Wikipedia

Gilt-edged securities

(Redirected from Index-linked gilts)
"Gilts" redirects here. For the hamlet in England, see Gilts, Cumbria.

Gilt-edged securities, also referred to as gilts, are bonds issued by the UK Government. The term is of British origin, and referred to the debt securities issued by the Bank of England on behalf of His Majesty's Treasury, whose paper certificates had a gilt (or gilded) edge.

In 2002, the data collected by the British Office for National Statistics revealed that at that time about two-thirds of all UK gilts were held by insurance companies and pension funds.[1] Since 2009 large quantities of gilts have been created and repurchased by the Bank of England under its policy of quantitative easing,[2] and in recent years overseas investors have also been attracted to gilts by their "safe haven" status.

Nomenclature

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In his 2019 book about the gilt market from 1928 to 1972, William A. Allen described gilt-edged securities as "long‐duration liabilities of the UK government" that were traded on the London Stock Exchange[3][4]: 1517 

Today, the term "gilt-edged security" or simply "gilt" is used in the United Kingdom as well as some Commonwealth nations, such as South Africa and India. However, when reference is made to "gilts", what is generally meant is UK gilts, unless otherwise specified. Colloquially, the term "gilt-edged" is sometimes used to denote high-grade securities, consequently carrying low yields, as opposed to relatively riskier, below investment-grade securities.

Gilt-edged market makers (GEMMs) are banks or securities houses registered with the Bank of England which have certain obligations, such as taking part in gilt auctions.[5]

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.[6]

History

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Following the 1688 Glorious Revolution, with the founding in 1694 of the Bank of England by Royal Charter, King William III borrowed £1,200,000 from the bank's 1,268 private subscribers to bank stock in order to fund the war with France.[7][8] This marked the inception of what became a permanent or perpetual national public debt, with the Stock Exchange dealing in UK government securities.[3]: 10  The Bank of England's debt securities were issued as certificates with gilded edges.[9]

The next major public debt incurred by the government was the South Sea Bubble of 1720.[9] British citizens continued to pay interest on those securities until 2014, when low interest rates led George Osborne, then the chancellor of the Exchequer to pay off the remaining loan.[9]

In 1927, the chancellor of the Exchequer, Winston Churchill issued 4% consols or securities, in part to refinance World War I National War Bonds.[9] In 2014, when they were to be repaid, these consols were valued at £218 million.[9]

The government sells bonds in order to raise the money it needs, like an IOU to be paid back at a future date—mainly from five to thirty years in the future—with interest.[10] This form of government borrowing proved successful and became a common way to fund wars and later infrastructure projects when tax revenue was not sufficient to cover their costs.[11][12] Many of the early issues were perpetual, having no fixed maturity date. These were issued under various names but were later generally referred to as consols.

Conventional gilts

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Conventional gilts are the simplest form of UK government bond and make up the largest share of the gilt portfolio (75% as of October 2016).[13] 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.

Coupon rate

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Conventional gilts are denoted by their coupon rate and maturity year, e.g. 4+1⁄4% 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, split into two semi-annual payments.

Gilt names

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Historically, gilt names referred to their purpose of issuance, or signified how a stock had been created, such as 10+1⁄4% Conversion Stock 1999; or different names were used for different gilts simply to minimise confusion between them. In more recent times, gilts have been generally named Treasury Stocks. Since 2005–2006, all new issues of gilts have been called Treasury Gilts.[14]

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

  • A substantial and persistent decline in market yields as the currency has stabilised compared to the 1970s and more recently UK gilts are seen as a safe haven compared to certain other government bonds.
  • A decline in coupons: several gilts were issued in the 1970s and 1980s with coupons of ≥10% per annum, but these have now matured.
  • A large and prolonged increase in the overall volume of issuance as the public sector borrowing requirement has increased.
  • An increase in the volume of issuance of very long dated gilts to respond to demand for these.
  • A large volume of gilts have been repurchased by central government under its quantitative easing programme.

