National Grid launches first ever inflation-linked retail bond

calypso_rhapsody

I agree with cmorgan that having a part of your portfolio in index linked products is a good strategy - an element of a diversified portfolio. I have about 10% index linked in a mix of NSandI ILSCs, various issues accumulated over the years and some Treasury IL gilts in my SIPP. Am pondering whether 10% is enough .... especially as i don't think i can tax shelter this issue except by selling something in either my SIPP or ISAs.

Reaper

For those considering it don't forget this is not the only game in town. You can buy bonds paying RPI * 1.3, details in this thread.

As with these you are depending on the issuer remaining solvent, and both can be placed in a S&S ISA to avoid tax.

Ark_Welder

Reaper wrote: »

For those considering it don't forget this is not the only game in town. You can buy bonds paying RPI * 1.3, details in this thread.

As with these you are depending on the issuer remaining solvent, and both can be placed in a S&S ISA to avoid tax.

I have both RBS offerings, with more in the 3.9% than the x1.3. My thinking on this is that when (if!) inflation falls then the floor of 3.9% could be worthwhile, whereas the x1.3 would provide more benefit when inflation spikes higher. The crossover for them is when inflation is 3%, which is still above BoE target.

JamesU

Ark_Welder wrote: »

My thinking on this is that when (if!) inflation falls then the floor of 3.9% could be worthwhile, whereas the x1.3 would provide more benefit when inflation spikes higher. The crossover for them is when inflation is 3%, which is still above BoE target.

Both are priced quite low at present, but the buy/sell spreads have increased substantially to around 2% as in link below.

http://forums.moneysavingexpert.com/showpost.php?p=46657135&postcount=7

JamesU

Ark_Welder

They have fallen a touch, but the spread is a tad narrower. Yesterday's close:

RBPI: 87.81/89.31
RBPX: 86.36/87.36

I did read somewhere (can't recall where, though now) that the prices tend to move more in line with conventional bond prices - and current RBS 'expectations'!

I might have a go at comparing potential returns from these two and the NG offering at different RPI over the term. But the main advantage the NG has is that it isn't a bank...

sabretoothtigger

The redemption price of the bond appreciates in line with RPI over the 10 years

That makes far more sense, so these pay better then NSI fair enough


The RBS product sounds like a structured product like SOCGEN's SG92 that pays 8% per year

You rely on them surviving long enough to pay out though I guess, a bond et al. are not 'guaranteed'

Reaper

sabretoothtigger wrote: »

The RBS product sounds like a structured product like SOCGEN's SG92 that pays 8% per year

I would say The RBS one is comparible to the NS&I one, or a savings account, and for many is simpler to understand. You put you savings in, get paid "interest", then get your money back at the end.

The National Grid one works more like an index linked gilt in that the capital value varies with inflation plus a small amount of interest is paid on top.

As with all company bonds you need to have confidence the companies involved will survive for the length of the term to make sure you get your money back, and this element of risk is why they pay better than savings accounts. Personally I can't see either going under, National Grid because it controls an essential service and RBS because it is almost completely owned by the government, but in these uncertan times nothing is... well... certain.

Ark_Welder

sabretoothtigger wrote: »

The RBS product sounds like a structured product like SOCGEN's SG92 that pays 8% per year

You rely on them surviving long enough to pay out though I guess, a bond et al. are not 'guaranteed'

These are criticisms that have been noted about them. Survival of RBS is one of the risks, which is why the ability to diversify using the NG bond is an attraction.

cepheus

There are two index linked gilts with a similar lifetime to this ending in 2020 and 2022.

http://www.fixedincomeinvestor.co.uk/x/ic-bondtable.html?groupid=IndexLinkedGilts

One has a redemption yield of 2.45% and the other 2.82% assuming an RPI of 3%. To obtain the total return at this RPI do you have to add the 3% to make 5.45% and 5.82%?

Ark_Welder

cepheus wrote: »

There are two index linked gilts with a similar lifetime to this ending in 2020 and 2022.

http://www.fixedincomeinvestor.co.uk/x/ic-bondtable.html?groupid=IndexLinkedGilts

One has a redemption yield of 2.45% and the other 2.82% assuming an RPI of 3%. To obtain the total return at this RPI do you have to add the 3% to make 5.45% and 5.82%?

No. The yield already assumes the 3% inflation.

DMO provide some info, and there are a couple of links on that page that show how to calculate redemption yields


A further read, which suggests that linkers are currently overpriced (at current expectations!): http://www.fixedincomeinvestor.co.uk/x/analysis.html?type=bond-blog&cat=analysis-comment&y=2011&aid=599