the market expected (or at least market hedgeable) path of inflation in coming years.

(Edit to your extended edited question) The UK government does not set the prices on its bonds, the market does. So the UK government is not claiming anything, it would be the market participants that are willing to invest in these bonds at the prevailing prices, whatever their reasons. One of which, as you mention, is that they represent the safest deposit of Sterling cash in large quantities, accessible to real money funds and investors.

  • Also, the quirks of bond taxation (the interest is taxed as income, but the capital loss cannot be used for CGT) means private investors purchasing gilts outside of a tax wrapper (e.g ISA or SIPP) would get a particularly bad deal: money.stackexchange.com/q/69274/35887 – timday Jun 25 '18 at 22:30

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