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  • FIRST POST
    SnowMan
    Why are individual investors holding conventional government gilts?
    • #1
    • 14th Nov 12, 11:29 AM
    Why are individual investors holding conventional government gilts? 14th Nov 12 at 11:29 AM
    Like a lot of others I have been looking at gilt redemption yields (I’m talking about conventional gilts, not index linked gilts or corporate bonds here) and I keep shaking my head saying ‘does not compute’.

    I can understand why institutional investors such as closed final salary pension funds are holding more conventional gilts to match an increasing proportion of fixed liabilities for pensions in payment for example. And I can understand how quantitative easing has pushed gilt yields down.

    But why are individual investors still holding individual gilts or gilts in gilt funds (which will further reduce yields because of charges)?

    Looking at the redemption yields yesterday (choose 'bonds and rates' and 'government benchmark bonds' and 13th November 2012 in the drop down boxes to locate) on Government benchmark bonds.

    5 year gilt: 1%, 09/17, redemption yield 0.72%
    10 year gilt: 1%, 09/22, redemption yield 1.71%
    30 year gilt: 4.50%, 12/42, redemption yield 3.04%

    So for example why would an investor hold a 5 year gilt that has a redemption yield of 0.72% pa when they could put that money in a 5 year fixed rate savings account and get about 4% pa gross.

    And why hold a 10 year gilt which only has a redemption yield of 1.71% pa? Would it not better to put it in a 5 year fixed rate savings account (about 4% pa) and then after 5 years put in the best 5 year account then available. It is hard to see how the individual investor can’t be better off than holding the gilt to maturity.

    Obviously with a gilt you have the option to sell before maturity and for gilts with over 5 years outstanding term you can hold it in a stock and shares ISA to avoid tax on coupons.

    But it still doesn’t make sense.


    What are your thoughts?
    Last edited by SnowMan; 14-11-2012 at 11:50 AM.
    I came, I saw, I melted
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