If you’re based in the UK and looking to invest some money into the financial markets, bonds are well worth considering. Your investment will be passive, meaning that you are not required to actively manage your money.
Instead, you’ll receive a fixed number of interest payments until the bonds mature. When they do, you’ll receive your initial investment back.
In this article, we list the best UK bonds to invest in 2020. We also show you which brokers to buy your chosen bonds from.
Table of Contents
How to Buy UK Bonds in 3 Quick Steps
Don’t have time to read our guide in full? Below you’ll see three quick steps that you need to follow to buy UK bonds right now.
Step 1: Find an FCA-regulated broker
You'll want to choose a broker that gives you access to bond ETFs - as these are suited to retail investors.
Step 2: Deposit money into your broker account
Deposit funds in a matter of seconds. Choose from a debit/credit card, e-wallet, or bank wire.
Step 3: Buy UK bond ETFs
Browse the many UK bond ETFs hosted by the broker, decide how much you want to invest, and place your trade.
5 Best Bonds to Buy or Trade
Looking for the best bonds currently offered in the UK market? Although there are thousands of bond instruments to choose from, we’ve narrowed our list down to just five. Be sure to read through our brief explainers on why each bond makes the cut.
1. Vanguard Total Market Bond ETF on eToro - 3.3% Annual Return
If you've got virtually no idea of what bonds you should invest in, we would suggest considering the merits of the Vanguard Total Market Bond ETF. Firstly, the bond is managed by leading fund provider Vanguard, which has more than $5 trillion worth of assets under management. As such, Vanguard will buy and sell thousands of bonds on your behalf, so the entire investment process is passive.
In terms of its portfolio, the Total Market Fund will invest in a fully diversified range of bonds. In the government sector, this includes everything from U.S.Treasuries and foreign sovereign bonds. The fund will also invest in blue-chip corporate bonds, as well as mortgage-backed securities. Moreover, Vanguard will even hold a small percentage of municipal bonds. This means that its bond basket contains instruments of all risk levels.
Crucially, Vanguard will rarely hold on to its bonds until maturity, as it will attempt to offload them for a profit on the secondary market. You will, of course, also benefit from ongoing coupon payments. If you like the sound of the Vanguard Total Market Bond ETF, we would suggest making an investment through eToro. The broker is regulated by the UK's FCA, CySEC (Cyprus), and ASIC (Australia), and you can deposit funds with a debit/credit card, e-wallet, or local bank transfer.
- Copy successful investors
- 0% commission on bond ETFs and stocks
- Minimum investment £200
- Minimum withdrawal of £50
- Limited number of assets compared to IG
- MT4/5 not available
2. Euro-Bund ETF on AVATrade - 9% Annual Return
If you're looking to gain exposure to a foreign sovereign bond, it might be worth considering the Euro-Bund ETF offered at AVATrade. In a nutshell, Euro-Bunds are securities issued by the government of Germany. In the vast majority of cases, the bonds have a 30-year maturity. However, as you will be investing in an ETF, the bonds never expire. Instead, you are speculating on the future direction of the bond.
Over the past 12 months, the value of Euro-Bunds have increased by 9%, which is a huge return. However, if you feel that the bonds are heavily overvalued, AVATrade also gives you the option of going short. This means that you will be speculating on the value of the bond going down. Further, AVATrade also allows you to trade Euro-Bunds at leverage of 5:1. As such, a £500 balance would allow you to invest £2,500.
In terms of the broker, AVATrade is hugely popular with newbie traders. You will be able to deposit funds instantly with a debit or credit, and a bank transfer if you require higher limits. Opening an account takes just minutes, and minimum deposits start at £100. Most importantly, AVATrade is heavily regulated. This includes licenses in Ireland, South Africa, Japan, and Canada - so you've got regulatory protection on multiple fronts.
- Very competitive spreads
- MT4/5 supported
- Multiple regulatory licenses
- Does not offer 2FA login
- Bond department could be more comprehensive
3. US TBond 30Y on Markets.com - 22% Annual Returns
Who would have thought that US Treasury Bonds could be so volatile, with the USTBond 30Y instrument on Markets.com increasing in value by over 22% over the past 12 months? Much of this is down to the effects of the global Coronavirus pandemic, with investors seeking a safe haven.
The way this particular bond type works is you are speculating on whether the yields on the bond will go up or down on the secondary market. If you think the value of the bonds will go down, you need to place a 'sell' order. Alternatively, if you think they will continue to rise, opt for a 'buy' order.
