Index Linked Gilts (Dirty prices)

zagfles

pensionslaw said:

This seems to be the most recent thread on linkers and isn't far removed from my own query so hope it's ok to tack onto it...

I'm interested in TR24: https://www.londonstockexchange.com/stock/TR24/united-kingdom/company-page

Just bought some at £1.5078 dirty price (plus separate payment for 98 days accrued interest). By my calculation, RPI-adjusted face value as at today (including carefully calculated interpolation for part months and noting the 3 month lag on these) is £1.537. Questions:
- have I bought at an effective discount of (100*(1.537-1.5078)/1.537)% i.e. roughly 2% ?;
- if I hold to maturity as planned, is my total return (i) that discount plus (ii) the as yet unpaid coupons (minus what I paid for 98 days accrued interest) plus (iii) change in RPI from (now minus 3 months) to (maturity date minus 3 months) ?
- what is a reasonable forecast range for that RPI change and what would you base it on ?
- can I get a better return with cash deposit levels of safety anywhere else over a 6 to 12 month timescale (am aware of the tax advantages of gilts, my marginal tax rate probably 40% for relevant period).

Thanks. Happy to share experiences if helpful, am buying through AJ Bell platform, where I hold most of my SIPP and ISA and non-tax-wrapper investments anyway.     

I think that's pretty much right. One point to bear in mind on (iii) is that's it's the change in RPI index between now (or 3 months ago) and Dec/Jan that's relevant for this, it's not what the value for RPI is then (that measures change over last 12 months)

See https://www.gov.uk/government/statistics/forecasts-for-the-uk-economy-june-2023 for some forecasts, they say RPI range of 4.6% - 11% with an average of 6.3% in "Q4" which I presume is Oct-Dec.

So if, say, Dec 2023 RPI is 6.3%, then the RPI index in Dec 2023 will be 383.1 (ie the Dec 2022 value 360.4 times 1.063) so that would be about a 4.3% increase over March or 2.8% increase over April, so with intermonth interpolation maybe a 3% rise, so adding that to the discount of 2% plus the coupon of a bit under 0.2%, minus any dealing/holding charges, maybe around 5% or a bit less, which is similar to best buy 9 months fixed savings but with a hedge against inflation plus potential access.

RPI index here: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/chaw/mm23

Yes I've been looking at the same thing - buying short dated index linked gilts - it did initially look like a no-brainer, but it's probably not as good at it first seems. I'm new to this so I may have misunderstood something though...

Can you buy these online with AL Bell? HL say you have to phone them and dealing charge is 1%/£50! 

pensionslaw

You have to phone with AJ Bell, but they only charge £9.95 anyway. Ongoing platform admin fee basis treats gilts same as shares, capped at £3.50 per account per month, which I'm already hitting with the shares I'm holding, so more than happy with that. 

jake_jones99

pensionslaw said:

You have to phone with AJ Bell, but they only charge £9.95 anyway. Ongoing platform admin fee basis treats gilts same as shares, capped at £3.50 per account per month, which I'm already hitting with the shares I'm holding, so more than happy with that. 

Glad this thread continues, and I'm surprised there isn't much talk of this index linked gilt. The 2% drop is due to the clean price going lower as you suggested. There is a post further up where I made some predictions of the  RPI. Indeed it's convoluted but once you understand it's easy. Basically you getting in now should be better off than when I got in. Because since then, it went down 2%, but when I got in the RPI was around 2% higher. But I only benefitted from that for 1 2 months. I already put 1/3 of my capital here since it's a great and safe opportunity and I'm thinking if I should get more to benefit from the discount.

GeoffTF

pensionslaw said:

Clean price is based on a unit size of 100 (£face value at issue ?)...

No. Gilts are initially sold by auction.

pensionslaw

Maybe I'm missing something. Since these are linkers, maybe I should have said "nominal" rather than "face" value, as I suppose "face" value could be used to mean the nominal amount adjusted by RPI at any given point, but in any event I'm not sure how them being initially sold at auction is relevant to calculation of, or unit size for, a quoted clean price ?

I'm following the language used here:

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

pensionslaw

jake_jones99 said:

[]

Glad this thread continues, and I'm surprised there isn't much talk of this index linked gilt.

Same. It seems particularly attractive relative to conventional gilts, for company money, as the gain is still partially tax free. 

GeoffTF

pensionslaw said:

Maybe I'm missing something. Since these are linkers, maybe I should have said "nominal" rather than "face" value, as I suppose "face" value could be used to mean the nominal amount adjusted by RPI at any given point, but in any event I'm not sure how them being initially sold at auction is relevant to calculation of, or unit size for, a quoted clean price ?
I'm following the language used here:
https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/

You asked whether 100 was the face value at issue. I took "face value" to mean the value for which they are sold at issue. The answer to that is no. They are sold at auction when they are first issued. The market value at issue can be more or less than 100. New gilts for an issue can be auctioned at any time after the first issue. The clean price at any given time is determined by the market.

Linton

The importance of the 100 value is that is the capital returned at maturity, increased in line with RPI if inflation linked.  So for example if you buy an index linked bond at a clean price of £150 your return will be well below inflation.  Conversely a clean price of £90 is well worth considering.

jake_jones99

It seems the RPI went down faster than in all of its ~60 years worth of history so now it's 4.1% up year to date . There might be a second peak of inflation in the next years, but it looks like this gilt will have been beaten by the interest rates when it matures. Glad I didn't buy the second time. Anyway, it was pretty fun to use it!

tichtich

As it happens, I bought the same bond issue as you, back in June of this year. I was planning to hold them to maturity in 2024. But some shares I was interested in fell to very attractive prices later in the year, so I sold the bonds early. Having bought them below par (I think the clean price was about 98.5p), I got a decent uplift when I sold them.

I'm with Interactive Investor, and I had to do both transactions over the phone, but they only charged me the normal web transaction charge of £3.99. If I remember correctly, they gave me the choice of either saying how many units I wanted to buy or how much I wanted to spend. I'd already decided on the number of units, so I gave that.