buying an individual gilt question

MarkCarnage

masonic said:

aroominyork said:

A bit more on those two 2030 gilts:

The last trade for higher coupon one, TR30, shows on the LSE website as 105.00 on Thursday. YTM 3.61%

The lower coupon one is TG30 (not TN30 - apologies), with the last trade at 73.88 on Friday (the final trade on Thursday also shows as 73.88). YTM 4.23%.

The prospectus can be found here: https://www.dmo.gov.uk/media/1aehow1z/prosp260520a.pdf and https://www.dmo.gov.uk/media/5snbalfh/prosp220909b.pdf
There doesn't seem to be anything unusual in one vs the other. Clearly one is returning mostly taxable interest, while the other is returning mostly a tax exempt capital gain, but I wouldn't have expected that to make much difference to the YTM. There is a clear difference in trading volumes between the two.

As well as the taxable status due to coupon difference, there is also a duration difference as the time weighted cashflows for the low coupon are nearly all weighted to redemption capital gain while the higher coupon cashflows are more front end weighted and therefore have a higher discounted time value due to potential for reinvestment compounding. For someone not paying income tax these would be more valuable. 
Back in the 80s there was quite game to be played in arbitraging between gilts with different coupons depending on one's tax position. 

Ciprico

So on maturity for Gilts held in Sipp (on II ) do they essentially convert seamlessly to cash...?

I have replaced cash in sipp with Gilts as return significantly more. 

Thanks for all the advice from the various members on here! 

biscan25

Ciprico said:

So on maturity for Gilts held in Sipp (on II ) do they essentially convert seamlessly to cash...?

I have replaced cash in sipp with Gilts as return significantly more. 

Thanks for all the advice from the various members on here! 

The redemption will be paid to the same place as the income.

biscan25

A_T said:

biscan25 said:

NannaH said:

Right, got it now thanks. 

Are Gilts only priced at £1 when they are first introduced ?   Then they rise and fall within the market? 

Doesn’t look like such a good deal now.  I’ve just got a 1 year fix at 4% for savings so I’ll see which way rates are going for a few months I think. 

They are nominally priced at £1, and then are sold at auction and the price received might be more or less than £1.

One year fixes are good IMO. That rate won't stick around for long (as market yields have come down today) and will come down reasonably quickly so I'd fund it ASAP.

Some say the opposite and that the BoE are likely to raise rates in November

That may well be the case, but I'm commenting on past data rather than speculating on future data, e.g. 1 year gilt opened at 4.0% on Friday, now is 3.6%. It may revert but I don't have a crystal ball.

BoE increases are already priced into these rates, but actual increases may exceed or fall short of market expectations.

aroominyork

Linton said:

NannaH said:

Right, got it now thanks. 

Are Gilts only priced at £1 when they are first introduced ?   Then they rise and fall within the market? 

Doesn’t look like such a good deal now.  I’ve just got a 1 year fix at 4% for savings so I’ll see which way rates are going for a few months I think. 

Gilts are initially  priced at £100.  The published price is in £s.

Is that right? They redeem at £100 but at the launch auction they won't necessarily be issued at that price.

Linton

aroominyork said:

Linton said:

NannaH said:

Right, got it now thanks. 

Are Gilts only priced at £1 when they are first introduced ?   Then they rise and fall within the market? 

Doesn’t look like such a good deal now.  I’ve just got a 1 year fix at 4% for savings so I’ll see which way rates are going for a few months I think. 

Gilts are initially  priced at £100.  The published price is in £s.

Is that right? They redeem at £100 but at the launch auction they won't necessarily be issued at that price.

You are correct it is the price you pay for a gilt and the redemption price of £100 which are the important figures.  WHat anyone else paid for them previously is irrelevent.

Looking at https://www.dmo.gov.uk/data/gilt-market/gilts-in-issue/it would appear that Gilts are currently being issued with a  coupon below market interest rates and then sold for less than £100.  If this is the case it would be interesting to understand why.

MarkCarnage

Linton said:

aroominyork said:

Linton said:

NannaH said:

Right, got it now thanks. 

Are Gilts only priced at £1 when they are first introduced ?   Then they rise and fall within the market? 

Doesn’t look like such a good deal now.  I’ve just got a 1 year fix at 4% for savings so I’ll see which way rates are going for a few months I think. 

Gilts are initially  priced at £100.  The published price is in £s.

Is that right? They redeem at £100 but at the launch auction they won't necessarily be issued at that price.

You are correct it is the price you pay for a gilt and the redemption price of £100 which are the important figures.  WHat anyone else paid for them previously is irrelevent.

Looking at https://www.dmo.gov.uk/data/gilt-market/gilts-in-issue/it would appear that Gilts are currently being issued with a  coupon below market interest rates and then sold for less than £100.  If this is the case it would be interesting to understand why.

The cynic in me says that continuing to issue with <1% coupons defers the debt service cost quite a few years down the line......it may be that they are also trying to appeal to private investors again who may find it more tax efficient. 

Ciprico

It may simply be that it takes several months to launch a new bond, so can get out of sync when rates change significantly and unexpectedly.... 

averageguy11

aroominyork said:

I don't think Truss did anything today to calm the markets so I hope for Friday's price or better when I buy a chunk of TN25 tomorrow. Think I'll also sell my global bond index fund and move it into single gilts. It's not quite Buffett's "when it rains gold put out the bucket not the thimble" territory, but 4.5% essentially tax free (low coupon) looks a good place to be.

On what price did you calculate 4.5% (i assume per annum)?

Edit

No need to reply…i misread a price

JohnWinder

‘Is that right? They redeem at £100 but at the launch auction they won't necessarily be issued at that price. ‘..........

‘would appear that Gilts are currently being issued with a  coupon below market interest rates and then sold for less than £100.  If this is the case it would be interesting to understand why. ‘........

‘The cynic in me says that continuing to issue with <1% coupons defers the debt service cost quite a few years down the line….'

‘It may simply be that it takes several months to launch a new bond, so can get out of sync when rates change significantly and unexpectedly.... ‘

That latter is the sound of common sense.
The price of a bond maturing in 5 years changes a bit almost every time it is traded which could be every day or so, thus changing its yield or the ‘interest rate’ it pays.
If that’s the case, how can the bond issuer print a piece of paper (the bond) or prepare a prospectus stating what its coupon will be if it wants to sell it for exactly £100 and pay interest on it, no more or no less than what another bonds already issued and maturing on the same day, are already paying? Can’t be done, unless it’s issued after the most recent trade for a similar bond and before the next trade.
So the issuer can specify any coupon % it likes on the bond; if the coupon is lower than the existing similar bonds are yielding at the time the new bond is issued, then no one will buy it unless they can buy if for less than £100. If the issuer flukes the coupon to exactly the yield available at the time of issue of the new bond, then the auction will result in the first purchase occurring at £100, otherwise not.