Index-linked gilts

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See also: Inflation-indexed bond

Index-linked gilts account for around a quarter of UK government debt within the gilt market.[15] The UK was one of the first developed economies to issue index-linked bonds on 27 March 1981.[16] Initially only tax-exempt pension funds were allowed to hold these bonds.[17][18] By January 2003, the UK Debt Management Office had issued 11 gilts of this type[19][20] and the issuance increased to around 60 index-linked bonds by mid-2019.[21] At the time of 26 August 2025 the DMO Gilts in Issue report individually lists 35 index-linked gilts.[22]

Index-linked gilts pay coupons which are set, at the time of issue, in line with market interest rates, then the principal payment along with the semi-annual coupons are adjusted in line with movements in the General Index of Retail Prices (RPI) over time.[23]

Ultra-long index-linked bonds, maturing in 2062[24] and 2068, were issued in October 2011 and June 2013[25] respectively, (the latter reissued September 2013),[26] and a 2065 maturity was issued in February 2016.[27] In November 2021, the DMO issued a 50-year index-linked gilt with a maturity date of 2073.[28][29]

Indexation lag

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As with all index-linked bonds, there are time lags 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 the vast majority of index-linked gilts now in issue are structured on that basis.

Double-dated gilts

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In the past, the UK government issued many double-dated gilts, which had a range of maturity dates at the option of the government. The last remaining such stock was redeemed in December 2013.[30]

Green gilts

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In September 2021, the UK held its inaugural "green gilt" sale, which was met with record demand. Investors placing over £100bn in bids.[31] The UK's Debt Management Office (DMO) plans to sell £15bn of green gilts this year. The 12-year bond will mature in July 2033, and is priced at a yield of about 0.9 percent. The money raised by the bonds are earmarked for environmental spending, such as on projects including flood defences, renewable energy, or carbon capture and storage.[32]

Undated gilts

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Historical undated gilts

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Until late 2014 there existed eight undated gilts, which by then made up a very small proportion of the UK government's debt. They had no fixed maturity date. These gilts were very old: some, such as consols, dated from the 18th century. The largest, War Loan, was issued in the early 20th century. The redemption (payout of the principal) of these bonds was at the discretion of the UK government, but because of their age, they all had low coupons, and so for a long time there was little incentive for the government to redeem them. Because the outstanding amounts were relatively very small, there was a very limited market in most of these gilts. In late 2014 and early 2015 the government gave notice that four of these gilts, including War Loan, would be redeemed in early 2015.[33] The last four remaining gilts, with coupons of 2.5% or 2.75%, were redeemed on 5 July 2015.[13]

Gilt strips

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Many 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.[34] 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.[35] Gilts can be reconstituted from all of the individual strips. By the end of 1999, there were 11 strippable gilts in issue in the UK totalling £116 billion.[36] According to the 2021 DMO's GEMM Guidebook, only certain institutions, GEMMs, the DMO and the Bank of England are permitted to strip or reconstitute eligible gilts.[37]

Maturity of gilts

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The maturity of gilts is defined by the UK Debt Management Office (DMO) is as follows: short, 0–7 years; medium, 7–15 years; and long, more than 15 years.

