Most of the time, investors looking for passive income head straight for dividend shares. And with good reason – they’ve tended to outperform bonds over the long term.

With the Budget nine days away and gilt yields climbing however, the bond market looks unusually attractive. The question for investors is how to try and take advantage.

The gilt-edged opportunity

Government bonds are much less risky than stocks. The trouble is, they’ve also offered much lower returns – according to JP Morgan, they’ve been the single worst asset class of the last 10 years.

Source: JP Morgan Guide to the Markets UK Q4 2026

That’s not much of an advertisement. But after years of offering not much reward for not much risk, 10-year gilts currently come with a yield above 5.3%.

That’s the highest (nominal) return in almost two decades. Importantly, according to JP Morgan’s data, this gives investors a reason for thinking future returns might be significantly better than past ones.

Historically, buying gilts at these yields has produced annual returns north of 9% over the subsequent five years. And the risk of the UK government not paying doesn’t seem to have gone up much.

Source: JP Morgan Guide to the Markets UK Q4 2026

There’s also a diversification argument. Bonds can offer protection from certain risks that come with the stock market and that’s something good investors think about.

I think it’s clear that right now is an unusually good time for investors to think about the balance of their portfolios. But there’s more than one way to benefit from higher yields.

Stocks and bonds

Rather than going directly at government bonds, another strategy is to look at companies that benefit from higher yields. Banks are a good example, but they aren’t all the same. 

Barclays (LSE:BARC) combines an investment bank with a big retail operation. That might look like an advantage, given the results Goldman Sachs and others have just reported.

But the detail matters. It’s equities trading that’s booming, with investors repositioning their portfolios — and generating fees for market makers.

The wrong kind of volatility, however, makes people wary. That’s been happening in the bond market – and fixed income is the bigger business at Barclays:

During the first half of 2026, equities trading clearly outperformed bonds. And I’m not expecting that to reverse quickly.

I’m a big fan of the diversified model Barclays has. But right now, I think another name might be a more promising candidate to consider.

An alternative idea

Lloyds Banking Group is almost entirely a UK retail and commercial bank. And it uses a structural hedge – investing stable deposits in longer-dated swaps – to smooth out its earnings.

As older positions mature, they get reinvested at higher rates. Lloyds expects hedge income of more than £7bn this year, £8bn in 2027, and £9bn by 2030.

There are risks. Higher rates increase the danger of defaults, and new Chancellor John Healey could raise the bank surcharge on 28 October – the day before Lloyds reports.

Gilt yields haven’t been this attractive since 2007. But for income investors, the way to take advantage might be by looking at names in the stock market.

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Stephen Wright does not own shares in any of the companies mentioned.