Gilt-Edged

The online free encyclopedia describes “Gilt-edged securities” as debt securities issued by The Bank of England, which had a gilt or gilded edge and hence they are known as gilts for short.

The first fund raising that can be considered a gilt issue was way back in 1694 when King William III borrowed £1.2m to fund a war with France, via the newly founded Bank of England. Since then the amount issued or retired has waxed and waned dependent on the government of the day (s) funding requirements, although it’s fair to say that over the past 30 years or so it has waxed ever higher so that the current amount outstanding, according to the UK Debt Management Office, is £1.35 Trillion OR £1350,000,000,000.

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Gilt Yields, simply the amount of interest paid throughout the lifetime of the gilt, have a relationship to the Bank of England’s base rate at the time of the issuance and here we show the UK base rate going back to 1694 but unfortunately there is not a 300+ year chart at hand in respect of gilt yields.

A fair observation from the above, however, is that yields were at historic lows during the “golden era of economic growth,” back in the 1950s, only to rocket to punitive levels, for the borrower that is, throughout the 1970s.

In the second chart, our UK base rate data is shown in black, with the UK 10-year gilt yield, courtesy of the Bloomberg service, shown in blue.

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This covers the longest bull market in gilt-edged securities, consistently falling yields and ever higher gilt prices, until the 27th July 2012 that is, when the 10-year yield hit 1.407% pa.

A final chart shows that in the relatively brief 16 months since that low, the yield has spiked by 116%, before consolidating those gains over the past couple of months.

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They now look set to spike ever higher which creates a bit of a problem for UK plc as it services its mountain of debt, including not just the government (or should we say the tax-payer) but the rafter of mortgage holders whose monthly cash-flow is starting to be squeezed hard.

Collins English Dictionary describes “Gilt-edged,” as government securities on which interest payments will certainly be met and that will certainly be repaid at par on the due date.

In a debt deflation, nothing is certain.

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