Bank of England
Sets Bank Rate. Buys and sells gilts too.
A public guide
Britain's finances are argued about every week. The market underneath them is barely taught, and poorly understood.
Government borrowing, the national debt, the deficit, inflation, interest rates, mortgage rates, Bank Rate. The phrases are familiar but what do they all really mean? The numerous entities and concepts you hear of every day all meet in a placed called the "Gilt Market". This is where the UK government actually borrows money, and where we can see through all the rhetoric to prices at which UK debt is actually bought and sold. The aim of this site is to take you on a tour of this gilt market, and on the way explain the concepts and institutions involved, and equip you with the understanding you need to sere through the headlines, and understand what is actually going on.
Gilt Market
R*
The long-run real interest rate. It sits in the real yield.
Inflation and inflation expectations
The gap between nominal and real.
Growth expectations
Where Bank Rate is expected to go. Priced into the slope of the curve.
National Deficit/National Debt
This year's gap, and the stock still outstanding.
DMO
The Debt Management Office sells the gilts. It does not set the yield.
Overseas investors
The largest share of the stock.
UK Banks
Natural holders of short gilts.
Pension Funds
Long-end holders. That bid has shrunk.
Insurance Funds
Hold long and index-linked gilts.
Hedge Funds
They trade the market. Not a published share of the stock.
Corporate bond yields
A spread over the gilt of a similar length.
Mortgage Rates
A fixed rate reads the gilt of the same term. A variable rate follows Bank Rate.
The subject is missing from the syllabus
The argument is conducted by journalists, by commentators, by politicians by think tanks, often incentivised to stress some points and downplay others. It's easy for them to do - the general level of understanding is poor, and the reason is not a mystery. Financial markets and Gilts are not taught at GCSE, and they are not taught at A-level. It is possible to leave a first-class economics degree without ever having studied the government bond market: how an auction clears, what a yield actually is, who has to own the long end, and why a change in Bank Rate is not the same thing as a change in the ten-year yield.
That is a serious failure once the importance of the market is clear. It is where the government's interest bill is set. It is where pension schemes hedge the incomes they have promised. It is where a bank hedges a fixed-rate mortgage. Decisions about tax, spending and interest rates land here first, as a price, before they land anywhere else. A public argument that cannot read that price is arguing in the dark.
What this site is for
This site will take you on a tour of the Gilt Market, and on the way explain how the aforementioned entities and concepts interrelate. Follow that through and the news starts to sort itself. A headline about "the markets" might be about Bank Rate, or about the long end, or about an auction that failed to find buyers at yesterday's yield. Those are different events. Along the way, this is a much deeper knowledge of how the country works: how it funds itself, who it owes, and what it means when the price of that debt moves.