The UK Gilt And Corporate Bond Market Flashcards
1
Q
Briefly explain gilts
A
- UK government bonds referred to as “gilt-edged” securities or “gilts”
- Usually pay gross coupons semi-annually
- Used to finance the shortfall between government expenditure and government revenue
- They are issued to cover the PSNCR - public sector net cash requirement (deficit between government spending vs revenue)
2
Q
Who issues gilts?
A
- The DMO - Debt Management Office issues gilts via auction
- Gilt settlement is made via CREST
3
Q
Who are the main holders of gilts?
A
- UK pension funds
- UK insurance companies
- Overseas investors
- UK banks
- Building societies
- Private individuals
4
Q
Who are the key market participants in the market for UK gilts?
A
- GEMMs - gilt edged market makers
- GEMMs MUST bid/ participate in DMO/ primary auctions
- Continuously quote bid-ask prices for gilt issues and must trade at these prices to maintain liquidity
- They get special dealing privileges with DMO and inter-dealer brokers (IDBs)
5
Q
Explain what corporate bonds are and how they’re sold
A
- They’re UK bonds - they can be sold as an open offer for sale OR directly to a small number of professional investors (private placing)
- Mainly trade in decentralised, dealer based, OTC markets where liquidity is provided by dealers/ other market participants (not on an exchange)
6
Q
Explain the concept of “bought deal” with regards to corporate bonds
A
Involves a syndicate of banks
Lead bank/ manager buys all the bonds and then sells them to the syndicate.
Risk of distributing the bonds is transferred to the underwriter (may have to sell at lower price if market is weak)
7
Q
Explain the concept of “fixed price re-offering” with regards to corporate bonds
A
Once lead manager and syndicate buy bonds together directly from the issuer.
The syndicate members sell the bonds (commonly offered at a fixed price for a certain period)
