Gilt auction failure.

Generali

Mr_Mumble wrote: »

Anyone with an annuity is! The regulatory requirements on pensions oblige insurers to buy long-dated gilts. Its effectively a tax on pensions, even those with unsecured pensions have to buy at 75 (alternatively secured pensions are an option but that is a technicality given the punitive tax hit).

The failure of this auction could well see the budget address the issue by 'obliging' pension trustees, insurers and life assurance companies to hold a greater amount of 'safe' government debt.

One thing that struck me earlier is that as stock markets fall, potential retirees become poorer and so stay in work. Therefore there are fewer people compelled to buy Gilts.

Just a thought. I've not seen any evidence to back it up.

ruggedtoast

Can someone explain how gilts work? I understand that you're lending the government money when you buy them, but what determines the rate of return?

Can gilts be traded again once purchased and can they change in value?

purch

Is it really that bad?

It's not horrendous, terrible or a disaster, but it should be a wake up call to the DMO that they cannot expect there to be limitless demand for these long dated paper issues.

Bear in mind that only 6 weeks ago, another 40 year auction was covered just over 2x with a 0.02 tail.

Things should not have changed too much since then, but there will always be a limit to the appetite for these long dated Gilts irrespective of the economic climate prevailing at the time.

Generali

ruggedtoast wrote: »

Can someone explain how gilts work? I understand that you're lending the government money when you buy them, but what determines the rate of return?

Can gilts be traded again once purchased and can they change in value?

The Government sells Gilts paying a certain rate of interest and asks people to bid for them. The bond purchased will pay a coupon payment (interest) and when it matures will pay £100.

Interested parties bid for the bonds so if the Govt tries to sell 1 year bonds paying 10%, buyers might bid £105 at present because that's the value they give to the £10 interest plus the £100 face value of the bond they're going to get back.

Gilts can be traded freely - most High Street banks will trade them on your behalf and there are tons of brokers who will trade hem for you too. Personally, I think they're a very good investment.

purch

Can gilts be traded again once purchased and can they change in value?

Gilts carry a coupon (interest rate) at the time of issue. This coupon is paid every 6 months.

The auction process does not always mean they are issued at par, but generally it is very close.

Gilts are a tradeable instrument, and their value fluctuates along with market forces and the current economic climate. Over the last 6 months there has been a flight to "quality" which has meant Gilt prices have soared on the markets, which effectively reduces their yield to anyone buying at these higher levels.

If an investor, buys and holds to maturity theie Investment is unaffected by market movements, and they will receive at maturity the nominal value of their Gilt in addition to the coupons they received over time.

Howver, due to the fact that their prices can fluctuate, Gilts held via a collective investment vehicle (Unit Trust, Pension etc etc) they are not the Low Risk investment that they are sometimes portrayed.

Generali

purch wrote: »

they are not the Low Risk investment that they are sometimes portrayed.

Short dated Gilts are low risk as are index linked Gilts when held to maturity.

Certainly it's hard for me to pick lower risk investments except perhaps farmland with an independent water supply. Then we're into tin hat territory.

ruggedtoast

OK thanks guys; I've never really understood that before.

Mr_Mumble

purch wrote: »

It's not horrendous, terrible or a disaster

Really?

The cover of just 0.93 times is believed to be the lowest in history

Generali wrote: »

One thing that struck me earlier is that as stock markets fall, potential retirees become poorer and so stay in work. Therefore there are fewer people compelled to buy Gilts.

Intriguing thought, hopefully the policy wonks have factored this into expectations for higher gilt demand given the surge of baby boomer retirements.

purch

Really?

Ok fair point.

I'll give you Horrendous and Terrible............but I'm holding onto Disaster for a later date !!!!!

Short dated Gilts are low risk as are index linked Gilts when held to maturity

I'm more referring to Collective Investments with no maturity.

If you stuck your hard earned into a Gilt Fund now, with the market at it's current levels, you could easily be looking at a sizeable capital loss over the next few years, even if the default risk is minute.

tomterm8

Mr_Mumble wrote: »

Really?

The cover of just 0.93 times is believed to be the lowest in history



.

I would be amazed if that was the case, after all I seem to remember a certain labour government going to the IMF because they were considered so fiscally prudent that they couldn't sell whelks on a whelk stall, let alone gilts to intelligent investors.


It's not a disaster, it is just a direct result of quantat.... Q.E. The bank of England says they might not need to buy as many gilts, and then surprisingly people decide not to buy as many gilts which they were originally buying to flog to the bank of england for an instant profit.