Gilts
Encyclopedia
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 fund
s. 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.
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 the return of the principal.
(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.
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.
, 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.
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.
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".
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
issued by certain national governments. The term is of British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
origin, and originally referred to the debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
securities issued by the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, 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
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
and some British Commonwealth countries, South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
. 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
Office for National Statistics
The Office for National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom.- Overview :...
data reveal that about two-thirds of all gilts are held by insurance companies and pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s. During 2009 large quantities of gilts were created and purchased by the Bank of England under its policy of quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
.
The term "Gilt Account" is also a term used by the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
to refer to a constituent account maintained by a custodian bank
Custodian bank
A Custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not likely to engage in "traditional" commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal...
for maintenance and servicing of dematerialized Government Securities owned by a retail customer.
Conventional gilts
These are the simplest form of UK government bondGovernment bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
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 the return of the principal.
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 more recent times, gilts have been generally named Treasury Stocks. 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 substantial 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 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 billion-30 billion) to maximise liquidity in global markets
- an increase in the volume of issuance as the Public Sector Borrowing Requirement has increased
- a large volume of gilts have been repurchased by central government under its quantitative easingQuantitative easingQuantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
programme
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 in line with movements in the General Index of Retail PricesRetail Prices Index (United Kingdom)
In the United Kingdom, the Retail Prices Index or Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services.-History:...
(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.
Indexation lag
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 OfficeUK Debt Management Office
The UK Debt Management Office , was established on 1 April 1998. The DMO is responsible for carrying out the Government's debt management policy of minimising financing costs over the long term, taking account of risk, and managing the aggregate cash needs of the Exchequer in the most...
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.
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, 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.Undated gilts
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 ConsolsConsols
Consol is a form of British government bond , dating originally from the 18th century. The first consols were originally issued in 1751...
, 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.
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
Backronym
A backronym or bacronym is a phrase constructed purposely, such that an acronym can be formed to a specific desired word. Backronyms may be invented with serious or humorous intent, or may be a type of false or folk etymology....
' 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.
Maturity of gilts
The maturity of gilts is defined by the DMOUK Debt Management Office
The UK Debt Management Office , was established on 1 April 1998. The DMO is responsible for carrying out the Government's debt management policy of minimising financing costs over the long term, taking account of risk, and managing the aggregate cash needs of the Exchequer in the most...
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".