What are gilts? A simple guide

The total value of all UK gilts, representing most of the UK Government’s total debt, was £2.6 trillion as of mid-December 2024.

This Insight explains what gilts are, how they work and what factors affect how they are valued.

What are gilts?

When the UK Government needs to borrow money, it can issue a bond. This is a way of requesting a loan from investors via the financial markets. In buying a bond, investors are loaning the government money.

The government pays interest on these bonds (known as ‘coupon payments’), and it repays the initial bond value (known as the ‘principal’) to the investor at the end of the loan period.

In the UK, the Debt Management Office issues and manages bonds on behalf of the government. The bonds they sell to investors have differing interest rates and are for different lengths of time. For instance, there are some shorter-term gilts, for a few years, some longer-term gilts, for 20 or 30 years, and many in between.

Why are they called gilts?

UK Government bonds are often called ‘gilts’ because the paper certificates for bonds in the past had a gilded (golden) edge. The name also refers to the security and reliability of holding the bond as an investment: the UK Government has never failed to make repayments.

Bonds can be issued by national governments and, in some countries, regional and local governments too. Some companies (usually larger ones) can also issue bonds.

How do gilts work?

When the government needs to borrow money, it can offer gilts to investors. Investors buying gilts will receive interest payments, and once the loan period is over they will also receive the initial amount that was loaned.

For example, the government may issue a two-year gilt for £100, paying 4% interest per year. An investor, say an investment bank, buys this gilt, giving the government a £100 loan for two years.

Over the two years, the investor receives £8 in interest payments (£4 a year). After two years, the investor receives back the original £100 it leant to the government; so the investor has £108 from the original £100 it leant the government, as the graphic below shows.

How are gilts bought and sold?

An investor that owns a gilt can sell it on to somebody else on the gilt market. The market price would depend on how much the new buyer would be willing to pay, and how much seller would sell it for.

Using the above example of the two-year gilt, it could sell for £100, the original value of the gilt. But it could sell for more or less, depending on market conditions.

The point at which the loan period expires is known as when the gilt ‘matures’. In our example, the gilt matures after two years: this is when whoever owns that gilt will receive back the original £100 from the government.

What factors affect the market for gilts?

The price of each gilt will fluctuate depending on market conditions. For example, if there is a lot of demand for a 10-year gilt with a £100 principal, its owner could sell it for £120 to make a profit of £20. However, they now won’t get the interest payments for what’s left of the 10-year period.

The market for gilts is influenced by a number of factors, including:

• How risky the loan is. Investing in gilts is almost always considered safe, as there is minimal risk that the UK Government would default (not repay what it owes). However, if the amount of UK debt is likely to rise sharply, investors may ask for a higher return to compensate for this higher risk.
• Interest rates and economic conditions. If interest rates are expected to rise, then demand for bonds tends to fall. This is because better investment returns are likely elsewhere, for example from newly issued bonds offering higher interest payments.
• Market conditions and alternative investments. How do the risk and return of UK gilts compare with other investments? For example, does investing in US Government bonds appear more attractive than investing in UK gilts?

What is the yield?

The overall return on owning a gilt (or any bond) until it matures is called the ‘yield’ or ‘redemption yield’. This is often reported in financial markets data and the news.

The yield reflects the total amount that the owner of the gilt will receive if they hold the gilt until it matures: it’s the sum of the interest payments and the profit (or loss) from buying a gilt at a different value from the original loan amount (the ‘principal’). This differs from the coupon the gilt pays, as these only reflect the fixed interest payments to the owner of the gilt.

For example, if you paid the original price of £100 for a gilt with a coupon payment of 3.25% a year that expired in 10 years, your yield would also be 3.25%.

However, if you paid £90 for the same gilt and held it to maturity in 10 years, you would get the interest payments and get an extra £10 (the difference between the £90 you paid and the £100 you will receive back in 10 years). Therefore the yield in this scenario is higher, about 4.5%.

The lower the price of the bond, the higher the yield. This is why media reports often say ‘bond yields move inversely to bond prices’ or similar. If, for instance, higher interest rates result in less demand for an existing gilt with a comparatively low rate of return, this could lead to the price of the gilt falling, and the yield going up.

What are the main types of gilts?

There are two main types of gilts:

• Conventional: the most common kind (used in the examples above). Conventional gilts make up around three quarters of all gilts. They have a fixed interest rate (coupon) and length (maturity).
• Index-linked: adjusted for inflation, meaning that the interest payments (coupon) and the overall loan amount (principal) are automatically adjusted for inflation. Index-linked gilts make up around one quarter of all gilts.

What is the value of all gilts?

As of 16 December 2024, the total value of all outstanding gilts was £2.6 trillion. This makes up the vast majority of the UK Government’s debt. As of the second quarter of 2024, around 31%, or £635 billion, of gilts were held overseas.

How much does the government spend on interest?

In the financial year 2023/24, the UK Government spent £107 billion on paying interest on all its debt, with the majority on gilt interest payments. This was up from around £40 billion in the years before the covid-19 pandemic. The main reasons for the increase are higher interest rates and the period of high inflation that increased the interest payments on index-linked gilts.

About the author: Daniel Harari is a researcher at the House of Commons Library, specialising in the UK and international economies.

Photo by: Kiril Strax