The history of British gilt edged securities can be traced back to the need for governments to raise capital. In essence, these gilts are bonds that are issued by a government to fund the shortfall between its tax revenues and its expenditure.
The term “gilt edged securities” is actually a British phrase that was initially a reference to debt securities that were issued by the Bank of England. These original debt securities featured a gilded edge, leading to the name of gilt edged securities.
In the present day, the phrase gilt edged securities is used in the UK, but also in some of the Commonwealth countries like India and South Africa. However, when a security is referred to as a gilt, it is generally a reference to the bonds issued by the UK government.
While these gilts were originally certificates with gold-leaf trimming, today they are traded in electronic form. Conventional Gilts are the simplest version of UK government bonds and account for the largest portion of outstanding UK government debt, at just over 81 per cent, according to the data from the Debt Management Office.
These conventional gilts have been around for some time – according to The Gilt-Edged Market by Choudhry, Cross and Harrison, the first fund raising that could be considered a gilt issue was in 1694 when King William III borrowed £1.2m to fund a war against France.
However, specific kinds of gilts, at least in the UK, such as index-linked gilts were first issued in 1981, with the UK being one of the first developed economies to do this. Index-linked gilt edged securities account for the next largest proportion of the UK government debt, at around 18%.
As it stands today, the UK government is raising around 170 billion pounds gross every year (around 115 to 130 billion pounds net issuance) through gilt auctions. This increased significantly following the financial crisis in 2008 and peaked at 227 billion pounds gross issuance in the Financial Year 2009 / 2010.
From the very first gilt issuance way back in 1694, the size of the national debt of the UK has grown, which is similar to many developed economies. This growth has been more extreme in recent years however. To illustrate this, in March 1998, the total stock of outstanding gilts was 418 billion pounds. However, as at November 2012, the outstanding stock of gilts has increased to just under 1.2 trillion pounds – an increase of 187% in just over 14 years.
Today, the statistics also provide a very reliable picture of which investors hold UK gilt edged securities, with around two thirds of all UK gilts now being owned by either pension funds or insurance companies. Since 2009, there have also been large amounts of gilts issued and re-purchased by the Bank of England by way of its policy of quantitative easing.
Investors who are interested in gilt edged securities are able to invest through their brokers or via a fund. It is also possible to invest in gilts directly through the Debt Management Office, which replaced the Bank of England as the issuer of these gilts in April 1998.