Gilts market

In order to calculate the range of implied forward rates, we require the term stmcture of spot rates for all periods along the continuous discount function. This is not possible in practice, because a bond market will only contain a finite number of coupon-bearing bonds maturing on discrete dates. While the coupon yield curve can be observed, we are then required to fit the observed curve to a continuous term structure. Note that in the United Kingdom gilt market, for example there is a zero-coupon bond market, so that it is possible to observe spot rates directly, but for reasons of liquidity, analysts prefer to use a fitted yield curve (the theoretical curve) and compare this to the observed curve. 

Bonds that have part or all of their cash flows linked to an inflation index form an important segment of several government bond markets. In the United Kingdom, the first index-linked bonds were issued in 1981 and at the end of 2012 they accounted for approximately 25% of outstanding nominal value in the gilt market. Index-linked bonds were also introduced in the United States Treasury market but are more established in Australia, Canada,... 

Due to the lag in the United Kingdom gilt market, for index-hnked gilts the base RPI is actually the level recorded for the 8 months before the issue date. 

EXHIBIT 5.1 Euro Government, Treasury, JGB, and Gilt Market in Percent Terms... 

The Euro market has not only become the largest government bond market in size but also in number of issues. This market had in February 2003 over 250 liquid issues (over 1 billion outstanding and 1-year maturity), significantly more than the 108 issues in the Treasury market or the nearly 170 JGB issues. There are just around 25 liquid issues trading in the UK gilt market. 

Securities issued by the government of the United Kingdom are known as gilts. The gilts market is the oldest government bond market in the world. In this chapter we present an overview of the gilts market, its structure, and institutions. 

The gilts market is overwhelmingly plain vanilla in nature. We describe all the market instruments here. 

The gilts market is primarily a plain vanilla market, and the majority of gilt issues are conventional fixed interest bonds. Conventional gilts have a fixed coupon and maturity date. By volume they made up 82% of the market in June 2002. Coupon is paid on a semi-annual basis. The coupon rate is set in line with market interest rates at the time of issue, so the range of coupons in existence reflects the fluctuations in market interest rates. Unlike many government and corporate bond markets, gilts can be traded in the smallest unit of currency and sometimes nominal amounts change hands in amounts quoted down to one penny ( 0.01) nominal size. 

EXHIBIT 9.2 Averse Daily Gilt Market Turnover... 

The gilts market is an over-the-counter market, meaning that transactions are conducted over the telephone between market participants. FTowever all individual issues are listed on the London Stock Exchange, which as a Recognised Investment Exchange is also supervised by the ESA. 

Part of the reforms in the gilt market throngh 1998 inclnded a facility for overseas investors to hold gilts in what was then CGO, via either the Euroclear or Clearstream clearing systems. This became possible after both Euroclear and Clearstream opened accounts at CGO. However in September 2002 CREST merged with Euroclear, hence facilitating pan-European and international settlement. 

The gilt market forms the cornerstone of the sterling asset markets. Therefore the exchange-traded market in gilt derivatives is an important feature of the debt capital markets as a whole. In terms of derivatives... 

Institutional investors in the gilt market including fund managers, pension funds, and life companies. 

We consider first a classic repo in the United Kingdom gilt market between two market counterparties, in the 5.75% Treasury 2009 gilt stock. The terms of the trade are given in Exhibit 10.3 and illustrated in Exhibit 10.4. Note that the terms of a classic repo trade are identical, irrespective of which market the deal is taking place in. So the basic trade, illustrated in Exhibit 10.3, would be recognisable for bond repo in European and Asian markets. 

An institution that wishes to borrow stock must pay a fee for the term of the loan. This is usually a basis point charge on the market value of the loan and is payable in arrears on a monthly basis. In the Eurobond market the fee is calculated at the start of the loan, and unless there is a significant change in the market value of the stock, it will be paid at the end of the loan period. In the UK gilt market the basis point fee is calculated on a... 

Note that in reality, in the gilt market the stock loan fee (here 20 bps) is calculated on the daily mark-to-market stock price, automatically within the gilt settlement mechanism known as CREST-CGO, so the final charge is not known until termination. Within the Eurobond market, for example in Clearstream, the fee on the initial loan value is taken, and adjustments are made only in the case of large movements in stock price. 

FIGURE 16.4 Gilt Market Gross Redemption True Yields and Imnllad Soot Yields on March 2. 1999 ... 

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