What factors cause the value of Gilts to rise and fall?
The headline coupon (rate of return) shown in a conventional gilts title e.g. Treasury 4% 2009, generally reflects the prevailing bank base rate at the time of the gilt’s issuance by the Bank of England. However, as soon as any gilt is trading on the secondary market, a combination of the current bank base rate and the likely future movement in the Bank of England bank base rate, become the dominant factors in moving gilt prices. The shorter the time length until a gilt is due to be redeemed by the Bank of England known as short dated gilts – the greater the influence of the current bank base rate on its price. Shorter dated gilts tend to show fewer movements in price compared to longer dated gilts. Longer dated gilts are far more affected by the prospects for future movements in the Bank of England’s base rate. As a rule of thumb, if interest rates are seen as rising in the future, gilt prices may be expected to fall and therefore their income yield will rise to reflect this likely hi
