Gilts are bonds issued by certain national governments. The term is of British origin, and originally referred 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. The term is also sometimes used in Ireland and some British Commonwealth countries, South Africa and India. When a reference is made to gilts, what is generally meant is British gilts unless otherwise specified. 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] During 2009 large quantities of gilts were created and purchased by the Bank of England under its policy of quantitative easing.
The term "Gilt Account" is also a term used by the Reserve Bank of India to refer to a constituent account maintained by a custodian bank for maintenance and servicing of dematerialized Government Securities owned by a retail customer.[2]
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These are the simplest form of UK government bond and make up the largest share of UK government debt.[3] 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 his final coupon payment and the return of the principal.
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.
Historically, gilt names referred to their purpose of issuance, or signified how a stock had been created, such as 10¼% Conversion Stock 1999. In more recent times, gilts have been generally named Treasury Stocks. From 2005-2006 onwards, all new issues of gilts are being called Treasury Gilts.
The most noticeable trends in the gilt market in recent years have been:
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 in line with movements in the General Index of Retail Prices (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. A further ultra-long index-linked bond, maturing in 2062, is being issued in October 2011.
As with all index-linked bonds, there is a time lag between the collection of prices data, 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 (between the month of collection of prices data and the month of indexation of the bond). This was so that the amount of the next coupon was known at the start of each six-month 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, first used in the Canadian Real Return Bond market, and several gilts have now been issued on that basis.
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, both "rump gilts" with a relatively small amount outstanding and a very limited market, and these are likely to be redeemed in the next few years: the government has announced that one of them will be redeemed in January 2012.
There exist eight undated gilts, which make up a very small proportion of the UK government's debt. They have no fixed maturity date. These gilts are very old: some, such as Consols, date from the 18th century. The largest, War Loan, was issued in the early 20th century. The redemption of these bonds is at the discretion of the UK government, but because of their age, they all have low coupons, and for a long time there has therefore been little incentive for the government to redeem them. However in early 2009, and again in late 2011, the yield on these gilts, and in some cases also the coupon, was higher than the redemption yield on long-dated redeemable gilts, which implied that the market was pricing in the chance that the government might redeem these gilts at some point. Because the outstanding amounts are relatively very small, there is a very limited market in these gilts.
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.[4]
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 since 2005 with a maturity of 50 years have been referred to as "ultra long".