Gilt Yields Explained: Running Yield vs YTM

Yield to maturity: the full picture

Yield to maturity, or YTM, folds in everything. The coupons you collect along the way, and the difference between what you paid and the £100 you get back at maturity. It assumes you hold the gilt to the end and it spreads the total return across the years you hold it.

For UK Treasury 0.875% 2033, the YTM is 4.85%. Compare that with the running yield of 1.14%. The difference is huge, and it comes almost entirely from the price.

You buy at 76.65. In 2033 the government repays 100. That is a capital gain of around 23 points, earned over about 7 years to maturity. Add that gain to the small coupon and the true annual return climbs to 4.85%. The running yield never captured it.

This is why the two numbers split apart. When a gilt trades below £100, its YTM sits above its running yield. The cheap purchase price does the heavy lifting.

When it works the other way round

The pattern flips for gilts bought above £100.

Look at UK Treasury 6% 2028. It has a fat coupon of 6% and trades at 103.9. Its running yield is 5.77%, which looks generous. But its YTM is only 4.34%.

Why lower? Because you pay 103.9 today and only get 100 back at maturity. That is a small capital loss baked in. The chunky coupon flatters the running yield, but the YTM quietly subtracts the loss you take when the gilt matures at par. The real annual return is 4.34%, not 5.77%.

So a high running yield can be a bit of an illusion. A gilt with a big coupon and a high price often gives back less than the headline income suggests.

Which number should you look at?

It depends on what you care about.

• Running yield matters if you want income now. It tells you the cash flowing into your account each year relative to your outlay. Handy if you are living off the coupons.
• Yield to maturity matters if you want your true total return. It is the fairer basis for comparing one gilt against another, because it accounts for both income and the pull towards £100 at maturity.

For most people weighing up gilts, YTM is the number to lead with. It stops you being fooled by a shiny coupon or a low price.

A quick sense check across the two examples:

• UK Treasury 0.875% 2033: low coupon, priced at 76.65, running yield 1.14%, YTM 4.85%.
• UK Treasury 6% 2028: high coupon, priced at 103.9, running yield 5.77%, YTM 4.34%.

The first looks poor on income but rewards you at maturity. The second looks rich on income but claws some back. YTM reveals what running yield hides.

A few things to keep in mind

YTM assumes you hold to maturity. Sell early and your actual return depends on the price that day, which can be higher or lower.

Tax also changes the picture. For most private investors, the capital gain on a gilt is free of Capital Gains Tax, while coupon income can be taxable depending on your allowances and how you hold the gilt. A low coupon, high YTM gilt like UK Treasury 0.875% 2033 can therefore be more tax efficient than the numbers alone suggest, because more of the return comes as a tax free gain rather than taxable income. Your own position will vary, so check before assuming.

Yields also move with prices every day. The figures here are a snapshot, not a fixed promise.

Once you can see why running yield and YTM part ways, gilt pricing stops feeling like a black box. A price below par pushes YTM up. A price above par drags it down. The coupon sets your income, but the price decides your return.

Risk warning: This article is for general education and is not financial advice. Bond prices and yields change constantly, and past figures do not predict future returns. The value of gilts can fall as well as rise, and you may get back less than you invested if you sell before maturity. Tax treatment depends on your personal circumstances and may change. Consider taking regulated financial advice before making any investment decision.