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 edges.

By nature, a gilt edge 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. 

Key Takeaways

  • Gilt-edged securities refer to high-grade bonds that some national governments and private organizations issue in an effort to generate revenue.
  • These vehicles 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.
  • These investments carry similar traits as 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 US Treasury securities.

The United Kingdom and other Commonwealth nations still rely on these securities, in much the same way the United States uses Treasury bonds to raise revenue. A conventional gilt issued by the United Kingdom 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 help jump-start relief efforts.

Nearly two-thirds of all UK gilts are held by pension funds and insurance companies.

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. With global economic conditions improving, rates are poised to bounce off near-zero levels, which means gilt funds are likely to experience a tumultuous ride. For this reason, investors looking to generate substantial returns 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.