What Are Gilt-Edged Securities?
Gilt-edged securities are high-grade bonds issued by certain national governments and reputable private organizations. Historically, these instruments referred to certificates issued by the Bank of England on behalf of the Majesty’s Treasury, named for their gilded (golden) edges.
By nature, a gilt-edged denotes a high-quality item whose value remains relatively stable over time. In investment terms, this translates to high-grade securities offering lower yields compared to riskier, below-investment-grade securities.
Initially, gilt-edge securities were issued solely by blue-chip companies and national governments with reliable profit records. Besides conventional gilts, the British government also issues index-linked gilts that provide semi-annual coupon payments adjusted for inflation.
Government bonds in the U.K., India, and other commonwealth countries are commonly known as gilts.
Key Takeaways
- Gilt-edged securities refer to high-grade bonds issued by some national governments and private organizations to generate revenue.
- These securities were originally issued by the Bank of England.
- Named for the gilded edges on the original certificates, gilt-edged securities were historically distinguished by this feature.
- Investors favor gilt-edged securities for their predictable returns and low default risk.
- These investments share similarities with United States Treasury securities.
Understanding Gilt-Edged Securities
Gilt-edged securities are high-grade investment bonds issued by governments and well-established corporations as a method of raising funds. Issuing institutions typically have strong track records of consistent earnings capable of covering dividend or interest payments. In essence, they are the next safest bonds to U.S. Treasury securities.
The United Kingdom and other Commonwealth nations continue to utilize these securities similarly to how the U.S. uses Treasury bonds for revenue generation. A conventional gilt issued by the U.K. government pays the holder a fixed cash amount biannually until maturity, at which point the principal is fully repaid. The coupon payment reflects the market interest rate at the time of issuance, indicating the annual cash payment for the holder.
Like U.S. Treasury securities, the duration of gilt-edged assets can span from a few years to as long as 50 years. After the 2008 recession, large quantities of gilts were created and repurchased by the Bank of England as part of its economic relief efforts. About 20% of all U.K. gilts are held by pension funds.
Limitations of Gilt-Edged Securities
Though gilt-edged securities are issued by reliable government bodies and major corporations, they have some drawbacks. Primarily, the bonds’ value fluctuates with interest rates; rate increases cause the price of a gilt to drop and vice versa.
When global economic conditions improve, interest rates generally rise, causing gilt exchange-traded funds (ETFs) and mutual funds to fall in value. Therefore, investors seeking higher returns during periods of economic growth might find better value in index funds.
The greatest advantage of gilt-edged securities is that they are typically tied to interest rates, making them ideal for retirees seeking reliable returns with minimal risk.
What Does Gilt-Edged Mean in Business?
In business or financial terms, “gilt-edged” refers to a financial product of high quality and low risk. These securities are often associated with U.K. government bonds due to their high value and reliability.
Why Is It Called “Gilt”?
U.K. government bonds, known as “gilts,” are so named because the original certificates featured gilded edges, leading to the designation of these bonds as “gilt-edged” securities.
What Are the Advantages of Gilt-Edged Securities?
The primary advantage of gilt-edged securities is their safety. These low-risk investments offer better asset quality compared to equities and come with lower yields. For investors desiring higher yields, riskier securities such as stocks or high-yield bonds may be more appropriate.
The Bottom Line
Gilt-edged securities are high-quality bonds issued by governments or blue-chip companies, primarily associated with the U.K. as they resemble U.S. Treasuries. Investors seeking safe securities with low yields might consider investing in gilts.
Related Terms: Government Bonds, Treasury Securities, Blue-Chip Companies, Interest Rates, Index Funds.
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”.
