Government Bonds

Government Bonds
Need Wealth Management Advice? Just ask Local Wealth Managers Vision IFP for Assistance
The UK government, through the Debt Management Office, an executive agency of the HM Treasury, dominates the sterling bond market, that is, those bonds that are issued in sterling currency. All other sterling bonds, from other issuers, have the UK government bond, or gilt, marked as their benchmark. The government issues bonds of the highest credit rating; in hundreds of years of history, it has never failed to make an interest or principal payment on it’s bonds as it falls due. This means that gilts usually trade off a lower yield than bonds of other issuers, this lower return being the price the holder has to pay for their additional security. Nevertheless, gilts are often the first point of call for a cautious investor.

There are a variety of different sorts of gilts; however the most common by far are conventional gilts. These are the simplest of the bonds, charachterised by a fixed payment every six months and a capital repayment upon maturity. There are around 30 actively traded conventional gilts to choose from at the time of writing and comprise of almost 75% by value of all gilts issued by the government. Their total value is estimated at some £300billion. Conventional gilts have names such as Treasury 4 percent 2009 where the 4% denotes the annual interest paid on each £100 nominal of stock (“the coupon rate”) and 2009 denotes the year in which the gilt will be redeemed. As an example, a holder of £25,000 minimal stock would receive an interest payment of £500 every 6 months until a specific date in 2009. (£4 a year for every £100 nominal equates to £1000 a year for £25,000 nominal or £500 every six months).

The actual current value of the holding will depend on prevailing market conditions; it’s most unlikely to be exactly £25,000. Gilt prices are published daily in such publications as the Financial Times, and are widely available elsewhere. Gilts are listed on the London Stock Exchange with prices quoted per £100 nominal. They can be bought and sold in any amount, down to a single penny.

Conventional gilts have in the past been issued with coupon rates of anything between 2% and more than 15%. The coupon rate reflects the level of interest rates at the time the gilt was issued. Gilts are usually issued with a price around par, that is, £100 nominal of stock costing £100, and as yields fall the market price will move above par. When an investor buys a gilt priced above par, he or she is guaranteeing a capital loss if held to redemption. However, this capital loss will be counterbalanced by the higher coupon payments. As interest rates have fallen over the past several years, most gilts are currently priced above par.

The government issues gilts throughout the year with a variety of years to final maturity, usually focusing on the 5-years, 10-years, 30-years and more recently, 50-year areas. This means that over the years, gilts have been issued which will mature in many of the years that lie ahead.

« Personal Pension Schemes