If you do want to speculate on US Treasuries, Markets.com allows you get to get started with an investment at just £100. The FCA-regulated broker also offers leverage, so you'll be able to trade with more money than you have in your account. We also like Markets.com for its extensive payments department. This includes deposits and withdrawals in the form of e-wallets, debit/credit cards, or a bank transfer.
- Globally recognized broker
- Thousands of financial instruments
- Low fees
- More suited for advanced traders
- Limited educational resources
4. Euro BTP Future Bonds on IG - 12.5% Annual Return
The Euro BTP Futures market is an instrument that tracks Italian bond yields. The basket typically focuses on long-term bonds with a maturity of between 7-11 years. With that said, if you decide to use a regulated broker like IG, you will be speculating on whether you think the value of Italian bonds will go up or down.
At the time of writing, more than 76% of the market is short on the bonds. In Layman's terms, this means that investors think that the value of the bonds will decline in the short-run. If you think that the markets are correct, IG allows you to place a short-sell order.
Moreover, if you've got a higher tolerance for risk, IG also allows you to apply leverage to your bond trades. What we also like about IG is that it is super-competitive on fees. Not only does it offer tight spreads, but you will not be required to pay any commissions. In terms of the broker's regulatory standing, IG is licensed in multiple countries. On top of the UK, it also holds licenses with BaFin in Germany.
- Regulated by the FCA
- Fast account activation for UK traders
- Commission-free broker
- 1% deposit fee when using Visa
- MT5 not support
5. Patryk Peltonen Bond Portfolio on eToro - 10.2% Annual Return
This particular UK bond is not a bond instrument per-say. On the contrary, it relates to the highly successful bond portfolio of independent eToro trader Patryk Peltonen. For those unaware, FCA regulated broker eToro allows you to copy the trades of other investors. You get to choose which investor you want to copy based on their historical trading results.
At the forefront of this is Patryk Peltonen - who has an excellent track record in buying and selling bonds at the platform. In the last 12 months alone, the trader has netted his backers 10.2% in gains. The individual has a passion for bond funds, so his basket is highly diversified. What we also like about Peltonen is that he is not afraid to short the markets.
In other words, if he thinks that a particular bond investment is overvalued, he'll have no hesitations in placing a short-sell order. Although his bond portfolio achieved double-digit growth last year, it is worth noting that the underlying assets that he invests in are high-grade instruments.
- Catered to newbie traders
- 0% commission on ETFs and stocks
- Supports heaps of everyday payment methods
- Minimum withdrawal of $50
- High spreads
- MT4/5 not available
How to Buy Bonds from eToro
So now that you’ve had the chance to browse through our top five UK bond picks of 2020, we are now going to show you how to make an investment today. We have decided to show you the process with regulated platform eToro, albeit, the process works largely the same regardless of which broker you opt for. Furthermore, we’ve specifically shown you the steps of how to buy our top-rated 2020 bond – the Vanguard Total Market Index Bond ETF.
Step 1: Open an Account
Your first port of call will be to open an account with eToro. This will require some basic personal information from you, such as your:
- First and Last Name
- Home Address
- Date of Birth
- National Insurance Number
- Telephone Number
- Email Address
Step 2: Upload Your ID
To bypass the KYC (Know Your Customer) process as quickly as possible, upload a clear copy of your passport or driver’s license. The eToro system should be able to validate this on the spot.
Step 3: Deposit Funds
Top-rated brokers like eToro give you a range of payment methods to choose from. This includes debit/credit cards (Visa, MasterCard, Maestro), e-wallets (Paypal, Skrill, Neteller), and a bank transfer. Apart from the bank account option, all other deposits are free. Take note, you will need to meet a $200 (GBP-equivalent) minimum deposit amount at eToro.
Step 4: Search for Vanguard Total Market Fund
Now that you have funded your newly created account, you are ready to buy your chosen bonds. In this example, we are showing you how to invest in the Vanguard Total Market Bond Fund, although you can invest in any bond instrument that you want.
Nevertheless, at the top of the screen, enter ‘VANGUARD TOTAL BOND’, and click on the corresponding result.
Step 5: Click on ‘Trade’
You will now be able to see some market stats on the Vanguard Total Market Bond Fund. To proceed with your investment, click on the ‘Trade’ button.
Step 6: Set up Order and Buy Bonds’
This is where things get a little bit complex. The reason for this is that you will need to set up an order form before you can invest in your chosen bonds. This ensures that you are able to place a customized trade that meets your long-term investment goals.
