National Grid launches first ever inflation-linked retail bond

cepheus

I think everyone uses different definitions which doesn't help

What does the redemption yield for index gilts precisely mean here? (the glossary is useless) These must be relative to some assumed inflation figure since the short dated ones have a negative return

http://www.dmo.gov.uk/reportView.aspx?rptCode=D1D&rptName=89901317&reportpage=D1D

Edit- Comparing with the other redemption figures, these look like relative to an assumed 3% inflation figure. If that's everything you get, divs and capital to redemption that is absolutely awful! Surely the National grid bond looks good value in relation to ILG and the price might rise after issue to compensate?

Ark_Welder

cepheus wrote: »

I think everyone uses different definitions which doesn't help

What does the redemption yield for index gilts precisely mean here? (the glossary is useless) These must be relative to some assumed inflation figure since the short dated ones have a negative return

http://www.dmo.gov.uk/reportView.aspx?rptCode=D1D&rptName=89901317&reportpage=D1D

Edit- Comparing with the other redemption figures, these look like relative to an assumed 3% inflation figure. If that's everything you get, divs and capital to redemption that is absolutely awful! Surely the National grid bond looks good value in relation to ILG and the price might rise after issue to compensate?

Redemption yield is the annual return to the investor to the date that the bond reaches maturity. It includes coupon payments and any difference between the bond's current price and its price upon redemption. For conventional bonds this is par value and is usually refered to as 100 per cent (which to me means 100 quid). The redemption yield being quoted for index-linked gilts assumes 3% inflation over the remaining lifetime of the bond. Obviously, could be more, could be less - just there as a guide. Sometimes you will see figures quoted that assume 5% inflation too.

But you are correct - the assumed redemption yields on current linkers are awful, and are a reflection of how overpriced they are (assuming that inflation does not get worse!).

[Edit]
The main difference, return-wise, to an individual is the tax treatment of the capital repayment: for gilts there is no liability, either income or CGT, but a gain on the NG bond will be taxed as income.

pqrdef

cepheus wrote: »

If that's everything you get, divs and capital to redemption that is absolutely awful!

Real return guaranteed for up to 40-odd years, almost no limit on investment, insurance against future high inflation, no CGT - where's the competition?

Most of us have a horizon of 5 years max and just let the future take care of itself.

Those who bought 2037 linkers may be laughing when the rest of us are pushing our wheelbarrows.

Not buying long-term linkers now might be seen as a gamble on getting in ahead of the market when it becomes necessary. Hmm.

cepheus wrote: »

Surely the National grid bond looks good value in relation to ILG and the price might rise after issue to compensate?

Different market really. The bonds are rated BBB+, which is only the second notch above junk. That'll scare off institutions whose rules might force them to sell out early if the rating slipped, and all at the same time.

NG are only looking to raise £20m or so with the first issue, so they're not expecting the big players. If the advisers have done their job right, the 1.25% coupon will have been pitched to produce a market price of 100. Or they might just have picked a random number, because nobody seems to know what anything is worth these days.

cepheus

Ark_Welder wrote: »

Sometimes you will see figures quoted that assume 5% inflation too.QUOTE]

It seems they don't bother to define whether Redemption Yields are relative to inflation or not, less still a specific inflation figure, as far as I can see!

These are 3% apart for example, or it as before the second site was taken off line!

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


http://www.dmo.gov.uk/reportView.asp...reportpage=D1D

Ark_Welder

cepheus wrote: »

It seems they don't bother to define whether Redemption Yields are relative to inflation or not, less still a specific inflation figure, as far as I can see!

In an un-named folder in a drawer in a locked filing-cabinet that is in an otherwise empty, locked office in the basement of a disused building, you might find the following...

Following market consultation, it was agreed that the RPI inflation assumption that should be used in the formulae for index-linked gilts with an 8-month indexation lag is 3% per annum. This will be reviewed by the DMO as and when a majority of market participants judge that a review is necessary.

http://www.dmo.gov.uk/documentview.aspx?docname=/giltsmarket/formulae/yldeqns.pdf&page=Formulae/Calc

I suppose I've been looking at the prices for so long now I just take it for granted!

oldvicar

pqrdef wrote: »

Those who bought 2037 linkers may be laughing when the rest of us are pushing our wheelbarrows.

