Gilt-edged securities are bonds issued by the UK Government. The term is of British origin, and then referred to the debt securities issued by the Bank of England on behalf of Her Majesty's Treasury, whose paper certificates had a gilt (or gilded) edge. Hence, they are known as gilt-edged securities, or gilts for short.
In 2002, the data collected by the British Office for National Statistics revealed that about two-thirds of all UK gilts are held by insurance companies and pension funds. Since 2009 large quantities of gilts have been created and repurchased by the Bank of England under its policy of quantitative easing, and in recent years overseas investors have also been attracted to gilts by their "safe haven" status.
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.
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.
The first fund raising that could be considered a gilt issue was in 1694 when King William III borrowed £1.2m to fund a war with France via the newly created Bank of England. The term "gilt" however would not be used until the late 19th century for these types of debt securities.
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. 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.
These are the simplest form of UK government bond and make up the largest share of the gilt portfolio (75% as of October 2016). 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.
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 payments in March and September.
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.
The most noticeable trends in the gilt market in recent years have been:
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.
In September 2021, the UK held its inaugural "green gilt" sale, which was met with record demand. Investors placing over £100bn in bids. 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.
Until late 2014 there existed eight undated gilts, which 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 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. The last four remaining gilts, with coupons of 2.5% or 2.75%, were redeemed on 5 July 2015.
In May 2012 the UK Debt Management Office issued a consultation document which raised the possibility of issuing new undated gilts, but there was little support for this proposal.
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. 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.
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.
Gilts with a term to maturity of less than three years are also referred to as "ultra short", while the new gilts issued since 2005 with a term to maturity of 50 years or more have been referred to as "ultra long".
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