As such, be sure to refer to the points outlined below when filling in your order form.
- Amount: This is the amount that you wish to invest in pounds and pence, and NOT the number of bonds that you wish to trade. For example, if you want to buy £300 worth of bonds, enter £300 into the ‘amount’ box.
- Set Rate: This refers to the price that you wish to buy the bonds at. If you want to take the current market price, leave the ‘set rate’ box as a ‘market order’. If you want to enter at a specific price, change it to a ‘limit order’.
- Stop Loss: This allows you to exit your bond trade at a pre-defined market price. In doing so, you will mitigate your losses in the event the trade goes against you.
- Take Profit: This allows you to exit your trade when you hit a pre-defined profit target.
Finally, click on ‘Buy’ to complete your order.
How do UK Bonds Work?
The UK bond space is a multi-billion pound arena, with heaps of bond types to choose from. This includes everything from corporate bonds, government bonds, municipal bonds, and savings bonds. However, much of the UK bond space is reserved for institutional money. By this, we mean that you need to meet a minimum lot size to get a look in, which can often exceed 6-figures. As such, this makes it very difficult for the Average Joe to invest.
The good news, however, is that there are a number of options open to everyday retail investors in the form of bond ETFs. In a nutshell, these bond types allow you to speculate on the future direction of a bond. For example, if you think that the value of UK Gilts is overpriced, you can place a sell order to short it.
This means that were the value of Gilts to go down in the open market, you would make a profit. An additional option available to you as a retail investor is a bond ETF fund. This is where the fund manager buys and sells bonds on your behalf. This allows you to make money on two fronts without needing to have any knowledge of how UK bonds work.
Firstly, you will receive your share any coupon payments as and when they are distributed. Funds normally credit your account on a monthly or quarterly basis. Secondly, bond ETF funds also allow you to benefit from capital gains. This will be the case if the underlying bond basket increases in value and thus – the value of the ETF goes up.
Account Minimums and Payments
When it comes to paying for your bond investment, regulated bond brokers like eToro, AVATrade, and Markets.com allow you to deposit funds with a range of payment methods.
This generally includes:
- Debit Cards
- Credit Cards
- Local Bank Transfer
- International Bank Wire
You will be able to withdraw your profits back to the same method that you used to fund your account. All deposits – apart from bank transfers, are typically credited instantly.
This allows you to complete the bond investment process in a matter of minutes. In terms of account minimums, this will vary from broker-to-broker. In most cases, this will average the £50-£150 mark.
UK Bond Brokers – Regulation and Safety
With hundreds of bond brokers now active in the UK market, knowing which platform to sign up with can be challenging. With that said, the most important factor that you need to look out for is whether or not the broker is regulated. While most brokers do hold the required regulatory remit to facilitate bond trades – unfortunately, this isn’t always the case.
This is why we only recommend UK bond brokers that are heavily regulated. In the vast majority of cases, our recommended brokers will hold multiple licenses – including that of the UK’s Financial Conduct Authority (FCA). Other tier-one licenses might include ASIC (Australia), MAS (Singapore), and CySEC (Cyprus).
Types of UK Bonds
Premium Bonds UK
Premium Bonds, also known as Lottery Bonds, refer to a special type of bond issued by the British Government through the National Savings and Investment Scheme. It is different from other types of bonds in the sense that instead of offering guaranteed, regular, and competitively priced interest rates, premium bonds get you fixed into a monthly lottery scheme. Here, you stand to win between £25 and £1 million and other interest-free rewards.
Ideally, you can invest a minimum of £25 and a maximum of £50,000. And for every £1 you spend on premium bonds, you get one unique bond number and an entry into the monthly draw. For example, if you invest £200, you will get 200 bond numbers. Therefore, the higher your contribution, the higher your chances of winning.
Anyone above 16 years can buy themselves a bond or on behalf of their child, grandchild, or great-grandchildren. You can buy the bonds online on the NS&I website or by calling their customer service team. You are also free to cash in the bond at any time by calling the NS&I team or downloading the Premium Bonds Cashing In Form, entering your cash-in request, and posting it to NS&I.
Government Bonds UK
Government bonds, also known as Gilts, Treasury stocks, or Treasury Gilts, refer to debt-based investment where you loan money to a government in exchange for an agreed interest rate for a specific period. The three unique features of a government bond include the fact that the money is lent to the Government, the Government pays a fixed interest rate at regular intervals (coupon), and they have a predetermined maturity date of say 3, 6, or 12 months and as much as 55 years.
