HM Treasury
The Debt Management Office sits inside it, as an executive agency. It chooses how much to sell. The bids choose the yield.
Primary and secondary
Where a gilt is bought, and where it is traded.
Gilts have two markets: primary and secondary. The primary market is where the UK government originates the gilt, the secondary market is where the gilt switches hands between other buyers and sellers.
Primary market
Gilt-edged market makers
The only firms that deal with the DMO directly. They bid at auction, for themselves and for clients. The government sells each gilt to them once. Then they quote a bid and an offer.
Secondary market
UK banks
They hold short gilts, out to about seven years. Those are close to being repaid, so the price moves less. They also deal for clients.
Hedge funds
They buy and sell to take a view, often with borrowed money. Their holding is not a published share of the stock.
Insurers
They hold long gilts and index-linked gilts against annuities and life policies that pay out years ahead.
Overseas
About a third of the market value is held overseas, by reserve managers and by private investors.
Pension funds
Defined-benefit schemes built the long end. The stock is still large. The bid for the next gilt is thinner.
Where a gilt is born
The first sale is the primary market. The Debt Management Office publishes a calendar and sells at auction, so the funding is regular and buyers can get ready. The firms allowed to deal with it directly are the gilt-edged market makers. They bid, for themselves and for clients, and they make a market in the gilt afterwards. This is where the UK government is actually borrowing.
The auction is a small weather report. If investors offer to buy much more than is for sale, appetite is healthy. If the bids only just cover the amount, or if the yield the government has to accept sits above the average accepted bid — the gap is called the tail — buyers are wary. How the bidding works, which maturities are sold, and how that yield sits on the curve, is the page on gilt auctions. The reason the auctions never stop is how much falls due, and when. Gilts mature, and they are paid off by selling new ones.
Where it changes hands after that
Every later transaction is the secondary market. Without it, a gilt would be locked away until the maturity date, and a pension fund could not use it as a way to hold savings. An auction is one morning, the secondary market is where the bulk of transactions take place. This constant buying and selling allows us to have a live price of gilts at every maturity; a live economic indicator as decided by the various market participants.
Now we understand how we have live prices for each gilt, how do we compare gilts of different maturities and coupons? What information can we glean from how these gilts are priced? For this we need to understand the yield.