Gilts 101?

soulsaver

"You also need to consider the market spread, which is very unfavourable for retail investors. You only pay half the spread if you hold to maturity. Spreads are smaller if you trade £50+ on the telephone, with the deal being made directly with a market maker."

I don't follow: There is a buying and selling price. The difference between them is the spread.

You buy at the buying price and hold to maturity when you get the face value. If you bought at the buying price which was below the face value, you'd get £100 minus the buying price as a gain. 

How does that become 'half the spread'?

NedS

Replying inline, in Bold:

ChilliBob said:

Guys, I'm trying to find some decent grounding in gilts to help the decision on whether to buy any or not, but I'm struggling really!

Thus far I seem to have the following in my head (I know there are gaps!)

* You can purchase different maturity gilts. One *could* view this a bit like a fixed savings account, however, you can also sell *before* maturity - which may or may not work out beneficial! 

Yes. The longer the duration (time to maturity), the more volatile they are likely to be as interest rates change, but as you say if you hold to maturity you know exactly what return you will be getting over that time frame.

* If you hold till maturity you know with 100% certainly what you will get back - £10k of 5 Yr gilts gets you £10k in 5 years, plus whatever your coupon is. Assuming the UK government doesn't default!

Yes, see above

* The coupon is taxable in the same way bank account interest is, if unsheltered.

Correct

* A capital gain is tax free... However, surely this means selling before maturity, if holding till maturity then surely there is no gain.

You are correct inasmuch as there are no capital gains tax on gilts. This is because technically there is no capital gain on a gilt - it costs £100 to purchase, pays a coupon and returns the £100 at the end of the duration. However, there are capital gains to be had if you purchase a gilt at below face value and then either sell it for a higher price or hold it to maturity and receive face value upon redemption. For example, TN25 2 year gilts (matures 31/1/2025) are currently trading for around £92.25 and paying a 0.25% coupon. If you purchased now, you'd make around 3.8% annualised return on your investment to maturity, but the vast majority of that return would come as a tax free capital gain upon maturity (or when you sell), with only a small amount returned to you as a taxable coupon. These low coupon gilts are therefore very attractive to high net worth individuals to hold in a general investment account outside of a tax wrapper. A couple weeks ago as gilts sold off, rates were touching 5%. I know if I had won the lottery and had a few million to invest, the prospect of a guaranteed 5% return, tax free would have seemed very appealing. So in answer to your question, no capital gains taxes to pay on gilts, but often there are (tax free) capital gains to be made, regardless of whether you sell for a gain or hold to maturity having purchased for less than the face value.

* If holding a gilt to maturity, and assuming the UK government doesn't default, then this can be directly compared to a fixed term savings account? - so, if you had a gilt paying 4.7% for 2 years and a fixed saver the paying the same... Ignoring transaction costs the gilt is actually the more flexible option since you can sell before maturity. 

Yes, although normally you can still withdraw your cash from a fixed term account, maybe with withdraw penalties. If interest rates have fallen and your gilt rises in value, you can choose to cash in early and take that profit now should you choose. Conversely, if rates have risen and the gilt's value has fallen, it may be viewed as comparable to the early withdraw penalty on a fixed term savings account. I see no clear advantage either way.

So yeah, I feel I have some major gaps in my gilt 101 knowledge, but I'm struggling to find out what really, any links, guides, comments much appreciated! 

GeoffTF

ChilliBob said:

GeoffTF said:

You can find out about gilts here:

https://www.dmo.gov.uk/responsibilities/gilt-market/

You can get prices, redemption yields, accrued interest etc by opening a free account here:

https://reports.tradeweb.com/account/login/

You also need to consider the market spread, which is very unfavourable for retail investors. You only pay half the spread if you hold to maturity. Spreads are smaller if you trade £50+ on the telephone, with the deal being made directly with a market maker.

This point confuses me a bit, why is the spread relevant if you're just buying to hold till maturity? Sorry, that may be a very naive question!

