Gilt-Edged Securities: Safe Investments for Stable Returns
Gilt-edged securities are high-grade bonds issued by certain national governments and private organizations. Throughout history, these instruments referred to the certificates issued by the Bank of England on behalf of the Majesty’s Treasury, so named because the paper they were printed on customarily featured gilded (golden) edges.
By nature, a gilt-edged denotes a high-quality item whose value remains fairly constant over time. As an investment vehicle, this equates to high-grade securities with relatively low yields compared to riskier, below-investment-grade securities.
For that reason, gilt-edged securities were once solely issued by blue-chip companies and national governments with proven track records of turning profits. Aside from conventional gilts, the British government issues index-linked gilts that offer semi-annual coupon payments adjusted for inflation.
Government bonds in the U.K., India, and several other commonwealth countries are still known as gilts.
Key Takeaways
- Gilt-edged securities refer to high-grade bonds that some national governments and private organizations issue in an effort to generate revenue.
- Also known as gilts, these securities were originally issued by the Bank of England.
- These instruments got their names because the certificates were printed on paper stock with gilded edges.
- Gilt-edged securities are favored by investors who seek predictable returns, with little risk of default.
- Gilt-edged investments have similar features to United States Treasury securities.
Understanding Gilt-Edged Securities
Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a method of borrowing funds. The issuing institutions typically boast strong track records of consistent earnings that can cover dividend or interest payments. In many ways, these are the next safest bonds to U.S. Treasury securities.
The United Kingdom and other Commonwealth nations still rely on these securities, in much the same way the U.S. uses Treasury bonds to raise revenue. A conventional gilt issued by the U.K. government pays the holder a fixed cash payment biannually until maturity, at which point the principal is returned in full. The coupon payment reflects the market interest rate at the time of issuance and indicates the cash payment that the holder will receive each year.
Similar to Treasury securities, the duration of gilt-edged assets can range from a few years up to 50 years. After the 2008 recession, large quantities of gilts were created and repurchased by the Bank of England in its campaign to jump-start economic relief efforts. About 20% of all U.K. gilts are held by pension funds.
Limitations of Gilt-Edged Securities
Although gilt-edged securities are offered by reliable government bodies and large corporations, they present certain drawbacks. Primarily, the bonds tend to fluctuate with interest rates, where rate hikes will cause the price of a gilt to decline, and vice versa.
During periods when global economic conditions are improving, interest rates tend to rise. In this case, gilt ETFs and mutual funds are likely to fall in value. For this reason, investors looking to generate substantial returns during periods of economic growth may source better value in index funds.
The greatest advantage of gilt-edged securities is the fact that these instruments are typically tied to interest rates. Consequently, they are ideal investments for retirees seeking reliable returns with minimal risk.
Gilt-Edged in Business: High Quality, Low Risk
In business or financial terms, “gilt-edged” refers to a financial product of high quality and low risk. Typically, these are securities of the highest value. They are most commonly associated with U.K. government bonds.
The Historical Origin of “Gilt” Bonds
U.K. government bonds, known as “gilts,” are termed as such because the original bond certificates had gilded edges, hence the name “gilt-edged” security.
Advantages of Gilt-Edged Securities
The primary advantage of gilt-edged securities is their safety. They are low-risk investments with a better asset quality than equities, and as such, come with low yields. To earn more yield, one would need to invest in higher-risk securities, such as stocks or high-yield bonds.
The Bottom Line
Gilt-edged securities are high-quality bonds issued by governments or blue-chip companies and are primarily associated with the U.K., as they are government bonds, similar to U.S. Treasuries. Investors looking for safe securities with low yields can consider investing in gilts.
Related Terms: U.S. Treasury securities, Blue-chip companies, Bond market, Government bonds
References
- Bank of England. “Working Paper No. 466. QE and the Gilt Market: A Disaggregated Analysis”, Page 3.
- MarketWatch. “U.K. 50 Year Gilt”.
- Office for National Statistics. “Funded Occupational Schemes in the U.K.: January to March 2022”.
