Gilt Market

Index-linked Gilts

 

The UK was one of the earliest developed economies to issue inflation-indexed bonds for institutional investors, with the first index-linked gilt issue being in 1981. A brief history of the main developments in the index-linked gilt market is available below.

Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI). RPI data since June 1980 and full details on all Index-linked gilts currently in issue are both available below.

The method used to calculate cash flows on index-linked gilts is set out in a paper available in this section, while historical values for the cash flows themselves are also available. In addition, a report for calculating estimates of redemption payments for index-linked gilts redeeming in the future appears below. For those interested in knowing how to calculate redemption yields on index-linked gilts a document is available in this section.

In 2005 the DMO launched an improved design for any new index-linked gilts which uses a shorter (3-month) indexation lag than that used in earlier index-linked gilts. Details on the technical features of index-linked gilts with a 3-month lag appear in a presentation available below. The index ratio report provides a daily reference RPI and index ratio series for all 3-month index-linked gilts.

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Key events in the development of the index-linked gilt market

1980 - The Wilson Report was published, recommending that the UK government should issue index-linked gilts for pension funds.

10 March 1981 - Geoffrey Howe, the then Chancellor of the Exchequer, announced the Government's intention to issue index-linked gilts.

27 March 1981 - £1 billion nominal of the first index-linked gilt (2% Index-linked Treasury Stock 1996) was issued by single price auction. Indexation was to the General Index of Retail Prices (RPI) and ownership was initially restricted to pension funds or similar institutions writing pension business. The Treasury published a paper setting out the rationale for introducing index-linked gilts in May 1981.

19 March 1982 - The fourth index-linked gilt (2% Index-linked Treasury Stock 1988) was issued. This was the first index-linked gilt with cash flows rounded down to 4 decimal places. Cash flows on the three previous issues (2% Index-linked Treasury Stock 1996, 2% Index-linked Treasury Stock 2006 and 2½% Index-linked Treasury Stock 2011) are rounded down to 2 decimal places.

March 1982 - The restrictions on the ownership of index-linked gilts were removed.

5 May 1983 - A convertible index-linked gilt was issued, giving investors the option to convert their holdings into a conventional gilt on any one of three dates.

January 1987 - The RPI was re-based from 394.5 to 100.

1988 - Single price auctions ceased and were replaced by taps.

14/15 September 1995 - The Bank of England hosted a conference for market participants, academics and sovereign issuers to discuss the scope for developing the index-linked gilt market.

April 1996 - A new taxation framework for gilts was introduced. Under the new system gilts are taxed on a total returns basis.

12 March 1997 - The government announced its intention to re-introduce auctions of index-linked gilts.

19 March 1998 - HM Treasury's remit to the DMO provided a commitment to a minimum gross supply of £2.5 billion cash of index-linked gilts in 1998-99 and for the foreseeable future. This commitment was maintained in subsequent remits.

6 April 1998 - Since this date all gilt income has been payable gross of tax.

10 June 1998 - The DMO published its proposals for index-linked auctions and a separate index-linked market maker list.

14 September 1998 - A specialist index-linked market maker list was introduced. When it was launched the list consisted of eight firms, but several other firms have since been added to the list.

28 October 1998 - Index-linked auctions were originally intended to be re-introduced on this date. However, the first auction was postponed in order to avoid a possible clash with the publication of the Pre-Budget Report.

25 November 1998 - Single price index-linked auctions were re-introduced. Taps are now used only for market management in exceptional circumstances.

12 March 2001 - The DMO published a consultation paper on index-linked gilt switch auctions.

10 May 2001 - The DMO published its response to the 12 March consultation paper on index-linked gilt switch auctions.

19 July 2001 - The DMO held its first index-linked switch auction.

7 September 2001 - The DMO published a consultation paper on index-linked gilt re-design.

22 November 2001 - The DMO announced that it was withdrawing its facility whereby it was prepared to bid market makers for index-linked gilts (2009 and longer). Instead, a reverse tapping facility was introduced.

15 January 2002 - The DMO published its response to its consultation exercise on index-linked gilt re-design. The decision was made to retain the current design albeit with some cosmetic changes. These are detailed in the response document.

10 July 2002 - The index-linked gilt 2% Index-linked Treasury Stock 2035 was issued. This was the first index-linked gilt with cash flows rounded to the nearest 6 decimal places. This was also the first index-linked gilt for which the DMO fixes the cash flows - on all previous bonds the Bank of England was responsible for fixing the cash flows.

2 December 2004 – The DMO published a consultation paper on issuance of ultra-long gilt instruments. This announced that any new index-linked gilts issued from April 2005 onwards would use a 3-month indexation lag and consulted on whether the DMO should issue ultra-long (circa 50-year) conventional and index-linked gilts; and ultra-long (circa 50-year) conventional and index-linked annuity-type gilts.

16 March 2005 – The DMO published its response to the 2 December consultation paper on ultra-long gilt products.

30 June 2005 – The DMO announced that it would auction the first three-month index-linked gilt (maturing on 22 November 2055) on 22 September.

31 August 2005 – The DMO announced that the auction of the 2055 index-linked gilt would be cancelled and that the bond would instead be sold by means of a syndicated offering. It was also the first index-linked gilt to be named as a "Treasury Gilt" rather than a "Treasury Stock".

20-22 September 2005 – The syndicated offering of 1¼% Index-linked Treasury Gilt 2055 took place. The issue date for the bond was 23 September 2005. This was the first index-linked gilt to be issued with a three-month indexation lag.

25 October 2005 – The first auction of 1¼% Index-linked Treasury Gilt 2055 took place.

29 June 2011 – The DMO published a consultation paper on CPI-linked gilts.

29 November 2011 – The DMO published its response to the 29 June consultation paper on CPI linked gilts

25 May 2012 - The DMO published a consultation paper on super-long gilts.

5 December 2012 - The DMO published its response to the 25 May consultation paper on super-long gilts.

11 March 2020 - Reader may also wish to inform themselves about : Reform to Retail Prices Index (RPI) Methodology – Consultation and further information.