See also

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References

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  1. ^ OECD public debt markets: trend and recent structural changes. Organisation for Economic Co-operation and Development. 11 June 2002. ISBN 92-64-19761-3.
  2. ^ Allen, W. (2014-08-03). "17". Monetary Policy and Financial Repression in Britain, 1951 - 59. Springer. ISBN 978-1-137-38382-2. LCCN 2014024394. Moreover, in its quantitative easing operations between 2009 and 2012, the Bank of England bought £375 billion of gilts, in exchange for its own deposit liabilities. As a result of these and other operations, bankers' deposits in the Bank of England amount to £297 billion.
  3. ^ a b Allen, William A.; Allen, Bill (3 January 2019). The Bank of England and the Government Debt: Operations in the Gilt-Edged Market, 1928–1972. Cambridge University Press. pp. xiv+260. ISBN 978-1-108-49983-5.
  4. ^ Singleton, John. "Review of 'The Bank of England and the Government Debt'". The Economic History Review. 72 (4).
  5. ^ Choudhry, Moorad; Cross, Graham "Harry"; Harrison, Jim (2003). Gilt-Edged Market. Elsevier. p. 261. ISBN 978-0-08-047286-7.
  6. ^ "PNB Gilts".
  7. ^ The Bank of England: History And Functions (PDF). Debden Loughton Essex: The Bank of England Archive. 1970. p. 19. G15/634. Retrieved October 12, 2022.
  8. ^ "Index to Original Subscribers to Bank Stock 1694". Bank of England. nd. Retrieved October 12, 2022.
  9. ^ a b c d e Castle, Stephen (December 27, 2014). "That Debt From 1720? Britain's Payment Is Coming". The New York Times. ISSN 0362-4331. Retrieved October 12, 2022.
  10. ^ Thomas, Daniel; David, Dharshini (11 October 2022). "Bank of England boss tells investors help will end in three days". BBC. Retrieved 11 October 2022.
  11. ^ "A Brief History Of British Gilt Edged Securities". Gilts360.com. January 1, 2013.
  12. ^ Choudry, Moorad; Cross, Graham "Harry"; Harrison, Jim (June 19, 2003). Gilt-Edged Market (Securities Institute Operations Management).
  13. ^ a b "UK Government index-linked gilts". United Kingdom Debt Management Office. 25 March 2009. Archived from the original on 10 November 2016. Retrieved 10 October 2016.
  14. ^ "UK Government Securities: a Guide to 'Gilts'" (PDF). londonstockexchange.com (pdf) (Eighth ed.). Debt Management Office. June 2010. p. 10. Archived from the original (PDF) on 6 March 2023. For some time new conventional gilts were referred to as "Treasury Stocks", but since 2005-06 all new gilts have been named "Treasury Gilts". Some older gilts are referred to as "Conversion Stock" or "Exchequer Stock".
  15. ^ Harari, Daniel (18 December 2024). "What are gilts? A simple guide". commonslibrary.parliament.uk. House of Commons Library. Retrieved 25 August 2025. Index-linked gilts make up around one quarter of all gilts.
  16. ^ Fabozzi, Frank J.; Choudhry, Moorad (2004-01-20). The Handbook of European Fixed Income Securities. John Wiley & Sons. p. 249. ISBN 978-0-471-64951-9. After announcing its intent in the 10 March 1981 Budget, the UK Treasury issued its first index-linked gilt on 27 March 1981 with an auction of £1 billion 2% Index-Linked Treasury 1996.
  17. ^ "UK Index-linked Gilts: Inflation-linked Bonds Explained". IG. Retrieved 2025-08-27. The first modern inflation-linked bonds, or 'linkers', were issued by the UK in 1981 ... The gilt's ownership was initially restricted to pension funds and institutions writing pension business.
  18. ^ Blake, David (2003). Pension Schemes and Pension Funds in the United Kingdom. Oxford University Press. p. 417. ISBN 978-0-19-924353-2. LCCN 2002035568. Index-linked government bonds were first introduced in the UK in March 1981 … Initially only pension funds could invest in them, because pension funds had (partially) index-linked pensions to deliver to their pensioners.
  19. ^ "Further details about yields data". www.bankofengland.co.uk. 3 July 2025. Retrieved 2025-08-27. Calculated from the prices of index-linked gilts, which were first issued following the 1981 budget ... There are 11 index-linked stocks in issue (4 in 1982), which have a market value of £84 billion compared to a conventional market of £241 billion (at end-January 2003).
  20. ^ Choudhry, Moorad; Cross, Graham "Harry"; Harrison, Jim (2003-05-01). Gilt-Edged Market. Elsevier. p. 92. ISBN 978-0-08-047286-7. There are currently eleven index-linked gilts in issue, with the longest dated bond maturing in 2035.
  21. ^ Oliver, Michael J.; Rutterford, Janette (14 May 2019). "'The capital market is dead': the difficult birth of index-linked gilts in the UK". The Economic History Review. 73 (1): 258–280. doi:10.1111/ehr.12875. ISSN 1468-0289. There are now 60 index-linked gilt issues, with a total value of approximately £400 billion, which represents a quarter of total government debt.
