Gilts - my unanticipated nightmare

Prism

For reference this is what this century has looked like..

jamesd

Diplodicus said:

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.

 

Yes, but there is considerable uncertainty about the amounts and timings, since it depends on economic circumstances. If the economy took a downturn there might even be cuts again for a while. But that's not the intended medium and long term pattern of the Bank and picking something that will only do well of the Bank of England fails to achieve its objectives isn't a great move.

Diplodicus

Two very different expectations for the next ten years of gilt investments, then.

Prism

Diplodicus said:

Two very different expectations for the next ten years of gilt investments, then.

Oh, I think most of us think that the next 10 years of gilt investments will be pretty flat and possibly negative. However thats my expectation for equities too, although gilts are much more predictable.

Thrugelmir

Diplodicus said:

Thrugelmir said:

Diplodicus said:

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.



 

In what context are Gilts investors long suffering?  

In the context of missing out on this historic bull market, Thrugelmir.

Investors would never had the benefit of the exceptional recent equity gains though. 

coastline

Diplodicus said:

Two very different expectations for the next ten years of gilt investments, then.

I know very little but I imagine it's hard to tell what will happen. Those in power will view the health of the world economy and decide the next move . Can't imagine it will happen overnight when you look at the link below. 30 years to peak and another 30 years to fall to the present day.

150629-gilt-yields-voxeu-chart.jpg (509×320) (weforum.org)

Any link with inflation and base rates was broken after the GFC in 2008 .

inflation-interest-rates-1945-2011-500x344.png (500×344) (economicshelp.org)

Since 2008 there's been two bursts of inflation in 2010 and 2017 yet there was no move upwards from the BofE on rates. Today inflation is around 4% and still nothing ? They're not in a hurry ? We're told it's temporary or transitory but what's that mean ? It's a decade and more since the GFC. If rates rise it'll not be much when you consider a move years ago from 10% to 11%. Today what's that 0.25% ?

uk-base-rates-inflation.png (1150×846) (economicshelp.org)

MK62

Diplodicus said:

Two very different expectations for the next ten years of gilt investments, then.

If buying today, I really wouldn't expect much.........but who knows in a few years time, if interest rates move up, and gilt yields rise (so dropping the price**), they may become much more attractive, especially if equities are in the doldrums at the time.

** or gilt prices fall, so raising the yield.....

Diplodicus

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

valiant24

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

masonic

Diplodicus said:

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

They are speading risk. Different risk factors drive different asset classes. One can try to tilt one's portfolio according to perceptions of the relative likelihood in the short term of certain events coming to bear, but there is no guarantee of being right. There are scenarios in which bonds could outperform equities in the short term.