Record negative UK Index linked bond yield

Glen_Clark

Britain's debt management office has sold a 36-year inflation-linked bond at a record negative yield. The £400m 2052 'linker' was sold at an average yield of -1.77% today, being over sibscribed by 3.12 times (Source FT)

EdGasket

That assumes benign inflation I take it? Maybe the market thinks otherwise.

Glen_Clark

I think it assumes high inflation, nevertheless a substantial loss (in real terms) is guaranteed.
And yet people still expect to make a real return from other investments?

redux

0.9823 ^ 36 = 0.52576

That is some hedge.

Dan83

So, is this a good thing or bad thing? If it's a good thing, how do I buy done? 36 years would take me to retirement hopefully

grey_gym_sock

it's not a good thing for individuals looking to invest money over 36 years and make a decent return. expected returns on index-linked gilts are exceptionally low, and a bit low on most other kinds of assets.

on the plus side, it means that new government borrowing costs less than nothing (in real terms). the government could - and should - be borrowing lots more at these exceptionally low rates in order to invest more (in housing, clean energy, public services, etc).

redux

Dan83 wrote: »

So, is this a good thing or bad thing? If it's a good thing, how do I buy done? 36 years would take me to retirement hopefully

As Glen Clark suggests, it's been sold to people who assume inflation higher than it is now.

For instance, if inflation is 1.77% every year or averages that from now until the end, you will get exactly your initial money back.

But as my post points out, the money will only be worth half as much compared to prices then.

If inflation was zero all the time you get half your money back in 36 years.

If inflation averages 3.5 to 4%, you get about double your money back, but prices are about 4 times higher by then.

So in some ways it is surprising anyone would buy it.

It's not a retail product. I assume it has been bought by professional fund managers to put in a portfolio with other types of asset that do well in low inflation, but not as well when prices are rising, as a way to hedhe their bets and spread risk. But even then I hardly understand it.

As grey gym sock hints, if the government can borrow money at these rates, we shouldn't be paranoid about public sector borrowing.

Glen_Clark

redux wrote: »

0.9823 ^ 36 = 0.52576

That is some hedge.

Certainly is. As I understand it, in real terms, they are guaranteed to only get about half their money back (52.5%) :eek:

Glen_Clark

redux wrote: »

If inflation was zero all the time you get half your money back in 36 years.

As I understand it, in real terms, you get about half your money back after 36 years, irrespective of the official rate of inflation.
PS - less than half if the Government continues to manipulate the official rate of inflation by excluding inconvenient items like houses.

redux

Glen_Clark wrote: »

As I understand it, in real terms, you get about half your money back after 36 years, irrespective of the official rate of inflation.
PS - less than half if the Government continues to manipulate the official rate of inflation by excluding inconvenient items like houses.

You're right, I misstated that a bit. That's the money back at the end, and meanwhile the rest of the prospective return is the coupon payments.

Masomnia

Both the capital value and the coupon are up-rated with inflation so how do you work out that you get 'half your money back'?