Here is a gilt that I hold:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-22032029-index-linked-gil

The quoted spread is Sell: £97.94 and Buy: £100.44. The mid-market price is £99.19. Wholesale investors will trade very close to the mid-market price. For a small trade, you might buy at a whopping £100.44. (That stock can only be dealt by telephone by the way.) These prices are "clean prices" rather than the "dirty prices" which include indexation. The dirty price will be what you actually pay. The gilt matures at a clean price of £100. You get £100 up-rated by inflation. Gilts are very technical. You should do some reading before you buy them.

GeoffTF

soulsaver said:

"You also need to consider the market spread, which is very unfavourable for retail investors. You only pay half the spread if you hold to maturity. Spreads are smaller if you trade £50+ on the telephone, with the deal being made directly with a market maker."

I don't follow: There is a buying and selling price. The difference between them is the spread.

You buy at the buying price and hold to maturity when you get the face value. If you bought at the buying price which was below the face value, you'd get £100 minus the buying price as a gain. 

How does that become 'half the spread'?

In my example above, the quoted spread is about 2%. About 1% more than mid-market to buy, and 1% less than mid-market to sell. If you buy and sell at quote, you lose about 2%. If you buy at quote and hold to maturity, you get out at mid-market, and lose only one side of the spread, i.e. you lose about 1% to the spread rather than about 2%.

aroominyork

I think you are wrong about online spreads. I have just priced, on Interactive Investor, selling TN25 or buying more. The price difference was between 0.5% and 0.6%. Don't be misled by the indicative prices given in the gilt's headline description.

GeoffTF

aroominyork said:

I think you are wrong about online spreads. I have just priced, on Interactive Investor, selling TN25 or buying more. The price difference was between 0.5% and 0.6%. Don't be misled by the indicative prices given in the gilt's headline description.

Thanks for that. I was alerting people to the spreads. Check before you trade. I have typically got within 0.25% of mid-market trading over the phone with iWeb and AJ Bell. (New style linkers cannot be traded online.) That is in line with your quote, but that is usually much more than for a blue chip share. The spread on the LSE will nonetheless depend on the volatility and liquidity at the time. The spreads are much smaller on the wholesale market, where most of the trading volume occurs. FWIW the advice from a former gilts market maker on the Lemonfool is to trade over the phone directly with a market maker. They are not going to be greatly interested in small trades though. I was once told by an iWeb dealer that my trade was of a good size and I would get a good price on it because it was worth their while. He tried more than one market maker.

soulsaver

aroominyork said:

I think you are wrong about online spreads. I have just priced, on Interactive Investor, selling TN25 or buying more. The price difference was between 0.5% and 0.6%. Don't be misled by the indicative prices given in the gilt's headline description.

   @aroominyork         That was on line prices? 

aroominyork

soulsaver said:

aroominyork said:

I think you are wrong about online spreads. I have just priced, on Interactive Investor, selling TN25 or buying more. The price difference was between 0.5% and 0.6%. Don't be misled by the indicative prices given in the gilt's headline description.

   @aroominyork         That was on line prices? 

Yes. I logged into ii and checked the price to sell the TN25 I own or to buy more. 

Albermarle

Yes, although normally you can still withdraw your cash from a fixed term account, maybe with withdraw penalties.
Almost no fixed term cash savings account will let you withdraw before the end of the term, except in exceptional circumstances, such as having not long to live.
Unless it is held within an ISA, where legally the provider has to allow withdrawals (with a penalty)

ChilliBob

Albermarle said:

Yes, although normally you can still withdraw your cash from a fixed term account, maybe with withdraw penalties.
Almost no fixed term cash savings account will let you withdraw before the end of the term, except in exceptional circumstances, such as having not long to live.
Unless it is held within an ISA, where legally the provider has to allow withdrawals (with a penalty)

That was my view too, making a 'gilt proxy' for a fixed saver actually more flexible. Obviously to take advantage of that flexibility one may have to take a loss, depends on circumstances.