Gilts 101?

ChilliBob

GeoffTF 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.

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.

What sort of scale do you think it'd be now to get a better price from a market maker? I have no idea if its say 10k, 50k or 250k type values! I suspect more the middle to top ones above! 

ChilliBob

NedS said:

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! 

Thanks @NedS, it was actually a post you made on another thread which made me view gilts differently. If you will it sort of sowed a seed in mind worth exploring further.

Ciprico

Seems the gilt sale is over for now

No short term gilts available for less than £100 and interest rates less than 1%

Google: HL gilts 

Linton

Ciprico said:

Seems the gilt sale is over for now

No short term gilts available for less than £100 and interest rates less than 1%

Google: HL gilts 

???There are lots of them, nothing has changed.

For example:
https://www.hl.co.uk/shares/shares-search-results/t/treasury-4.25-07122027-gilt

The short term gilts with coupons at around 0.125 and prices significantly below £100  will have effective returns of around 4% taking into account the capital gain at maturity.

For example:
https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-31012024-gilt

ChilliBob

Thanks Linton. So that's just factoring in the fact that it's £96 odds to buy, so that's you're guaranteed 4% if held to maturity (the interest is minimal but tips the 96.x into nearly 4%.

So less than the equivalent conventional fix, but with no tax to pay on the gain as the main attraction. Interesting! (no pun intended!) 

Linton

ChilliBob said:

Thanks Linton. So that's just factoring in the fact that it's £96 odds to buy, so that's you're guaranteed 4% if held to maturity (the interest is minimal but tips the 96.x into nearly 4%.

So less than the equivalent conventional fix, but with no tax to pay on the gain as the main attraction. Interesting! (no pun intended!) 

Plus huying and holding a Gilt will incur some platform charges.

aroominyork

ChilliBob said:

Thanks Linton. So that's just factoring in the fact that it's £96 odds to buy, so that's you're guaranteed 4% if held to maturity (the interest is minimal but tips the 96.x into nearly 4%.

So less than the equivalent conventional fix, but with no tax to pay on the gain as the main attraction. Interesting! (no pun intended!) 

If TN24 had 12 months to run then the yield would be a little over 4% based on £96 buy price but it has over 15 months so you need to adjust for that. To understand the detail you could work through this thread. The midprice on LSE's website now is 96.06 which gives a YTM (XIRR calc) of 3.34%. The buy price on Interactive Investor is 96.22 (previewing an order) which gives a YTM of 3.21%.

biscan25

Linton said:

ChilliBob said:

Thanks Linton. So that's just factoring in the fact that it's £96 odds to buy, so that's you're guaranteed 4% if held to maturity (the interest is minimal but tips the 96.x into nearly 4%.

So less than the equivalent conventional fix, but with no tax to pay on the gain as the main attraction. Interesting! (no pun intended!) 

Plus huying and holding a Gilt will incur some platform charges.

In some cases, but usually only if held within an ISA.

soulsaver

I have checked charges with Interactive Investor: For me, buying online is my usual dealing fee, £6 (and maybe free if I have credit left from the monthly fee).

There is no additional charge to hold. Not sure without revisiting the message whether there is another £6 charge at maturity.

So minutiae questions: 


Coupon(is it?) If bought now you'd get 2 x 0.125%  - first at 31/01/23 and 2nd again at 31/01/24?

Is it paid half yearly?

And when working out comparatives, @aroominyork rightly took the actual time invested into account, whereas I've seen other posts talk about 1 or 2 year fix equivalents when there has been 15/16 or 27/28 months to run.

So impact on the exact calculation: How soon after maturity to see the funds returned? I've seen a month mentioned?

Anyone comment on 'usual' time scales? Or is it always a month after maturity date?

JohnWinder

Can you not use the YIELD function in excel to work out the yield of a bond which isn’t allowing the mental arithmetic useful when there are a whole number of years left to maturity?