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Investing in GILTS

Am I missing something?

I see that the Government security: CONSOLS 4.0 Perpetual
is selling at around 76p so the yield is actually 5.26%

Sounds good on a secure investment.

What's the catch?
THE NUMBER is how much you need to live comfortably: very IMPORTANT as part 1 of Retirement Planning. (Average response to my thread is £26k pa)

Comments

  • Aegis
    Aegis Posts: 5,695 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Gatser wrote: »
    Am I missing something?

    I see that the Government security: CONSOLS 4.0 Perpetual
    is selling at around 76p so the yield is actually 5.26%

    Sounds good on a secure investment.

    What's the catch?
    2 main catches:
    • No inflation proofing - in the event of rising inflation rates, the yield will not rise to protect your real income. At that stage, you'll start losing out in both income and capital terms as the gilt becomes less desirable
    • Capital will be susceptible to interest rate rises - a 4% gilt is going to look rubbish if bank accounts are available at 5% at some stage (quite likely in the long run). At that point your gilt will be worth a lot less than now, so your higher initial yield may be more than offset by the capital loss if you choose to sell.
    If you're looking to buy and hold forever and have no problem with inflation eating away at your real income stream, then there basically isn't a catch.
    I am a Chartered Financial Planner
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • Masomnia
    Masomnia Posts: 19,506 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 8 April 2010 at 1:33AM
    Aegis wrote: »
    2 main catches:
    • No inflation proofing - in the event of rising inflation rates, the yield will not rise to protect your real income. At that stage, you'll start losing out in both income and capital terms as the gilt becomes less desirable
    • Capital will be susceptible to interest rate rises - a 4% gilt is going to look rubbish if bank accounts are available at 5% at some stage (quite likely in the long run). At that point your gilt will be worth a lot less than now, so your higher initial yield may be more than offset by the capital loss if you choose to sell.
    If you're looking to buy and hold forever and have no problem with inflation eating away at your real income stream, then there basically isn't a catch.

    That's all true, but a falling gilt price in future will mean the opportunity to buy more on the cheap and pick up a higher yield for when interest rates fall again. This could work quite well if you choose to reinvest your income.

    The other thing is if the government decide to redeem your gilts you'll make a handsome profit as the nominal value is £100. Admittedly that's pretty unlikely though, especially for the foreseable future.

    So lots to weigh up :)
    “I could see that, if not actually disgruntled, he was far from being gruntled.” - P.G. Wodehouse
  • Consols 4% are perpetual bonds so will never redeem unless it is in the government's interest to do so.

    War loan 3.5% (also a perpetual) is currently 70.65. Back when interest rates were in the region of 10%+, the price was around 30 to 35.
  • purch
    purch Posts: 9,865 Forumite
    2 main catches

    No the main catch is that the GEMMS are not obliged to make a market in Perpetuals other than the War Loan, so therefore they are extremely illiquid.
    'In nature, there are neither rewards nor punishments - there are Consequences.'
  • Reaper
    Reaper Posts: 7,322 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Photogenic
    purch wrote: »
    No the main catch is that the GEMMS are not obliged to make a market in Perpetuals other than the War Loan, so therefore they are extremely illiquid.
    In case anybody else was wondering a GEMM is a Gilt-Edged Market Maker. It took me a while to figure out, but that might just be me.
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