What are UK gilts?

UK gilts are bonds issued by the UK government through HM Treasury's Debt Management Office. When the government needs to borrow money, either because it is running a deficit or because existing debt is maturing and must be refinanced, it issues gilts to investors. Buyers of gilts lend money to the government in exchange for a fixed rate of interest, paid twice a year, and the return of the principal at a specified future date. Gilts are named from the original gilt-edged paper on which the certificates were printed.

How gilts work

Each gilt has three defining characteristics: its face value (the amount repaid at maturity), its coupon rate (the annual interest payment as a percentage of face value), and its maturity date. A £1,000 gilt with a 4 percent coupon and a 10-year maturity pays £40 per year in interest and returns £1,000 at the end of 10 years.

Gilts are traded in secondary markets, meaning their price fluctuates after issue. The yield on a gilt, which is what matters to investors and to the economy more broadly, is the effective return based on the current market price rather than the face value. If a gilt with a £40 annual coupon trades at £900, the yield is higher than 4 percent. If it trades at £1,100, the yield is lower. This inverse relationship between price and yield is fundamental: when gilt prices fall, yields rise, and when prices rise, yields fall.

Why gilt yields matter

UK gilt yields are one of the most important prices in the financial system. They serve as the reference rate for a wide range of borrowing costs throughout the economy. Mortgage rates, particularly fixed-rate mortgages, are priced partly off gilt yields through the swap market. Corporate bond yields are typically expressed as a spread above gilts. Pension fund liabilities are discounted using gilt yields, so changes in yields directly affect pension fund valuations and the decisions of corporate sponsors.

The cost of government borrowing is also directly determined by gilt yields. When the government issues new gilts, it pays the yield demanded by the market. If yields are rising, the government pays more to finance its deficit and to refinance maturing debt. UK 10-year gilt yields rose from below 1 percent in 2020 to above 4.5 percent in 2023, substantially increasing the annual cost of servicing the national debt. For the full picture on government borrowing, see our note on what the UK national debt is and who owns it.

Conventional gilts versus index-linked gilts

The majority of gilts are conventional, meaning they pay a fixed coupon and return a fixed principal. Index-linked gilts are different: both the coupon payments and the principal are adjusted for inflation, measured by RPI. Index-linked gilts protect the holder against inflation but offer a lower base coupon rate than conventional gilts. They are held primarily by pension funds seeking to match inflation-linked liabilities. The UK index-linked gilt market is large relative to most comparable economies.

The Bank of England and gilts

The Bank of England became one of the largest single holders of UK gilts through its quantitative easing programmes. At the peak in 2021, the Bank held approximately £895 billion of gilts. It has been reducing that holding through quantitative tightening since 2022. The Bank's gilt purchases and sales have significant implications for gilt yields, the cost of government borrowing, and financial conditions more broadly. For the full explanation of QE and its effects, see our note on what quantitative easing is.

Gilt yields are monitored in real time by investors, treasurers, and pension managers. The Briefed daily briefing covers gilt market movements and what they imply for interest rates and borrowing costs, every weekday at 6:45am. Free to read.