Information about Gilts

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.

The gilts market can trace its origins to the creation of the Bank of England and the British national debt in 1694. Since 1998 they have been issued by the UK Debt Management Office (DMO) on behalf of HM Treasury. The UK government has a AAA credit rating from Standard & Poor's and Aaa from Moody's, and all other rating agencies also award UK government debt, whether in sterling or foreign currency, the highest possible rating.

Conventional Gilts

These are the simplest form of UK government bond and make up the largest share of UK government debt. 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 .

Conventional gilts are denoted by their coupon rate and maturity, 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.

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, all new issues of gilts are to be called Treasury Gilts.

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 in line with market interest rates. However, their semi-annual coupons and principal payment are adjusted by the Retail price index (RPI) in the UK.

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 have had an eight-month indexation lag. 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.

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.

(Also see inflation derivatives).

Double-Dated Gilts

In the past, the UK government issued Double-Dated gilts, which have a range of maturity dates, such as 12% Exchequer Stock 2013-2017. There are three remaining in issue. 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 of which date from the eighteenth century, such as Consols or War Loan. 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 little incentive for the government to redeem them.

Gilt Strips

Strips is the acronym for Separately Traded Interest and Principal Securities. 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. The UK gilt strip market started in 1997.

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’.

External Links

• UK DMO information page
• inflationderivatives.com
• Inflation-Indexed Securities: Bonds, Swaps, and Other Derivatives 2nd Ed.