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.
The gilt market is essentially comprised of two different types of securities - conventional gilts and index-linked gilts
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.
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).
Gilts are usually considered safest, however, the following risk factors could affect the prices of gilts:
• Interest rates – if interest rates rise, the existing gilts may drop in value in order to offer a more attractive yield to investors.
• Inflation expectation – if inflation expectation rise, the existing conventional gilts (particularly those with longer maturity) may drop in value.
• Credit ratings – if UK government’s credit rating is downgraded, the existing gilts may drop in value.