GILT vs Corporate Bonds: Which is Better?

When building a bond portfolio, one of the fundamental decisions is choosing between government bonds (GILTs) and corporate bonds. Both have their place, but understanding the differences is crucial.

Key Differences

Credit Risk

GILTs:

• Backed by the UK government
• Virtually no default risk
• AAA credit rating
• Considered the safest UK bonds

Corporate Bonds:

• Backed by private companies
• Varying credit ratings (AAA to junk)
• Default risk exists
• Credit spreads reflect risk

Yield Comparison

GILTs:

• Lower yields (safety premium)
• Yield reflects government borrowing costs
• Influenced by monetary policy

Corporate Bonds:

• Higher yields (risk premium)
• Yield reflects company creditworthiness
• Credit spread over GILTs

Price Volatility

GILTs:

• Price moves with interest rates
• Lower volatility than corporates
• More predictable price behavior

Corporate Bonds:

• Price moves with rates AND credit risk
• Higher volatility
• Can experience sharp moves on news

When to Choose GILTs

GILTs are better for:

• Capital Preservation: Protecting principal is the priority
• Risk-Averse Investors: Those who can't tolerate losses
• Retirement Planning: Reliable income in retirement
• Inflation Protection: Index-linked GILTs available
• Tax Efficiency: Some GILTs have tax advantages

When to Choose Corporate Bonds

Corporate bonds are better for:

• Higher Income Needs: Require higher yields
• Risk Tolerance: Comfortable with credit risk
• Diversification: Adding to a GILT-heavy portfolio
• Active Management: Willing to research companies
• Yield Enhancement: Seeking better returns

Portfolio Allocation Strategies

Conservative Portfolio

• 80% GILTs, 20% High-grade corporates
• Focus on capital preservation
• Steady, reliable income

Balanced Portfolio

• 60% GILTs, 40% Corporates
• Mix of safety and yield
• Moderate risk approach

Aggressive Portfolio

• 40% GILTs, 60% Corporates
• Higher yield focus
• Accepts more risk

Tax Considerations

GILTs:

• Some are tax-free for UK residents
• Index-linked GILTs have tax advantages
• Consider tax wrapper (ISA, SIPP)

Corporate Bonds:

• Taxable on coupon income
• Capital gains may apply
• Consider tax-efficient accounts

Liquidity Comparison

GILTs:

• Highly liquid market
• Easy to buy and sell
• Tight bid-ask spreads

Corporate Bonds:

• Varies by issuer
• Some less liquid
• Wider spreads possible

Using Our Calculator

Our calculator supports both:

• GILTs: Full UK government bond calculations
• Corporate Bonds: Calculate yields and returns
• Compare side-by-side to make informed decisions

Conclusion

Neither GILTs nor corporate bonds are inherently "better." The right choice depends on:

• Your risk tolerance
• Income requirements
• Time horizon
• Tax situation
• Overall portfolio goals

Many successful investors hold both, using GILTs for safety and corporates for yield enhancement. Use our calculator to model different scenarios and find the right balance for your portfolio.