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Gilts are bonds issued by the governments of the United Kingdom, South Africa, or Ireland. The term is of British origin, and refers to the debt securities issued by the Bank of England, which had a gilt (or gilded) edge. Hence, they are called gilt-edged securities, or gilts for short. Generally, when a market participant refers to gilts, what is meant is British gilts unless otherwise specified, and the description below applies to the UK gilt market. ONS data reveal that about two-thirds of all gilts are held by insurance companies and pension funds.[1] However in 2009 large quantities of gilts have been purchased by the Bank of England under its policy of quantitative easing.

Contents

Conventional gilts

These are the simplest form of UK government bond and make up the largest share of UK government debt[2]. A conventional gilt is a bond issued by the UK government which pays the holder a fixed cash payment (or coupon) every six months until maturity, at which point the holder receives their final coupon payment and the return of the principal.

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Coupon rate

Conventional gilts are denoted by their coupon rate and maturity year, e.g. 4¼% Treasury Gilt 2055. The coupon paid on the gilt typically reflects the market rate of interest at the time of issue of the gilt, and indicates the cash payment per £100 that the holder will receive each year in two semi-annual payments.

Gilt names

Historically, gilt names referred to their purpose of issuance, or signified how a stock had been created, such as 10¼% Conversion Stock 1999. In recent years, gilts have been generally named Treasury Stocks. However, from 2005-2006 onwards, all new issues of gilts are being called Treasury Gilts.

Trends

The most noticeable trends in the gilt market in recent years have been:

  • a decline in market yields as the currency has stabilised compared to the 1970s
  • a decline in coupons: several gilts were issued in the 1970s with coupons of around 15% per annum, but these have now matured
  • a decline in the number of different gilts in issue, as the policy of the government has been to issue large quantities of each gilt (around £10 to 30 billion) to maximise liquidity in global markets

Index-linked gilts

These account for around a quarter of UK government debt. The UK was one of the first developed economies to issue index-linked bonds in 1981, and has issued 19 index-linked bonds since that date. Like conventional gilts, index-linked gilts pay coupons which are initially set in line with market interest rates. However, their semi-annual coupons and principal payment are adjusted by the Retail Prices Index (RPI).

In September 2005, the UK Government issued the longest ever index-linked government bond, 1¼% Index-linked Treasury Gilt 2055, maturing on 22 November 2055.

Indexation lag

As with all index-linked bonds, there exists a lag between the publication of the inflation index and the indexation of the bond. From their introduction in 1981 index-linked gilts had an eight-month indexation lag - the purpose of this was that the amount of the next coupon was known at the start of the interest accrual period. However in 2005 the UK Debt Management Office announced that all new issues of index-linked gilts would use a three-month indexation lag design, first used in the Canadian Real Return Bond market, and several gilts have now been issued on that basis.

Double-dated gilts

In the past, the UK government issued many double-dated gilts, which had a range of maturity dates, such as 12% Exchequer Stock 2013-2017. There are now only two of these gilts remaining in issue and these are likely to be redeemed in the next few years. These are callable bonds: the government can choose to redeem these gilts in whole, or in part, on any day between the first and final maturity date of the gilt, subject to giving no less than three months’ notice.

Undated gilts

There exist eight undated gilts, which make up a very small amount of the UK government’s domestic debt. These are perpetual bonds. These gilts are very old: some date from the 18th century, such as Consols. The largest, War Loan, was issued in the early 20th century. The redemption of these bonds remains at the discretion of the UK government, but because of their age, they all have low coupons, and there is therefore currently little incentive for the government to redeem them. However in early 2009 the yield on these gilts was higher than the redemption yield on long-dated redeemable gilts, which implies that the market may be pricing in the chance that the government may redeem these gilts at some point. Because the outstanding amounts are relatively very small, there is a very limited market in these gilts.

Gilt strips

Certain gilts can be "stripped" into their individual cash flows, namely Interest (the periodic coupon payments) and Principal (the ultimate repayment of the investment) which can be traded separately as zero-coupon gilts, or gilt strips. For example a ten year gilt can be stripped to make 21 separate securities: 20 strips based on the coupons, which are entitled to just one of the half-yearly interest payments; and one strip entitled to the redemption payment at the end of the ten years. The title Separately Traded and Registered Interest and Principal Securities was created as a 'reverse acronym' for strips.

The UK gilt strip market started in December 1997.

Gilts can be reconstituted from all of the individual strips. By the end of 2001, there were 11 strippable gilts in issue in the UK totalling £1,800 million.[3]

Maturity of gilts

The maturity of gilts is defined by the DMO is as follows: short 0-7 years, medium 7-15 years and long 15 years+.

Gilts with a maturity of less than three years are also referred to as ‘ultra short’, while the new gilts issued in 2005 with a maturity of 50 years have been referred to as ‘ultra long’.

See also

References


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