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Why are individual investors holding conventional government gilts?
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# 1
SnowMan
Old 14-11-2012, 11:29 AM
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Default Why are individual investors holding conventional government gilts?

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?
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Last edited by SnowMan; 14-11-2012 at 11:50 AM.
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# 2
Glen Clark
Old 14-11-2012, 11:55 AM
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Because they expect Mad Merve to continue printing money to buy up a dwindling stock of gilts, forcing gilt prices even higher. As you point out, many institutions are obliged to hold gilts however overvalued they are, leaving only a few investors free to sell.
Rather like Gold prices fell even lower when Gordon Brown announced he was going to sell off half our stock, irrespective of the price.

Last edited by Glen Clark; 14-11-2012 at 12:00 PM.
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# 3
Milarky
Old 14-11-2012, 12:01 PM
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Good question: ''ask a financial advisor''
.....under construction....
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# 4
Glen Clark
Old 14-11-2012, 12:06 PM
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Quote:
Originally Posted by Milarky View Post
Good question: ''ask a financial advisor''
- there were plenty of 'financial advisor's advising Gordon Brown to sell off half our gold at $250 an ounce
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# 5
Linton
Old 14-11-2012, 1:35 PM
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I guess that most private investors holding gilts have done so for a long time. Some are very conservative, others use them to create a balanced portfolio safely storing excess profits from higher performing but volatile equities. A third use is to safeIy store your pension pot prior to taking an annuity to avoid any catastrophic losses from a last minute stock market crash. In any such case the recent bubble in gilt prices is nice to have but hardly the purpose of the exercise. The basic reason is safety with return being a secondary concern.

A five year fixed rate account ties up your money for, err, five years and so isnt a useful substitute.
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# 6
Glen Clark
Old 14-11-2012, 1:58 PM
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Quote:
Originally Posted by Linton View Post
I guess that most private investors holding gilts have done so for a long time. Some are very conservative, others use them to create a balanced portfolio safely storing excess profits from higher performing but volatile equities. A third use is to safeIy store your pension pot prior to taking an annuity to avoid any catastrophic losses from a last minute stock market crash. In any such case the recent bubble in gilt prices is nice to have but hardly the purpose of the exercise. The basic reason is safety with return being a secondary concern.

A five year fixed rate account ties up your money for, err, five years and so isnt a useful substitute.
But gilt yields are below the rates a private investor could get in an instant access account where their money is guaranteed. I can't see why you think gilts are safer than that. By hanging on to gilts they are not only getting less interest, but the gilts they are holding could fall in price just like shares.
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# 7
Linton
Old 14-11-2012, 2:22 PM
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Quote:
Originally Posted by Glen Clark View Post
But gilt yields are below the rates a private investor could get in an instant access account where their money is guaranteed. I can't see why you think gilts are safer than that. By hanging on to gilts they are not only getting less interest, but the gilts they are holding could fall in price just like shares.
Gilts are very much more stable than shares, they only change price slowly and cannot vary too much because of the fixed price at maturity. The return from gilts is dependent on the time to maturity. 20+year dated gilts currently provide a return of 2.5-3.2%. Certainly comparable with bank accounts and very much less hassle involved if buying and selling within a portfolio held through a broker. With short dated gilts, since you arent going to hold them for a long time the return doesnt matter much. And short dated gilts are close to par value so very safe.
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# 8
grey gym sock
Old 14-11-2012, 4:49 PM
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very short gilts are are alternative to savings accounts for risk-averse ppl with too much money to keep within 85k per deposit taker.

for anybody with too much cash for the maximums that deposit takers will accept in savings accounts, gilts are a good temporary home for money, as they are very liquid and can be bought in huge quantities.
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# 9
SnowMan
Old 14-11-2012, 6:59 PM
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For the purposes of argument let's consider a passive portfolio that is made up of

75% equity trackers and
25% in the L and G All Stocks Gilt Index fund

Assume that funds are being held for the long term as part of a fully passive strategy.

Now about 60% of the gilt fund is invested in short or medium term gilts of 10 years outstanding term or less (and 40% in longer term gilts) because of the make up of that index.

As I mentioned in the first post those short and medium term gilts are as good as guaranteed to do worse than holding the same amount in savings accounts.

So surely you are guaranteed to do better by switching to a portfolio of

75% equity trackers
15% best buy savings accounts (0.6 x 25)
10% long term gilts (of same average duration as the long term gilts in the original gilt fund)

Of course if gilt yields increase and prices fall you may switch back the cash element into gilts. You could do this at any point where the return on savings accounts couldn't be guaranteed to beat the short and medium term gilt returns.
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Last edited by SnowMan; 14-11-2012 at 7:30 PM.
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# 10
gadgetmind
Old 14-11-2012, 7:04 PM
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The problem is that you need to hold a mix of asset classes in each pot as the restrictions of SIPPS and ISAs mean you can't flow capital between different wrappers at will.

I hold some cash (at about 3.5% interest) and NS&I linkers unwrapped, but within ISAs and SIPPs have to use more bonds/prefs/etc.

I have *very* few gilts and only via some strategic bond funds, which I'd also rather not be holding TBH!
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# 11
DiggerUK
Old 15-11-2012, 11:30 AM
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Quote:
Originally Posted by SnowMan View Post
....But it still doesn't make sense...
That's because they are a desperate choice, for desperate times.
With yields so close to price inflation, I am at a loss as to why anybody takes such a high risk route. Especially when inflation will chop their redemption value to pieces.

It seems that 'Bad Economic Climate Change Deniers' are the only ones who think they are a good investment.
..._
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# 12
Glen Clark
Old 15-11-2012, 11:50 AM
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Bear in mind than the Government is effectively paying banks to borrow money which they are supposed to lend to house buyers and start up businesses, but are not doing. The banks would rather put the money into bonds because its safer. The return may be derisory, but when the banks can buy them with money borrowed from the Government at even lower rates...
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# 13
RetiredInThailand
Old 15-11-2012, 12:28 PM
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My concern with owning gilts is not so much that the interest rate is so poor, it is that if/when interest rates rise this will surely be reflected by a swift and possibly very large drop in the price of gilts. And saying that "gilts are stable" probably wont make the fall any less swift when it comes.

So by owning gilts you not only get a poor return in interest today but will probably get a big capital loss too at some point.

Gilts were a good buy 4 or 5 years ago, just before everyone else started buying them. Today I think the only people/organisations buying them are doing so because they dont have much choice.

http://www.thisismoney.co.uk/money/p...k-pension.html
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