What it costs to roll the debt over.

A conventional gilt pays its coupon until the maturity date, and then pays the face value. The coupon was fixed when the gilt was sold. On the maturity date the holder is paid £100 for each £100 of nominal, whatever has happened to yields since.

The cash for that payment is raised by selling new gilts, together with the rest of the financing plan. In the Debt Management Office's arithmetic, redemptions are one input and the government's new cash need is another. National Savings, Treasury bills and a cash adjustment sit in the same sum, so those two numbers are not themselves the gilt sales. How the sale clears is on Gilt auctions. The later years, counted as gilts in market hands, are on How much and when?.

The DMO's objective is to keep down, over the long term, the cost of meeting the government's financing needs, taking account of risk, and to keep debt management consistent with monetary policy. It chooses the gilt and the size. The yield is the one the bids clear at.

The choice is made in three steps. The annual remit, set with the Budget and revised through the year, divides gilt sales into short conventionals (up to 7 years), medium (7 to 15), long (over 15) and index-linked, and leaves a slice unallocated. That split follows consultation with the gilt-edged market makers and with the investors who buy the bonds. A quarterly calendar then names the auctions. About a week before each auction the DMO names the gilt and the nominal for sale.

Inside a bucket, the gilt is usually a reopening of a bond already in the market, added to so that it stays easy to trade. A new maturity is opened when the current benchmark has rolled down, or grown large enough, or when the redemption profile has a thin year. The coupon on a new gilt is set so that it prices close to face value at the yield investors are charging. The nominal sold is then close to the cash raised.

Cost is the yield locked in for the life of the new gilt. With the curve sloping upward, a longer gilt locks a higher coupon and pays it for longer. A shorter gilt locks a lower coupon and comes back to be refinanced at whatever yield is going then. Refinancing risk is a large slice all falling due in one expensive year. Spreading the maturity dates, which is what the redemption profile is for, keeps any one year from having to raise the whole stock.

Demand is the other constraint. Banks, money-market funds and reserve managers buy the short end. The long end and the index-linked gilts were built for defined-benefit pension funds. That bid has shrunk, so the marginal buyer of a new long gilt is thinner, and the remit leans on short auctions, with syndications doing more of the long and index-linked supply. The unallocated portion is the room to aim a sale at whichever maturity the market will take.

Index-linked gilts add a further choice. The coupon is a real rate, and the cash repaid at maturity rises with the Retail Prices Index. Refinancing a linker into a conventional gilt swaps that inflation uplift for a fixed nominal coupon. Refinancing it into another linker resets the real coupon to the real yield on the day. Why the monthly interest bill jumps around, including that uplift, is on Questions.

Maturing linker

The coupon is a real rate. The cash repaid at maturity rises with the Retail Prices Index.

Into a conventional gilt

The principal is fixed at £100. A nominal coupon replaces the RPI uplift.

Into another linker

The principal still rises with RPI. The real coupon is set to the real yield charged that day.

The holder of a low-coupon gilt sees its price fall as yields rise. The government keeps paying the old coupon until maturity, then pays the face value. The higher yield becomes a cost to the public finances when that face value is raised again by selling a new gilt. Gilts with years still to run keep the coupons they were issued with. The bill resets gilt by gilt, as each one matures.