Gilt-Edged Securities: Definition, History, and Current Uses

What Are Gilt-Edged Securities?

Gilt-edged securities are high-grade bonds issued by certain national governments and private organizations. In the past, these instruments referred to the certificates issued by the Bank of England (BOE) 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-edge 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.

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 30 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.

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 which case gilt 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-edge 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.