Government backed stock, known as 'Gilts' are loans made to the Government by in effect the investors. Much of the national debt is comprised of Government Gilts, so when the Government needs to 'borrow' more, it simply issues a new Gilt.
Gilts provide income derived from interest payments and a final redemption. Inflation erodes away at the true value of the Gilts redemption, whilst interest rates will make the Gilts income appear more or less attractive. Broadly speaking when interest rates rise the value of the Gilt will fall and vice versa. Many professional investors and fund managers invest part of their portfolio in Gilts because Gilts can help them to spread risk and/or provide income.
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