A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange. The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security. This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due. An explanation of terms relating to gilts appears in the glossary.
The use of gilts (including gilt strips) in the Bank of England’s Sterling Monetary Framework is available from the Bank’s website.
The gilt market is comprised of two different types of securities - conventional gilts and index-linked gilts. An explanation of the different types of gilt appears below. Data are available showing how the breakdown of the gilt market by type of gilt has changed over time.
Conventional gilts are the simplest form of government bond and constitute around 75% of the gilt portfolio. A conventional gilt is a liability of the Government which guarantees to pay the holder of the gilt a fixed cash payment (coupon) every six months until the maturity date, at which point the holder receives the final coupon payment and the return of the principal. The prices of conventional gilts are quoted in terms of £100 nominal. However, they can be traded in units as small as a penny.
A conventional gilt is denoted by its coupon rate and maturity (e.g. 1½% Treasury Gilt 2047). The coupon rate usually reflects the market interest rate at the time of the first issue of the gilt. Consequently there is a wide range of coupon rates available in the market at any one time, reflecting how rates of borrowing have fluctuated in the past. The coupon indicates the cash payment per £100 nominal that the holder will receive per year. This payment is made in two equal semi-annual payments on fixed dates six months apart (these payments are rolled forward to the next business day if they fall on a non-business day). For example, an investor who holds £1,000 nominal of 1½% Treasury Gilt 2047 will receive two coupon payments of £7.50 each on 22 January and 22 July.
Conventional gilts also have a specific maturity date. In the case of 1½% Treasury Gilt 2047 the principal will be repaid to investors on 22 July 2047. In recent years the Government has concentrated issuance of conventional gilts around the 5-, 10- and 30-year maturity areas, but in May 2005 the DMO issued a new 50-year maturity conventional gilt. In June 2013, following market consultation the DMO issued a new 55 year maturity conventional gilt.
Index-linked gilts (IGs) form around 25% of the gilt portfolio. The UK was one of the earliest developed economies to issue index-linked bonds for institutional investors, with the first issue being in 1981. As with conventional gilts the coupon on an index-linked gilt reflects borrowing rates available at the time of first issue. However, as index-linked coupons reflect the real borrowing rate for the Government rather than the nominal borrowing rate there is a much smaller variation in real yields over time.
Index-linked gilts 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). 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. For index-linked gilts whose first issue date is before July 2002, the Bank of England performs the function of calculating and publishing the uplifted coupons on each index-linked gilt following the release of the RPI figure which is relevant to it, while for index-linked gilts first issued from July 2002 onwards the DMO performs this function. The DMO has produced a detailed paper with examples which sets out the method for calculating cash flows on index-linked gilts.
Each coupon payable on index-linked gilts consists of two elements:
New index-linked gilts issued from September 2005 employ the three-month indexation lag structure first used in the Canadian Real Return Bond market and not the eight-month lag methodology used for index-linked gilts issued before that date. In addition to the lag being shorter, with this design the indexation is applied in a significantly different way. The new design of index-linked gilts also trade on a real clean price basis. As a result, the effect of inflation is stripped out of the price of the new gilts for trading purposes, although it is included when such trades are settled. The first three-month lag index-linked gilt had a 50 year maturity.
An index ratio is applied to calculate the coupon payments, the redemption payment and accrued interest. The index ratio for a gilt measures the growth in the RPI since it was first issued. For a given date it is defined as the ratio of the reference RPI applicable to that date divided by the reference RPI applicable to the original issue date of the gilt and is rounded to the nearest 5th decimal place.
The reference RPI for the first calendar day of any month is the RPI for the month three months earlier (e.g. the reference RPI for 1 June is the RPI for March). The reference RPI for any other day in a month is calculated by linear interpolation between the reference RPI applicable to the first calendar day of the month in which the day falls and the reference RPI applicable to the first calendar day of the month immediately following. Interpolated values should be rounded to the nearest 5th decimal place.
Daily index ratios and reference RPIs for index-linked gilts with a 3-month indexation lag are published on this website following both the publication each month of the RPI and when a new index-linked gilt is issued.
For more details about these calculations see Annex B of the DMO publication Formulae for Calculating Gilt Prices from Yields. This publication also includes all relevant technical details for both types of index-linked gilts.
Index-linked gilts with a three-month lag trade and are issued on the basis of the real clean price per £100 nominal. Settlement proceeds are calculated by multiplying the real clean price by the relevant index ratio to get the inflation-adjusted clean price and then adding the (inflation-adjusted) accrued interest to this.
To calculate the inflation adjustment two RPI figures are required - that applicable to the gilt when it was originally issued and that relating to the current interest payment. In each case the RPI figures used are those applicable eight months before the relevant dates (e.g. for a November dividend date the RPI from the previous March is used). This “indexation lag” is required so that the size of each forthcoming interest payment is known at the start of the coupon period, thereby allowing the accrued interest to be calculated.
”Strips” is the acronym for Separate Trading of Registered Interest and Principal Securities. “Stripping” a gilt refers to breaking it down into its individual cash flows, which can be traded separately as zero-coupon gilts. For example, a three-year gilt will have seven individual cash flows: six (semi-annual) coupon payments and a principal repayment. Gilts can also be reconstituted from all of the individual strips. The strip market began in the UK on 8 December 1997 and all strippable gilts are currently conventional fixed coupon instruments.
Currently, all strippable gilts are conventional fixed coupon instruments. There are two series of strippable gilts; the first, paying coupons on 7 June/7 December, became strippable in December 1997. The second, paying coupons on 7 March/7 September, followed in April 2002. The DMO has no current plans to make gilts strippable that are issued on the more recent conventional gilt series (introduced in October 2009 and paying coupons on 22 January/22 July and in March 2018 paying coupons on 22 April/22 October).
