buying an individual gilt question

aroominyork

Looks like I've been corrected! I built a spreadsheet yesterday looking at the total return - capital and interest - by the time of maturity compared to the current price and divided by the number of years the gilts were held. The longer dated ones showed a higher percentage but something in the back of my head was saying 'discounted cash flows' and I suspect it was about having to wait decades for your capital to be returned. masonic, please correct this because I'll be gobsmacked if it's correct.

masonic

aroominyork said:

Looks like I've been corrected! I built a spreadsheet yesterday looking at the total return - capital and interest - by the time of maturity compared to the current price and divided by the number of years the gilts were held. The longer dated ones showed a higher percentage but something in the back of my head was saying 'discounted cash flows' and I suspect it was about having to wait decades for your capital to be returned. masonic, please correct this because I'll be gobsmacked if it's correct.

Yes, essentially correct. Nominal forward rates are determined by considering bonds of different durations and what they imply, when taken together, about future rates. So if you had a 1 year gilt at a particular yield, and a 2 year gilt at another yield, you can treat the 2 year gilt as being composed of the 1 year yield and an implied forward yield corresponding to that required in year 2 to achieve the same overall return. In this case where the yield curve is essentially inverted, there is an opportunity cost to buying longer duration debt, so while you might see a yield of 3.9% for a 30 year gilt, for example, you can treat this as a compounded rate that varies along the journey to maturity according to the yields of gilts of other maturities. At the moment, those higher yielding short dated gilts are depressing the implied yield of the later years, as you could buy one of those shorter dated gilts and at maturity reinvest in a lower yielding asset to achieve the same return.

MarcoM

In a nutshell, is the 2030 gilt listed by the OP a better option than cash fixed rate accounts in a SIPP which has ten years left to run till it is used? 

aroominyork

Thanks. Do you agree that short dated nominal gilts look good value compared to bond funds, and potentially compared to cash?

masonic

MarcoM said:

In a nutshell, is the 2030 gilt listed by the OP a better option than cash fixed rate accounts in a SIPP which has ten years left to run till it is used? 

It would very likely be a better option than cash held within the SIPP, which would normally earn very little if any interest. A crystal ball would be needed to predict future savings rates outside of the SIPP if that were a relevant comparison for the OP.

masonic

aroominyork said:

Thanks. Do you agree that short dated nominal gilts look good value compared to bid funds, and potentially compared to cash?

Bond funds? I'd be terrified to hold a UK government bond fund at the moment.

I am and will continue to weigh up cash options vs gilts of appropriate duration. Things are very fluid at the moment. In the last few days a calculation is out of date very quickly, sometimes within hours.

aroominyork

I wasn't thinking of a gilt fund. Thinking of short dated corporate bonds, partly because as they come up to maturity the cost of refinancing might lead to defaults at BBB level. Also global aggregate index funds (as we've discussed before) because comparative returns on short dated gilts look worth locking in. 

masonic

aroominyork said:

I wasn't thinking of a gilt fund. Thinking of short dated corporate bonds, partly because as they come up to maturity the cost of refinancing might lead to defaults at BBB level. Also global aggregate index funds (as we've discussed before) because comparative returns on short dated gilts look worth locking in. 

I'm not keen on corporate bonds in general, especially the lowest rated investment grade ones. Heading into a global recession with high interest rates driving significant increases in the cost of refinance... Not where I'd be.

With global aggregate, you'd still have interest rate sensitivity unless you can find a short dated fund. I think 4%+ on UK/US government debt makes any low risk low return proposition far less attractive.

aroominyork

masonic said:

A_T said:

I guess it's like buying an annuity - but with the principle returned on a certain date.

I'm not sure what platforms allow investors to buy individual gilts - I know HL do but not Fidelity.

Interactive Investor do. I believe iWeb/Halifax do, but it may be telephone only.

I bought a nominal gilt online on ii a few weeks ago. Today it cannot be traded online. I spoke to ii who explained this is due to market volatility but they said phone trading would be charged at the usual online rate (£7.99) and not at the standard £49 phone dealing rate.

boxedin

Just bought some tn24  The gry on the brokers site 3.19 the gry on sharescope 4.36 The spread is 1.05 I am assuming that is the reason for the difference but I could be wrong either way its better than cash in an isa for me

I am interested in index linked gilts, the spread looks to be about 2.5% !. Does anyone have experience of buying these and the pitfalls. in these volatile times. Some went up by 20% yesterday I am guessing thats because of BOE purchases