How do Gilts work in practice?

solidpro

So they only ever sell for £100 and mature at £100? And therefore in years of high inflation, the interest rate has to be high to factor in the likely devaluation of the £100 and balance out the unattractiveness.

Is the term always the same?

Also, it seems unless you're a true player, it doesn't matter which you buy - if it's all balanced out to be around 3.65%, unless perhaps you're privvy to some insider information about interest rates or inflation or something?

gravel_2

Afaik gilts are sold at auction and the price depends on demand. It will typically be around the £100 mark but ultimately if the market doesn't want to pay £100 for X%, then they will pay less so the effective % is better. Likewise, if everyone is running for shelter in gilts and bonds the autions may be oversubsribed and >£100 paid.

You can see more here. https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D2.1A

Linton

solidpro said:

So they only ever sell for £100 and mature at £100? And therefore in years of high inflation, the interest rate has to be high to factor in the likely devaluation of the £100 and balance out the unattractiveness.

Is the term always the same?

Also, it seems unless you're a true player, it doesn't matter which you buy - if it's all balanced out to be around 3.65%, unless perhaps you're privvy to some insider information about interest rates or inflation or something?

They always have a face value of of £100 but their initial price is always set by the normal operation of the market.  However the government will normally set the interest such that the price starts close to par.

The terms vary considerably between a single digit number of years up to 50 or more, especially for index linked gilts.  And of course existing bonds will get old and new bonds ussued which over time wuill provide a wide range of durations.

I dont know where you get your 3.65% from.  One of the benefits of bonds is that the interest in £ terms is fixed, like a fixed term savings account (without compounding).  However you cant get savings accounts for more than 5 years whereas gilts can provide the guaranteed steady fixed interest for decades. 

Bear in mind that almost all gilts are bought by financial institutions dealing with things like fixed annuities, mortgages and other loans where inflation is irrelevent or simply as efficient storage for cash - banks and large companies cant hold £Ms in bags of £20 notes.   They are not designed to be particularly helpful for personal finance.

solidpro

aroominyork said that 2 bonds with completely different interest rates and buy prices are "The yield on both is about 3.65% pa." - so it seems that if such wildly different % and buy price end up being about the same then everything inbetween will be. What I meant is it's about timing....? Like buying at auction for below value betting on the future or with a view on predicting a change in interest rates - and being right before everyone else?

In the past I've see guilts show up within the 20/40/60/80% risk products to create the percentage of the share invested in cash or near-cash. I've never heard of an indivdual buying them, but if I was trying to build my own portfolio based on a general percentage of appetite to risk, I would buy 80% S&P shares and 20% in cash or gilts and then I'd be doing virtually the same thing?

Linton

solidpro said:

aroominyork said that 2 bonds with completely different interest rates and buy prices are "The yield on both is about 3.65% pa." - so it seems that if such wildly different % and buy price end up being about the same then everything inbetween will be. What I meant is it's about timing....?

In the past I've see guilts show up within the 20/40/60/80% risk products to create the percentage of the share invested in cash or near-cash. I've never heard of an indivdual buying them, but if I was trying to build my own portfolio based on a general percentage of appetite to risk, I would buy 80% S&P shares and 20% in cash or gilts and then I'd be doing virtually the same thing?

Gilt funds behave very differently to individual gilts.  With an individual gilt you know exactly how much the bond will be worth at maturity and you know exactly how much interest you will receive in the meantime.  Both are guaranteed.

Gilt funds contain gilts with a range of maturity durations which will be much the same when you sell as when you bought and with a range of interest rates which will change over time.  Nothing is guaranteed.  Personally I dont see any point in them for a private investor. To me your example of S&P 500 shares and cash makes more sense because you know why you are holding each and how you expect them to behave.

solidpro

How about if you just wanted something ultra safe and near-cash for a year or two and you'd maxed out some bank £85k protected bank acounts and savings accounts along with a couple's premium bonds, then maybe a personal investor might consider gilts or gilt funds?

Altior

I dispute the assertion that the market price is always right, ie gilts are never over or under valued. It's usually the case. But a couple of years ago we experienced a squeeze and the BoE bizarrely dumping assets on the market and telling the market in advance, then forced to buy back! It was a good opportunity for the level headed.  

Altior

solidpro said:

How about if you just wanted something ultra safe and near-cash for a year or two and you'd maxed out some bank £85k protected bank acounts and savings accounts along with a couple's premium bonds, then maybe a personal investor might consider gilts or gilt funds?

How are you planning to hold the assets? GIA, ISA? 

Linton

solidpro said:

How about if you just wanted something ultra safe and near-cash for a year or two and you'd maxed out some bank £85k protected bank acounts and savings accounts along with a couple's premium bonds, then maybe a personal investor might consider gilts or gilt funds?

For a year or two you would look at short dated gilts or MM funds.  A typical broad Gilt index fund would be somewhat risky. It could easily go down 5%.in a year

wmb194

Conventional gilts aren't much more complicated than a fixed rate, fixed term savings bond with a building society. You just need a stockbroker, realise you need to pay a bit for the accrued interest from the last coupon date but this can be netted from the next coupon and understand yield to maturity.

Freetrade's currently the only broker that's offering one month UK Treasury bills and these are even simpler as you buy them at issue and in about 28 days you receive your principal plus interest. There's an auction every Friday and you place your order by 21.00 on Thursday. Currently paying c.5% annualised. No access during the term.

https://freetrade.io/treasury

https://www.yieldgimp.com/