Gilt-Edged Bond (Gilts)

Key takeaways

• Gilts are high-quality, low-risk bonds issued by governments (notably the U.K.) and some large corporations.
• They offer predictable income through regular coupon payments and return of principal at maturity.
• Gilts are sensitive to interest-rate changes and typically yield less than riskier securities.
• The U.K. also issues index-linked gilts whose payments adjust for inflation.

What are gilt-edged securities?

Gilt-edged securities, commonly called gilts, are investment-grade bonds traditionally associated with the U.K. government. The name comes from historical bond certificates printed on paper with gilded edges. In practice, “gilt-edged” refers broadly to any very high-quality, low-default-risk bond.

How gilts work

• Issuers: National governments (most famously the U.K.) and some blue‑chip corporations.
• Payments: Conventional gilts pay fixed coupons (typically twice a year) and return principal at maturity. Index-linked gilts adjust payments for inflation.
• Maturities: Range from a few years to several decades (some up to 50 years).
• Safety: Considered among the safest investments after U.S. Treasuries, used by investors seeking stable, predictable returns.

Uses and market role

• Governments use gilts to raise long-term funding.
• Institutional investors, particularly pension funds, hold a significant share of gilts for liability-matching and income—about 20% of U.K. gilts are held by pension funds.
• Central banks have used gilts in quantitative easing programs (e.g., large-scale purchases and repurchases after the 2008 crisis) to stimulate the economy.

Advantages

• Low credit/default risk relative to corporate bonds and equities.
• Predictable income stream and principal protection if held to maturity.
• Some gilts (index-linked) protect holders against inflation.

Limitations and risks

• Interest-rate risk: When market interest rates rise, gilt prices fall; when rates fall, gilt prices rise.
• Lower yields: The high credit quality comes with relatively low yields, which can underperform equities or high-yield bonds during periods of economic growth.
• Market value volatility: Holding gilt ETFs or mutual funds can expose investors to capital losses if rates move unfavorably.

Who should consider gilts?

Investors seeking capital preservation, stable income, and low credit risk—such as retirees or institutions managing fixed liabilities—may find gilts suitable. Those seeking higher returns during growth cycles may prefer equities or broader market index funds.

Conclusion

Gilts are high-grade bonds primarily associated with the U.K. government that offer safety and predictable income, but they carry interest-rate sensitivity and generally lower yields than riskier investments. They remain a core fixed-income option for conservative portfolios and institutional liability management.

Sources / further reading

• Bank of England — Working Paper No. 466, “QE and the Gilt Market: A Disaggregated Analysis”
• MarketWatch — U.K. 50 Year Gilt
• Office for National Statistics — Funded Occupational Schemes in the U.K.