What Are Gilts?

What Are Gilts?

Let me explain gilts to you directly: they are government bonds issued in the U.K., India, and other Commonwealth countries, much like U.S. Treasury securities. The name comes from the old certificates with gilded edges issued by the British government, symbolizing their reliability.

You should know that the British government has never missed an interest payment on its gilts since they started issuing them in 1694 to fund a war with France.

Similar to U.S. Treasuries, gilts give you a low but almost risk-free return. They react to interest rate shifts but help diversify your portfolio because they often move opposite to stock markets.

Key Takeaways

Here's what you need to grasp: the gilt market features index-linked gilts that track inflation, alongside conventional ones. If you're outside the U.K., you can invest through ETFs or mutual funds focused on U.K. government bonds. Also, low-risk corporate bonds get called gilt-edged securities.

Conventional Gilts

Conventional gilts make up most of the U.K.'s government debt; they're issued in British pounds and don't adjust for inflation.

These are nominal bonds that pay you a fixed coupon rate every six months or so. At maturity, you get the final coupon plus the principal back.

When they're issued, the coupon rate matches the current market interest rate. They come with set maturities, like five, 10, or 30 years from issuance.

Index-Linked Gilts

Index-linked gilts tie their interest rates and principal to inflation changes, just like U.S. Treasury Inflation-Protected Securities (TIPS).

The U.K. pioneered these in 1981, and India followed in 2013.

In the U.K., they pay coupons every six months and the principal at maturity, with rates adjusted based on the retail price index.

For gilts issued after September 2005, adjustments use the inflation rate from three months prior; older ones use an eight-month lag.

Corporate Bonds or Gilt-Edged Securities

You might hear low-risk corporate bonds and stocks called gilts or gilt-edged securities. This term means high-quality items that hold value steadily over time.

Don't mix these up with actual government bonds. In the U.K. or Commonwealth countries, corporate gilts are like U.S. blue-chip securities.

A gilt-edged bond has top credit ratings from agencies like Standard & Poor's or Moody's. They yield less than riskier bonds and form the base of portfolios for conservative investors focused on preserving capital.

Fast Fact

As a private investor, you can buy gilts on the primary market through the U.K. Debt Management Office or on the secondary market via authorized brokers.

Gilt Funds

Gilt funds are ETFs or mutual funds that mainly invest in U.K. government bonds.

Their goal is conservative: to preserve your capital. They often hold a mix of short-, medium-, and long-term government securities. Take the iShares Core U.K. Gilts UCITS ETF as an example—it invests in U.K. gilts, had a -3.3% return over one year in 2024, and charges a 0.07% expense ratio.

How Do Gilt Values Change With Interest Rates?

Gilt market values shift with interest rates. Typically, when rates go up, existing bond values drop; when rates fall, bond values increase.

Do Investors Have to Hold Gilts to Maturity?

No, you don't have to hold a gilt until maturity. You can sell it on the secondary bond market anytime.

What Are Clean and Dirty Prices?

When quoting gilt prices on the secondary market, we talk about clean and dirty prices. The clean price excludes accrued interest, while the dirty price is the full amount you pay, which is the clean price plus any interest accrued since the last payment.

The Bottom Line

To wrap this up, gilts are government bonds from the U.K. and other Commonwealth countries, though the term also covers high-quality corporate bonds.

They're safe investments that provide steady returns, but their values can vary with interest rate changes.