What are Gilt-Edged Securities
Gilt-edged securities are high-grade bonds issued by some national governments and private organizations. In the past, it refereed to paper certificates issued by the Bank of England (BOE) on behalf of the Majesty's Treasury. The certificates were printed on gilt or gilded edges – hence, the name gilt-edge securities.
By nature, a gilt edge denotes a high quality item whose value remains fairly constant over time. As an investment vehicle this equates to a high grade security with low yields compared to risky, below investment-grade securities. For that reason, only blue chip companies and national governments that have a track record of operating in a safe and profitable manner issue gilt-edge securities. Besides conventional gilts, the UK government issues index-linked gilts that offer semi annual coupon payments adjusted for inflation.
BREAKING DOWN Gilt-Edged Securities
Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds. The issuing institutions often have a strong track record of consistent earnings and can be relied on to cover dividend or interest payments. In many ways, these are the next safest bonds to a US Treasury security.
The United Kingdom and other Commonwealth nations still rely on the securities the same way the United States does with Treasury bonds. A conventional gilt issued by the United Kingdom government pays the a holder a fixed cash payment bi-annually 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 the holder will receive each year. Similar to Treasury securities, gilt-edged assets can run for a few years and up to 30 years. After the 2008 recession, large quantities of gilts were created and repurchased by the Bank of England to help jump-start the relief efforts.
Limitations of Gilt-Edged Securities
Although gilt-edged securities are offered by reliable government bodies and large corporations, they have some drawbacks. The bonds often fluctuate with interest rates, meaning a rate hike would cause the price of a gilt to decline and vice versa. With global economic conditions improving and rates poised to bounce off near zero levels, gilt funds are in store for a tumultuous ride.
Meanwhile, investors looking to generate somewhat substantial returns can find better value in an index fund. The greatest upside of a gilt-edge security is typically tied to interest rates, making them ideal investments for retirees seeking low risk and constant returns.