A newly issued gilt on the relevant coupon series is not declared strippable until a sufficient amount of the gilt has been issued in order to maintain liquidity in both the stripped and unstripped formats – for recent issues this has been a minimum of £5 billion (nominal) in issue.
The list of gilts which are currently strippable is available here. Activity in the strips market is, however, minimal. The DMO has no current plans to make any changes to the eligibility criteria for gilts to be strippable. Should the DMO decide to change the eligibility criteria, it would make an appropriate announcement setting out any changes and giving the market an appropriate amount of notice.
Gilt strips are eligible in Deliveries By Value (DBVs) used as collateral in the Bank of England’s daily money market operations. In addition, the Bank of England accepts strips as eligible securities in intra-day repos for liquidity in the Real Time Gross Settlement (RTGS) programme. Further details can be found here.
The extent of fungibility between gilt strips is summarised below:
Further information on strips fungibility can be found in the STRIPS section of the Information Memorandum entitled “Issue, Stripping and Reconstitution of British Government Stock”.
Only Gilt-edged Market Makers (GEMMs), Her Majesty’s Treasury and the Bank of England may strip and reconstitute gilts. The obligation to make prices in strips was removed in August 2011, reflecting the low level of market activity since the inception of the strips facility in 1997. The general market making requirement was replaced by a Strips Market Participants List. GEMMs could elect to be added to this list, indicating to end investors that they are prepared to offer a dealing service in strips. Nevertheless, parties seeking prices in strips or wishing to strip or reconstitute gilts may approach any GEMM for these services.
The DMO indicates on its website which GEMMs have elected to be members of the Strips Participant List. A list of them can be found at Strips Market Participants. The DMO has no target or minimum for the number of GEMMs that elect to become Strips Market Participants.
The last remaining ‘undated’ bonds in the UK gilt portfolio were redeemed on 5 July 2015. This concluded a process first initiated by the Chancellor of the Exchequer in October 2014 against the backdrop of prevailing historically low long gilt yields and reflecting the intention to continue to modernise the gilt portfolio.
Undated gilts were the oldest remaining gilts of their type at their redemption, some dating back to the 19th century (but some with legacies back to the 18th century). The term ‘undated’ refers to the fact that they were either gilts issued with no fixed maturity date (the investor paid the issuer to purchase the bond and in return received an unending stream of coupons from the issuer), or were issued with an earliest potential redemption date which had long since passed. The options to redeem these gilts rested exclusively with the government.
At end-October 2014, when the government launched the redemption process, there were eight undated gilts in issue, which comprised just 0.23% of the gilt portfolio (a total of £2.59 billion nominal). Historically, undated gilts used to comprise the majority of the UK debt stock prior to the Second World War. No undated gilts have been issued by the government since 1946.
Details of the undated gilts in issue at the start of the redemption process are shown in the table below - listed in order of redemption date.
|Gilt||Amount in issue at redemption (£mn nom)||Dividend dates||First Issue date||Redemption date||Notes on first issue|
|19 Jan 1927||1 Feb 2015||Issued for cash and in exchange for 5% Treasury Bonds 1927, 4% National War Bonds 1927, 5% National War Bonds 1927, 5% Treasury Bonds 1933-1935, 4½% Treasury Bonds 1932-1934 and 4½% Treasury Bonds 1930-1932.|
|01 Dec 1932||9 Mar 2015||Issued in exchange for 5% War Loan 1929-1947.|
|01 Apr 1921||1 Apr 2015||Issued in exchange for 5% National War Bonds 1922, 1923 (Apr and Sep), 1924 (Feb and Oct), 1925 (Apr and Sept). Had an active sinking fund.|
|01 Mar 1946||8 May 2015||Issued in exchange for Bank Stock in accordance with the provisions of the Bank of England Act 1946.|
|17 Oct 1884||5 Jul 2015||Issued by exchange for New 3% Annuities, Reduced 3% Annuities and Consolidated 3% Annuities.|
|28 Oct 1946||5 Jul 2015||Issued for cash.|
|5 Apr 1888||5 Jul 2015||Issued in exchange for Consolidated 3% Annuities (1752), Reduced 3% Annuities (1752) and New 3% Annuities (1855).|
|13 Jun 1853||5 Jul 2015||Issued in exchange for South Sea Stock, Old South Sea 3% Annuities, New South Sea 3% Annuities, Bank 3% Annuities (1726) and 3% Annuities (1751).|
In accordance with the terms of their relevant prospectuses, the redemption of the undated gilts were all announced, giving three months’ notice, in the London Gazette. Primary legislation (provisions in the Finance Act 2015) was required to effect the redemption of 2½% Annuities, 2¾% Annuities and 2½% Consolidated Stock. The redemption of the undated gilts added to the redemption totals in 2014-15 and 2015-16 and was financed as part of the DMO’s overall debt sales programme in those financial years.
The gilt registrar, Computershare Investor Services PLC, has attempted to contact all registered stockholders regarding the redemption of the undated stocks. However, there remains a number of unclaimed payments and if you believe that you may have held an undated stock and have not received the redemption proceeds you should contact Computershare for further information about how to claim any payments due.
In the past, the Government has issued double-dated gilts with a band of maturity dates. The Government had the option to redeem these gilts in whole, or in part, on any day between the first and final maturity dates, subject to giving not less than three months' notice in the London Gazette. The final gilt of this type, 12% Exchequer Stock 2013-17 was redeemed on 12 December 2013.
The last remaining floating rate gilt redeemed in July 2001. The main difference between floating rate gilts (FRGs) and conventional gilts was that for FRGs each coupon was set in line with short term interest rates.