A conventional gilt is a reliable fellow. He is quite predictable right through to maturity, with yields drifting up or down broadly in line with his siblings.
But his wayward cousin the linker has no intention of going quietly. With less than a year to live, index-linked gilts seem to throw off the shackles of convention and lose all inhibition. Yields surge and plunge quite alarmingly.
What is the cause of such unseemly behaviour? And can investors benefit from it?
Linkers gone wild
Here’s the yield for the 22/03/2026 index-linked gilt for the year to maturity (blue), compared with that of the 2027 and 2028 linkers:
(All yield data is from Tradeweb .)
These three linkers start the year with similar real yields. But between June and July – about nine months from maturity – the 2026 yield suddenly jumps higher. The others barely move.
Linker yields reported on Tradeweb (and elsewhere) exclude the effect of inflation. They show the real yield – what your return would be if inflation was zero.
The actual return will be the real yield above plus RPI (to be replaced by CPIH in 2030). You only know this retrospectively, when all the relevant inflation reports are published by the ONS.
An opportunity?
You might be forgiven for thinking that this wild surge in yield represented an opportunity for a few months’ higher returns on some idle cash.
At least I hope you could be forgiven. Because that was the mistake I made.
But before we look at why there aren’t actually easy extra returns here, it’s worth illustrating this late-stage yield movement is not unusual.
The 2024 linker
The last index-linked gilt to mature before 2026 was the 22/03/2024 issue. It also had a 0.125% coupon.
Here’s the plot of its yield compared to its two nearest peers in the run up to maturity:
Again, the yields clearly diverge about nine months from maturity.
The 2022 linker
Just for fun, here’s the wild last ride of the linker maturing on 22/11/2022, mapped against its nearest peers:
This time there’s a slump in yield, rather than a spike. But more notable are the astonishing negative yields.
But let’s leave the madness of a post-pandemic inflation spike and a bonkers mini-budget and return to that late surge in yield on the 2026 linker.
Inflation
Inflation clearly has a central part to play in index-linked gilt pricing.
Look at annual RPI change below. Nothing seems to jump out that would account for the sudden change in yield on the 2026 linker:
But the value of index linked gilts does not increase with annual inflation. It increases (and sometimes decreases) with the much more volatile monthly changes in the index:
Advance warning
Because (most) linkers use a three-month RPI lag — and inflation data is published with a few weeks delay — investors know part of the future indexation in advance (as laid out in the DMO rules).
For example, the RPI figure for January 2026 was published on 18 February. That value feeds into the index ratio applied to linkers during March. So on 18 February, investors already know the inflation uplift that will be applied to the bond over the next six weeks.
When a linker has a few years to run, this advance warning doesn’t tell you much about the likely overall return. But as you run down the final months towards maturity, it most certainly does.
Impact on yield
As a linker approaches maturity, a growing proportion of the remaining inflation uplift is already determined by published RPI data that has yet to be fed into the index ratio applied to linkers.
Once that future uplift is known, the bond’s price adjusts to reflect it, which shows up as a move in the quoted real yield.
When only a few months remain before maturity, even small changes in the expected total return can translate into large swings when expressed as an annualised yield.
The 2026 linker yield
We can see a steep increase in RPI in April 2025, for which the corresponding increases in the principal and interest rates of the 2026 linker would play out over the course of June.
Thus, as June progresses, with more of that April gain locked in and the prospect of a lower future inflation uplift, the market works to increase the real yield to compensate for it.
Which explains the surge that we saw earlier in the yield graph for the 2026 linker.
Coincidentally, there is also a big rise in RPI in April 2023 which would similarly account for the June rise in yield for the 2024 linker.
Adding it all up
I’ve shown below a comparison of the annual inclusive yield of the 2026 linker and the corresponding yield on offer at the time from the conventional gilt maturing on 31/01/2026.
The ‘inclusive yield’ here means the total return including inflation indexing — the real yield plus the RPI uplift.
Obviously, at the time you didn’t know what the inclusive yield would be. But we do know this retrospectively, now we have all the inflation data:
Despite the headline yield for the 2026 linker swinging up three or four percentage points, the inclusive yield doesn’t change by much more than one point, and then much more gradually.
The swings in headline yield experienced since June are just smoothing out the monthly fluctuations in RPI to give an expected inclusive yield that isn’t a million miles from what you could get from a conventional gilt with a similar maturity date.
Which is pretty much what you’d expect from an efficient market.
These seemingly violent moves in real yield are really just the market doing its job – adjusting for inflation data already known to investors.
Not so wild linkers?
Rather disappointingly then, and despite my rather racy title, the last year of a linker is not wild at all. It looks a lot like the last year of a conventional gilt.
In other words, a bit like holding cash.
Indeed funds like Vanguard U.K. Inflation-Linked Gilt Index and iShares £ Index-Linked Gilts ETF (both based on the Bloomberg U.K. Government Inflation-Linked Float Adjusted Bond Index) sell gilts in their final year. There isn’t much inflation protection left in them by this stage.
The hangover
Experienced linker investors will know all this already. I suspect some are now rolling their eyes – assuming of course that they got this far.
But I only started dabbling in linkers last year. And I jumped into the middle of the yield spike to see what would happen. Having some money invested is the only way I seem to be able to focus my attention enough to learn about different instruments.
My future – wiser – self now knows:
- Not to confuse a temporary spike in headline linker yield with the genuine prospect of a better return.
- To consider the baked-in effect of the last couple of RPI values when judging the value of a linker nearing maturity.
- There’s nothing exciting about linkers in their last year and very little to be gained by buying, or for that matter selling, in this period.
So I didn’t get rich, but I did learn something – which is the best kind of return you could wish for. (Just as The Investor told me when he agreed to let me write for Monevator…)
