Gilts are government bonds issued by the U.K., India, and Commonwealth countries, akin to U.S. Treasury securities. The term ‘gilt’ originates from historical certificates with gilded edges issued by the British government, signifying their low-risk profile and modest returns.
Gilts are particularly sensitive to interest rate changes but offer diversification benefits due to their low or negative correlation with stock markets.
Key Takeaways
- Government bonds in the U.K., India, and Commonwealth countries are known as gilts.
- Gilts may be conventional gilts issued in nominal terms or index-linked gilts tagged to inflation.
- Low-risk corporate bonds are often referred to as gilt-edged securities.
- Gilt funds are ETFs or mutual funds that primarily invest in U.K. government bonds.
Conventional Gilts
Governments issue conventional gilts, representing the majority of government debt, in the national currency without adjustments for inflation. These nominal bonds promise to pay a fixed coupon rate at regular intervals, such as every six months, and the principal upon maturity.
At issuance, the coupon rate of a conventional gilt approximates the market interest rate. Maturities for conventional gilts are typically set at five, ten, or 30 years from the date of issuance.
Index-Linked Gilts
Index-linked gilts are bonds with borrowing rates and principal payments tied to inflation rate changes. These gilts, introduced in the U.K. in 1981 and in India in 2013, are akin to U.S. Treasury Inflation-Protected Securities (TIPS).
In the U.K., index-linked gilts make semi-annual coupon payments along with principal at maturity. Coupon rates are adjusted to reflect shifts in the U.K. retail price index. For gilts issued post-September 2005, coupon rates are updated based on inflation data from three months prior.
Corporate Bonds or Gilt-Edged Securities
Low-risk corporate bonds and stocks can also be referred to as gilts or gilt-edged securities, indicating high-quality assets with stable value over time. Unlike government bonds, private sector gilts in the U.K. or Commonwealth countries are akin to blue-chip securities in the U.S.
Gilt-edged securities carry top ratings from credit rating services like Standard \& Poor’s or Moody’s. They offer yields lower than those from more speculative bonds and are ideal for conservative investors prioritizing capital preservation.
Private investors can purchase gilts on the primary market through the U.K. Debt Management Office or the secondary market via authorized government brokers.
Gilt Funds
Gilt funds are ETFs or mutual funds that invest primarily in U.K. government bonds with the objective of preserving capital. These funds typically diversify across various short-term, medium-term, and long-term government securities. Here are some examples:
- iShares Core U.K. Gilts UCITS ETF: This ETF invests in U.K. government securities, with 99.92% of its portfolio in U.K. Government bonds as of June 16, 2023. The fund’s return for 2022 was -23.8% in British pound terms.
- Janus Henderson Institutional U.K. Gilt Fund: This mutual fund primarily targets U.K. government gilt securities. Its one-year performance in the investor share class was -17.26% in British pound terms as of June 16, 2023.
Market Value Fluctuations and Interest Rates
The market values of gilts shift in response to interest rate changes. Typically, when interest rates rise, the value of existing gilts falls, and when rates fall, gilt values increase.
Do Investors Have to Hold Gilts to Maturity?
No, investors are not obligated to hold gilts until maturity. They can sell their gilts on the secondary market.
What Are Clean and Dirty Prices?
When discussing gilt prices on the secondary market, the clean price is the price of the gilt without accrued interest, whereas the dirty price is the total price, including the clean price plus any accrued interest since the last payment.
The Bottom Line
Gilts are government bonds in the U.K. and other Commonwealth countries. The term also commonly refers to high-quality corporate bonds. Gilts are regarded as safe investments, offering reliable returns, though their values can fluctuate with interest rate changes.
Related Terms: US Treasury securities, principal, inflation rate, retail price index, credit rating services, secondary market, capital preservation.
References
- United Kingdom Debt Management Office “About gilts”.
- United Kingdom Debt Management Office. “Index-linked Gilts”.
- United Kingdom Debt Management Office. “How to calculate cash flows on index-linked gilts”, Page 1.
- iShares. “iShares Core UK GIlts UCITS ETF”.
- Morningstar. “Janus Henderson Institutional UK Gilt Fund”.
