Gilts - 趙永祥的數位歷程檔

Government bonds in the U.K., India, and several other Commonwealth countries are known as gilts. Gilts are the equivalent of U.S. Treasury securities in their respective countries. The term gilt is often used informally to describe any bond that has a very low risk of default and a correspondingly low rate of return. They are called gilts because the original certificates issued by the British government had gilded edges.

Gilts are government bonds, so they are particularly sensitive to interest rate changes. They also provide diversification benefits because of their low or negative correlation with stock markets. Gilts often respond strongly to political events, such as Brexit.

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Why is 'Gilts' the Term of the Day?

Cumulative Change in Long-Term Government Bond Yields

Last month, the new U.K. government under Prime Minister Liz Truss had announced sweeping tax cuts and other relief measures that roiled U.K. debt and foreign exchange markets amid concerns the plan could exacerbate inflation in the U.K., which hovers around an annual rate of 10%.

The price of bonds fell sharply and the yields on those bonds rose, as bond prices move inversely to yields. The massive selloff prompted the Bank of England to intervene, announcing last week that it would halt its plans to sell long dated government bonds or gilts, and begin to buy gilts.

But on Tuesday, the Bank of England rejected all offers to buy back long dated government bonds (gilts) which it was offered at auction. It also rejected long dated yield purchases on Monday as well. The Bank of England explained that it aimed to be a backstop to ensure financial stability rather than to cap yields at any particular level.

Just ten days after announcing the tax cut, Liz Truss reversed course, withdrawing the top rate tax cut for high earners. This might have had the additional benefit of helping to stabilize the pound, which had been hovering close to parity with the dollar.

-Stella