  22. ^ "Index-linked Gilts in Issue". www.dmo.gov.uk. Retrieved 2025-08-27.
  23. ^ Stevenson, David; Tuckwell, David (2019-02-25). The ETFs Handbook. Harriman House Limited. p. 149. ISBN 978-0-85719-726-9. LCCN 2018493369. Index-linked gilts are still bonds issued by the government to pay for spending but their structure of payouts is very different from that of conventional gilts with linkers the semi-annual coupon payments and the principal (the final payout) are adjusted in line with a measure of inflation called General Index of Retail Prices (also known as the RPI).
  24. ^ "T62 03/8% IL Treasury Gilt 62". www.londonstockexchange.com. Retrieved 2025-08-25. Admission date: 20 October 2011; Maturity date: 22 March 2062.
  25. ^ OECD (2014-03-28). OECD Sovereign Borrowing Outlook 2014. OECD Publishing. p. 80. ISBN 978-92-64-20755-4. In June 2013, supported by strong demand, the UK DMO extended the gilt curve modestly by launching a 55-year gilt (maturing in July 2068) via syndication. The DMO raised £4.8 billion of 2068 gilts from the transaction.
  26. ^ "Launch by Syndicated Offering of 0⅛% Index-Linked Treasury Gilt 2068" (PDF). dmo.gov.uk. United Kingdom Debt Management Office. 17 September 2013. Retrieved 25 August 2025.
  27. ^ Suter, Laura (27 July 2016). "UK Govt Sells 50-Year Bond at Record Low". Fundweb. ProQuest 1807167449. Retrieved 25 August 2025. Coupons on the 0.25 per cent Index-linked Treasury Gilt 2065 are linked to the retail price index measure of inflation.
  28. ^ Milliken, David (2021-11-23). "UK sells new 50-year inflation-linked bond with record-low yield". Reuters. Retrieved 2025-08-25. Britain sold 1.1 billion pounds ($1.47 billion) of a new index-linked gilt maturing in 2073 on Tuesday, which will pay investors a record-low inflation-adjusted yield for a bond sold via a syndication.
  29. ^ "Syndicated Launch of £1.1 Billion of 0⅛% Index-Linked Treasury Gilt 2073: Result" (PDF). dmo.gov.uk. United Kingdom Debt Management Office. 23 November 2021. Retrieved 25 August 2025. Commenting on the result, Sir Robert Stheeman, the Chief Executive of the DMO, said: "The new index-linked gilt has a 2073 maturity date and represents the first extension to our real yield curve since the launch of the 2068 index-linked gilt in September 2013."
  30. ^ "Redemption of 12% Exchequer Stock 2013-2017 on 12 December 2013" (PDF). UK Debt Management Office. Retrieved 16 June 2016.
  31. ^ "UK's first Green Gilt raises £10 billion for green projects". GOV.UK. 21 September 2021. Retrieved 2025-08-27. £10 billion was raised from the sale of the Gilt this morning: the largest inaugural green issuance by any sovereign, with the largest ever order book for a sovereign green transaction.
  32. ^ Stubbington, Tommy (21 September 2021). "UK's debut 'green gilt' sale draws blockbuster demand". Financial Times. Retrieved 21 September 2021.
  33. ^ "Chancellor to repay the nation's First World War debt". 3 December 2014. Archived from the original on 12 June 2017.
  34. ^ Arnold, Glen (2015-07-15). The Financial Times Guide to Bond and Money Markets. Pearson UK. p. 56. ISBN 978-0-273-79180-5. Some conventional gilts, following issuance by the government and trading on the secondary market, can be stripped. A gilt STRIPS (the letters stand for Separate Trading of Registered Interest and Principal Securities) occurs when the gilt is separated from its coupons and the gilt and its coupons all become zero coupon bonds.
  35. ^ Choudhry, Moorad; Cross, Graham "Harry"; Harrison, Jim (2003-05-01). Gilt-Edged Market. Elsevier. p. 107. ISBN 978-0-08-047286-7. The gilt strips market is a recent development, with trading having commenced only on 8 December 1997. Not all gilts are strippable; only stocks designated as being strippable by the BoE (and subsequently the DMO) may be stripped.
  36. ^ Deacon, Mark (August 2000). "Stripping facilities" (PDF). dmo.gov.uk. The Actuary. p. 27. Retrieved 29 August 2025. By the end of December 1999 the number of strippable bonds was 11, totalling £116bn and representing over one-third of the total amount of gilts outstanding.
  37. ^ United Kingdom: Her Majesty's Treasury: Debt Management Office (DMO) (2021-03-08). "GEMM Guidebook: A guide to the roles of the DMO and Primary Dealers (GEMMs) in the UK government bond market". Documents: 7. Footnote 5 – via EliScholar. GEMMs, as well as the DMO and the Bank of England, are the only institutions permitted to strip and reconstitute gilts. Strips may only be held or transferred within CREST.
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