What are ‘Gilts’?
A gilt or ‘gilt-edged security’ is a government bond. In the UK they are issued by HM Treasury and listed on the London Stock Exchange. The term gilt is also issued in India and other Commonwealth countries.
Typically, they have a very low risk of default and a corresponding low rate of return. This is because the British Government has never failed to make interest or principal payments on gilts as they fall due. Their name comes from the original certificates issued by the British government which had gilded edges.
The gilt market is comprised of two different types of securities – conventional gilts and index-linked gilts.
Conventional gilts are the simplest form of government bond. These types of gilts promise to pay a fixed coupon rate at set time intervals, such as every six months, until the maturity rate, at which point the holder receives the final coupon payment and the return of the principal. Conventional gilts represent the majority of government debt and about 75% of the gilt portfolio.
Index-linked gilts (IGs) represent bonds with borrowing rates and principal payments linked to changes in the inflation rate. This means that both the coupons and the principal paid on redemption of these gilts are adjusted to take account of accrued inflation since the gilt was first issued. They differ from conventional gilts in that the semi-annual coupon payments and the principal are adjusted in line with the UK Retail Prices Index (RPI). They form around 25% of the gilt portfolio.
Due to their low risk, gilt-edged bonds have yields that are well below those offered by more speculative bonds. As such, they are given a top rating by credit rating services such as Standard & Poor's and Moody's and often used by conservative investors whose top priority is capital preservation.