Gilt prices are impacted by a number of things, including the outlook for interest rates and inflation, as well as the market demand for gilts.

To understand this, it’s important to note that newly issued gilts generally have their dividend (interest rate) set close to the prevailing market interest rate at the time of issuance.

So, when interest rates fall, gilt prices usually go up. This is because the fixed interest offered by the gilts will become relatively more attractive compared with prevailing interest rates in the market.

Conversely, if market interest rates rise, gilt prices typically fall. This is because their fixed dividend becomes less attractive compared to prevailing market interest rates. As a result, an investor would want to pay less for the gilt to ensure their resulting yield is more in line with market rates.

Gilts with longer maturity are more sensitive to interest rate changes. This means their market prices can be more volatile than short-term gilts.

Gilt prices can also be impacted by inflation. Higher inflation erodes the purchasing power of the fixed dividend payments and the principal repayment, making gilts less attractive. When inflation rises, gilt prices often fall.