What are Gilts

Gilts are bonds issued by the British government, that are generally considered to be low-risk investment vehicles. The U.K.'s equivalent to U.S. Treasury securities, gilts are so named because the original certificates issued by the British government had gilded edges.

Gilts can come in two types: conventional gilts issued in nominal terms, and index-linked gilts, which are indexed to inflation and are quite similar to the United States' Treasury inflation-protected securities.

Breaking Down Gilts

A gilt is a bond denominated in British pounds, that's issued by HM Treasury, which is Britain's economic and finance ministry, responsible for maintaining control over public spending. Payments on gilts are backed by the credit of the U.K. government.

While the term "gilt" is primarily associated with the United Kingdom, India's government issued securities are also known as gilts, thanks to the country's history as a British colony. Furthermore, bonds issued by blue-chip companies that are considered to be high-quality and low-risk investments, are sometimes called "gilt-edged securities".

Key Takeaways

  • Gilts are British government issued bonds, equivalent to U.S. Treasury securities.
  • Gilts are broadly viewed as low-risk investment vehicles. 
  • Gilts are so named because the original certificates issued by the British government featured gilded edges.
  • Gilts may either be conventional gilts issued in nominal terms, or index-linked gilts that are indexed to inflation.

While primary private purchasers of gilts include pension funds and life insurers, ownership of gilts by U.K.'s central bank--the Bank of England, increased dramatically, subsequent to the 2008 U.S. economic crisis.
Private investors can buy gilts either through the primary market administered by the U.K. Debt Management Office, or they may purchase gilts through the secondary market, accessible via stockbrokers and other parties authorized to transact in the buying and selling of these instruments.

Conventional Gilts

Conventional gilts, which represent the majority of U.K. government debt, are nominal bonds that promise to pay a fixed coupon rate every six months. When a conventional gilt matures, its holder is paid the final coupon and the principal. When issued, a coupon rate of a conventional gilt typically approximates the market interest rate, at the time of issuance. Conventional gilts have prescribed maturities, which are five, 10 and 30 years from the date of issuance. Occasionally, U.K. issues ultra-long conventional gilts that mature in 55 years. On a rarer basis, the U.K. issues undated gilts.

Index-Linked Gilts

Index-linked gilts represent bonds with borrowing rates and principal payments linked to changes in the inflation rate. Index-linked gilts make coupon payments every six months, coupled with one principal payment upon maturity. Coupon rates are adjusted to reflect changes in the U.K. retail prices index, which is a proxy for inflation. A higher inflation rate results in a higher coupon payment on index-linked gilts. For gilts issued after September 2005, coupon rates are adjusted based on the inflation rate published three months before. Securities issued before September 2005 use an eight-month indexation lag.

Gilt Strips

Separate trading or registered interest and principal securities (strips) refer to the separation of a gilt into two distinct securities. They are based on cash flows from either the principal or the coupon, and they can be traded as zero-coupon gilts. The strip market began in December 1997, and strip gilts are typically of the conventional type.

[Important: Investors may gain exposure to gilts through exchange-traded funds (ETFs).]