Gilts with a maturity period of fewer than 12 months are referred to as Treasury Bills. Guilts with a maturity of fewer than 10 years are referred to as Treasury Notes while the rest with a maturity of above 10 years are referred to as Treasury Bonds. There also are the inflation-protected bonds, also known as Index-Linked Gilts. These don’t have a fixed coupon rate, but their interest rates move along the UK Retail Prices Index (RPI).
The Bills, notes, and bonds are sold to the public through the Debt Management Office (DMO) via a public auction and you can participate by placing a bid on the DMO website. You will first need to pass the Approved Group of Investor criteria set by DMO. Most of these Gilts are later exchanged through the secondary markets like brokerages either online or over the phone. You may also invest indirectly via the Mutual funds, ETFs, or even CFDs.
Glossary of Bond Terms
A bond is when companies or governments need to generate funds and when you invest you will receive lump sump back with interest at the end of your agreement.
Gilts refer to the bonds and debt securities issued by the UK government through the Debt Management Office. They carry fixed interest rates and are categorised among the most secure forms of investment as they are government backed thus have never failed to pay interest or repay back capital upon maturity.
A Municipal Bond is usually issued by United Kingdom Municipal Bonds Agency to finance public projects initiated by the local authority such as roads, drainage, and schools. You will receive you lump sum and interest back at the end of the term.
A Corporate Bond is issued by businesses to raise funds for expansions or projects. You will recieve you lump sum and interest back at the end of the term.
A Bond that has no interest rate but your investments are entered into prize draws to win £25 to £1mil.
Usually offered by Banks and Building Societies, Saving Bonds will last for a fixed term and earn interest. You are not able to access the money during the fixed term.
Fixed Rate Bonds
A Fixed Bond will start and end with same Interest Rate.
In summary, although the UK bond space is vast – access from the perspective of an everyday retail trader is limited. As noted in this article, this is because bond issuers typically require a minimum lot size that can often exceed £100,000. With that being said, regulated brokers like eToro allow you to buy and sell a range of bond ETFs, meaning that you can get started with an investment in less than 10 minutes.
Most importantly, there is no minimum lot size to contend with, so you can speculate on the future value of a bond, or group of bonds, with small amounts. It might also be worth considering a bond ETF fund, which is the best option if you are looking to earn passive income.
This is because fund providers like Vanguard will buy and sell bond instruments on your behalf, so you won’t be required to actively manage your investments. Crucially, whichever UK bond broker you do opt for, just make sure that it holds a regulatory license with the FCA. Click here to get started at eToro.
Are bond brokers in the UK regulated?
Most, but not all, bond brokers trading in the UK are regulated. If they aren't, then the broker is operating without the legal remit to do so. We only recommended brokers that are regulated by tier-one licensing bodies like the UK's FCA.
What are bond ETFs?
Bond ETFs allow you to speculate on the future value of a bond (such as UK Gilts), or group of bonds (like a basket of US Treasuries), without you owning the underlying asset. Instead, you are speculating on whether the bond will increase (buy order) or decrease (sell order) in value.
How do I make money with bonds?
This depends on the type of bond that you invest in. If you entrust your money with a leading bond ETF fund provider, you will make money from coupon payments and capital gains - proportionate to the amount that you invest,
Why can't I buy UK corporate bonds direct from the issuer?
When publically-listed companies issue bonds, they usually require a minimum lot size of 6/7 figures. This means that everyday traders often do not get a look in.
What is the minimum investment to buy UK bonds?
If you're using a regulated broker that offers bond ETFs, you can normally invest as little as you like. You will, however, need to meet a minimum deposit amount. This varies from broker-to-broker.
Why does the UK government issue bonds?
Known as 'Gilts', the UK government issues bonds as a means to raise money to help pay for frontline services. This allows it to meet its spending targets without borrowing funds from the Bank of England.
How much do UK bonds pay?
This can vary wildly. For example, if you invest in UK Gilts, the coupon rate will rarely exceed 1-2%. Corporate bonds, however, pay much more, as the risks of default are higher.
What payment methods do UK bond brokers offer?
If the bond broker is targeting the retail investor space, then it will typically offer a range of everyday payment methods. This should include a bank transfer and debit/credit card at a minimum, and in some cases, e-wallets too.
Can I trade UK bonds on my phone?
Most of the bond brokers listed on this page offer a fully-fledged mobile app. Usually available on both Android and iOS devices - this allows you to buy and sell UK bonds on the move.