The recent Mini Budget, a £45 billion tax cutting package, paid for by increased public borrowing, led to panic among many investors and a run on Britain’s pension funds. As a result, the Bank of England was forced to step in to stop a collapse by pledging to buy around £65 billion of long-dated gilts.
But what exactly are gilts and why do they matter? For many, the financial jargon that has – justifiably – dominated the headlines in recent weeks is confusing and incomprehensible, so we’ll try to answer these questions in straightforward terms.
UK gilts are fixed-interest securities issued by the British government when it wants to raise funds. They are considered low-risk investments, as the government isn’t likely to go bankrupt, which means they’re likely to be able to pay back the loan in full, plus the interest.
You can either invest in conventional gilts, with a fixed interest rate or in index-linked gilts, which are linked to the Retail Price Index, meaning their values will rise with inflation.
So investing in a gilt, or a government bond, is similar to making a loan. But instead of lending to an individual, you’re lending to a business or government.
Investors can then receive a regular income in the form of interest over a set period of time, or this income can be reinvested.
When the gilt reaches maturity, the initial nominal investment is then repaid, along with the proceeds of any reinvested amounts.