Gilts Understanding

SavingStudent1

Hi everyone,

I was looking at investing in Gilts, but I'm not really sure how they work! I was wondering if someone can help me please.

1. Is it better or easier to invest gilts using a brokerage platform and if so, which one? (as compared to buying them from the Debt Management Office)

2. For example, if I am looking at the gilt: TREASURY 1.5% 2026 (TG26) GILT on the HL website - Hargreaves Lansdown, then can someone help me calculate what I would get:

Let's say it costs £104.24 to buy today. If I want to buy £20000 worth of this gilt, then if I hold them ALL to maturity, how much would I make from it and how do I perform this calculation?

So, if I buy it today, I'll buy: 20000/104.24 = 191.864927091 = 191 gilts.  
Now, in 6 months time, I'll be paid a coupon, how much would I get from that coupon? Is it 191 * 1.5% = £2.87 ?

Now, let's say I keep it till maturity, then along wiht all the coupons, what would I get at the end - would I get £20000 - the amount that I invested, or something else?

Thank you!

Aretnap

You would get coupon payments of £1.50 per gilt per year (1.5% of their face value). Or 75p every 6 months.

Then on maturity you would get back the face value of the gilts - £100 per gilt, or £19,100 in total.

A total return, depending on the exact maturity date, of about £20500 on your £20000.

By contrast, if you put your money into the best available 5 year fixed rate savings account, you would get back a total of over £22000 over about the same time period. Why not do that instead? Buying and holding gilts to maturity only really makes sense if you don't have access to FSCS protected best buy savings accounts, either because you have too much money, or because it's in a pension wrapper or similar. 

SavingStudent1

Aretnap said:

You would get coupon payments of £1.50 per gilt per year (1.5% of their face value). Or 75p every 6 months.

Then on maturity you would get back the face value of the gilts - £100 per gilt, or £19,100 in total.

A total return, depending on the exact maturity date, of about £20500 on your £20000.

By contrast, if you put your money into the best available 5 year fixed rate savings account, you would get back a total of over £22000 over about the same time period. Why not do that instead? Buying and holding gilts to maturity only really makes sense if you don't have access to FSCS protected best buy savings accounts, either because you have too much money, or because it's in a pension wrapper or similar. 

Oh, now I understand! Thank you, that makes sense :). 

Do you mean the "because you have too much money" in the sense that if you are putting over £85,000 because they only compensate you up to that amount right if the fixed rate savings account provider is unable to pay you back?

Yes, I think you are right - I am just worried sometimes because most of the banks that offer the best deal are ones I have never heard off, like high-street banks as HSBC, NatWest, Santander etc.. and I am just worried about that. I don't really know much about reliability and banks in general, so I only deal with the well-known ones lol.

Thrugelmir

SavingStudent1 said:

1. Is it better or easier to invest gilts using a brokerage platform and if so, which one? (as compared to buying them from the Debt Management Office)

DMO does not sell Gilts to the retail market. 

SavingStudent1

I was meant to say, *unlike high-street banks...

masonic

Aretnap has done the maths for you. The reason most people hold gilts is as a diversifier. For that purpose a fund is more convenient. The aim is have some inverse correlation with equities and to rebalance from one to the other so as to buy low and sell high in general. That was a good proposition when bonds returned ~ inflation + 1%, today not so much. Buying and holding gilts to maturity will be almost guaranteed to return less than a fixed term consumer savings account.

masonic

SavingStudent1 said:

Yes, I think you are right - I am just worried sometimes because most of the banks that offer the best deal are ones I have never heard off, like high-street banks as HSBC, NatWest, Santander etc.. and I am just worried about that. I don't really know much about reliability and banks in general, so I only deal with the well-known ones lol.

Check they have FSCS protection, if so your money is just as safe as if held anywhere else provided you stay below the compensation limit.

Thrugelmir

Deleted_User said:

Thrugelmir said:

DMO does not sell Gilts to the retail market. 

https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/purchase-sale-service/

Computershare act as their broker. 

DMO themselves currently do not deal directly with the public. Retail investors are unable to partcipate in auctions or new issuance of Gilts. 

ColdIron

SavingStudent1 said:

Yes, I think you are right - I am just worried sometimes because most of the banks that offer the best deal are ones I have never heard off, like high-street banks as HSBC, NatWest, Santander etc.. and I am just worried about that. I don't really know much about reliability and banks in general, so I only deal with the well-known ones lol.

High St banks, almost without exception, offer the worst rates on the market. I have been using the challenger banks for over 10 years and many of them have been running for longer than that. If they have FSCS protection your money is no less safe

SavingStudent1

masonic said:

Aretnap has done the maths for you. The reason most people hold gilts is as a diversifier. For that purpose a fund is more convenient. The aim is have some inverse correlation with equities and to rebalance from one to the other so as to buy low and sell high in general. That was a good proposition when bonds returned ~ inflation + 1%, today not so much. Buying and holding gilts to maturity will be almost guaranteed to return less than a fixed term consumer savings account.

Thank you, I am a beginner so I don't know much of what all these things mean, but I am planning to read and learn on it all .
Yes, I just realised this to be honest when I understood the calculations thanks to Aretnap and done it on larger values.

So, can I ask: How do we know when a government releases a new gilt e.g. if they release it today at face value HM Treasury 1.5% Sept 2035, - made it up, but how would I know that it has been released? Do I just have to keep up with the news or follow a certain page? Because I assume then I can buy it at face value £100 and the savings would be a bit better I suppose?

But yes, with low moneys, a fixed term consumer savings account earns so much more!!

ColdIron

Gilts are auctioned to the highest bidder so you cannot buy at face value