Gilts Understanding

aroominyork

I asked because terminology is used inconsistently. For example, when you look at funds on HL it defines distribution yield as "the amounts that may be expected to be distributed over the next 12 months".

masonic

aroominyork said:

I asked because terminology is used inconsistently. For example, when you look at funds on HL it defines distribution yield as "the amounts that may be expected to be distributed over the next 12 months".

Yes, it is used inconsistently. Normally it is defined somewhere, although more likely in a prospectus than a KID. Even when it is the better HL definition, it won't account for anything purchased over the next 12 months, which could contribute income to that same period. At best, it is therefore useful as a rough guide.

GeoffTF

masonic said:

aroominyork said:

I asked because terminology is used inconsistently. For example, when you look at funds on HL it defines distribution yield as "the amounts that may be expected to be distributed over the next 12 months".

Yes, it is used inconsistently. Normally it is defined somewhere, although more likely in a prospectus than a KID. Even when it is the better HL definition, it won't account for anything purchased over the next 12 months, which could contribute income to that same period. At best, it is therefore useful as a rough guide.

As you have already said, it does not account for capital gains (or losses), so the distribution yield is not even a rough guide to the likely return.

If the yield curve is stable, you can assume that reinvestment will take place on that curve. With the usual rising yield curve that increases the likely yield above the weighted average YTM, because the reinvested bonds are further up the yield curve and have a higher yield. Currently, we cannot reasonably assume that the yield curve is stable. Nonetheless, the weighted average YTM may be an optimistic estimate of the likely return.

masonic

GeoffTF said:

masonic said:

aroominyork said:

I asked because terminology is used inconsistently. For example, when you look at funds on HL it defines distribution yield as "the amounts that may be expected to be distributed over the next 12 months".

Yes, it is used inconsistently. Normally it is defined somewhere, although more likely in a prospectus than a KID. Even when it is the better HL definition, it won't account for anything purchased over the next 12 months, which could contribute income to that same period. At best, it is therefore useful as a rough guide.

As you have already said, it does not account for capital gains (or losses), so the distribution yield is not even a rough guide to the likely return.

If the yield curve is stable, you can assume that reinvestment will take place on that curve. With the usual rising yield curve that increases the likely yield above the weighted average YTM, because the reinvested bonds are further up the yield curve and have a higher yield. Currently, we cannot reasonably assume that the yield curve is stable. Nonetheless, the weighted average YTM may be an optimistic estimate of the likely return.

No, yield would not be a guide to total return, but for someone wishing to estimate the natural yield for retirement income planning or tax purposes, it could be a relevant guide. I can only assume aroominyork is thinking along those lines.

aroominyork

One reason it interests me is because I have a large amount unwrapped which will take several years to move into ISAs/SIPPs, so the tax benefits of low coupon gilts affects my view of where to invest the c.30% of my investments I want in fixed interest.

aroominyork

A question. How much of the anticipated rise in base rates is already priced into short dated gilts, eg TN25? Another 2 x 0.25%? 

masonic

aroominyork said:

A question. How much of the anticipated rise in base rates is already priced into short dated gilts, eg TN25? Another 2 x 0.25%? 

The interest rates anticipated by the market will be priced in, but so will any anticipated falls next year. The market certainly won't be predicting the future perfectly.

GeoffTF

masonic said:

aroominyork said:

A question. How much of the anticipated rise in base rates is already priced into short dated gilts, eg TN25? Another 2 x 0.25%? 

The interest rates anticipated by the market will be priced in, but so will any anticipated falls next year. The market certainly won't be predicting the future perfectly.

...or at all well if its past record is anything to go by.

ChilliBob

masonic said:

aroominyork said:

@spider42 makes good points about tax benefits of gilts (and I hold TN25 for just that reason) but even in tax-wrapped SIPPs/ISAs they are attractive compared to hedged global aggregate bond funds which seem to be distributing under 3%.

You are not comparing like with like when comparing YTM of the gilt with yield of a fund (TN25's distributions are tiny compared with its forward capital gain). The effective YTM for the Bloomberg Global Aggregate Float Adjusted and Scaled Index (tracked by Vanguard and others) is 4.0% vs TN25's 4.65%. The reason this number is lower than for TN25 is that the fund buys debt securities across the yield curve and despite including higher yield corporate bonds, the inversion of the yield curve makes such a fund relatively unattractive compared with an individual short dated gilt, or indeed an ultra-short duration fund. In a SIPP or ISA, a money market fund could be an attractive alternative if you want an open-ended alternative that does not come with all the trading complexities of individual gilts. CSH2 is returning about 4.7% annualised at the moment looking at its gradient over the past month. The return will adjust (upward or downward) in line with the market, whereas individual gilts are useful to lock in a particular return if you fear interest rate policy is nearing a reversal (or to harvest that attractive tax exempt capital gain unwrapped if selecting the right issues).

Thanks for this Masonic - it makes sense, and I do indeed hold some money market funds within my ISA - as it was simple, obviously, to purchase etc.

Regarding gilts, an ft.com alert for an article telling that us yields are now *above* mini budget levels renewed my interest in this area - especially when I think I'd be paying tax on my savings interest for the 24-25, and probably in 25-26 tax years based on what I have locked away at the moment etc.

You say the complexities of individual gilts - it looks like I could just buy say TN25 on Interactive Investor, and assuming I held to maturity, I'd just expect cash to be in the trading account once the period has expired (post 31-Jan-25), plus the distributions coming in as usual dividends. What are the complexities I'm overlooking? (I saw PensionCraft video about buying Index Linkers and that being painful, but I thought simple gilts wouldn't be any more complex than buying an OEIC, ETF or share?)

ChilliBob

I've just done some rough calculations, which I'm pretty sure have a couple of holes, however, curious to see if people think this is roughly the size of it.

FIGHT! - In the blue corner we have TN25, in the red corner we have Investec 12 Month fixed saver..

Investec Saver: 5.35%, assume 20% tax on the interest = 4.28% interest rate in the end.
TN25 Gilt: 

Buy price = 92.75
Redemption = 100
Period = 19 Months
Interest over period = 7.25%  (Ignoring coupon)
(7.25/19)*12 = 4.83  (factoring in the 0.25% coupon (received twice?) and 20% reduction in this due to tax)

So, the gilt improves the interest one would get by 0.55%.. Admittedly this isn't apples with apples since one is 12 months and one is 19 - but 18 month fixes aren't too different a rate to the Investec one.

So, if you had 50k invested the gilt side of things would net you a gain (ignoring trading costs) of £275

It's obviously better to have £275 than not - I guess how much you have to invest/save in this situation dictates if it's worthwhile or not for you.