They may well laugh. But they will be the ones with (full) wheelbarrows, not the rest of us.


Back to topic: has anyone gone for these NG bonds?
As someone said earlier "I'm out": I don't like the uncertainty of capital revaluation being taxed as income at maturity, I don't want to pay for a wrapper to put a few in an ISA, and I'd fret too much about the risk of NG's credit rating (although I do have some of their shares).

Ark_Welder

oldvicar wrote: »

Back to topic: has anyone gone for these NG bonds?

In the end I decided against. I wouldn't have been able to purchase in an ISA without having to sell something first, and I didn't want to do that. And I wasn't sure that I would be able to manage my tax situation in 10 years time so as to try to minimise any deduction then - it is the main problem that I see with potentially having most of the return as indexed capital.

I also did a few comparisons against the two RBS products and some high yield (and therefore, higher risk) bonds and preference shares - although the last two are not index-linked products. Over the 9 remaining years for RBPX inflation would need to be a around 8.5% p.a. for the returns on the NG bond to be superior. Around 6.4% to beat SAN, and around 8.3% to beat some of the LBG ECNs. Potentially higher-risk alternatives given that they are in the banking sector - but the fact that they are financials is the main reason why the NG bond still has its attractions.

Over the next 9 or 10 years I don't think that inflation will be high enough for long enough for the NG return to beat the others. Although RBPI can be beaten at a lower inflation rates it has the advantage of paying a minimum of 3.9% a year - and this might turn out to be an OK return if infation does tail off, and I err more to this persuasion than toward the rampant one.

So I'll stick with my existing holdings and not allocate any more to index-linked - at the moment..:) But I do already have around 40% of my bonds index-linked already(direct and via funds), so I'm perhaps in a different situation to some others. And it that allocation does sound incompatibe with the belief that inflation is likely to be lower then just think 'insurance'...;)

Sceptic001

It looks like this issue went well. £260 million raised from around 10,000 investors, which looks like a scary average of £26,000 per investor. Makes my small punt look a bit puny!

I hope they are not all expecting to receive 6.45% when they get their first cheque, as most of the press are still incorrectly reporting how these bonds work, eg:

More than 10,000 private investors rushed to buy the 10-year sterling bond which will pay 1.25% over the retail price index (RPI), currently at 5.2%.
http://www.citywire.co.uk/money/national-grid-closes-retail-bond-launch-after-raising-260m/a528802?ref=citywire-money-latest-news-list

More links here:
http://news.google.co.uk/news/story?q=national+grid+inflation+linked+bond&um=1&ie=UTF-8&ncl=dsALGyotCFNbpXMGJZ-J2KtimKOfM&hl=en&ei=CUaHTqnAEMfKhAfPnImADQ&sa=X&oi=news_result&ct=more-results&resnum=4&ved=0CF0QqgIwAw

cmorgan091

I only went for the minimum 2k investment, I really liked the sound of it due to diversifying my portfolio and keeping away from banks (which I have a fair amount of exposure to separately.

I also went for the RBPX bonds that was previously mentioned as I felt they were well priced on the secondary market. But my exposure to bonds has been slightly muted just because I feel there are alot of shares available that appear to be undervalued in my (completely novice investor) opinion!

Did many others on here take up the option I wonder? Also does anyone with more experience know what to expect the price of the bonds on the secondary market to do over time? Do they go on at a loss? Do they usually move with inflation (owing to the fact that initial capital adjusts with RPI)?

Just wondering.

Cheers

Chris

Sceptic001

cmorgan091 wrote: »

Also does anyone with more experience know what to expect the price of the bonds on the secondary market to do over time? Do they go on at a loss? Do they usually move with inflation (owing to the fact that initial capital adjusts with RPI)?

I am expecting them to behave in a similar way to index-linked gilts, influenced mainly by current and future expected movements in the RPI.

It will be interesting to see how the price moves when they are first quoted (which National Grid expects on 6th Oct), although I am intending to hold them long term.