Gilts are cheap again...?

wmb194

CoolGeek123 said:

Can I buy the 10 year UK gilt for my SIPP? If yes, how to do it? I am unable to find this security instument. I can see other ETFs and fixed income funds in my AJ Bell SIPP, but cannot find direct retail gilts for individual investors. 

Yes, you should be able to. Find the LSE ticker e.g., TR27 and search for it. With AJ Bell you'll need to call its dealing line but you'll be charged at the online rate, not telephone.

https://www.ajbell.co.uk/our-services/investment-options/bonds

tichtich

Ciprico said:

What do other people undertand that I don't, does the maths of inflation even out the returns of both ....?

It's probably fair to say that the market prices different instruments to (more or less) pay the same risk-adjusted annual rate of return.

The appropriate question is not which instrument class is fundamentally better value, but which one better suits your circumstances, and which risks would you prefer to take (and perhaps do you agree with the market's assumptions). Any instrument with fixed returns exposes you to inflation risk. If inflation turns out to be higher than the market has priced in, then (other things being equal) you would have been better off with an inflation-linked instrument.

A fully inflation-linked annuity gives you a (pretty much) guaranteed income for life. That's a very safe option for a retiree. But you pay for that safety.

I, for one, fear inflation, partly because I have a fixed annuity as part of my retirement income (though fortunately it's not a very large part). I also doubt that future inflation will be as low as the market is pricing in. I personally would not consider buying long fixed-rate bonds to hold to maturity. (I've considered buying long bonds as a short term speculation on bond yields falling, but so far I've decided not to take that risk.) 

I have most of my retirement pot in shares that pay solid dividends which look like they should be able to keep up with inflation. Of course that's more risky than an inflation-linked annuity. But I think the risk is worth taking for the sake of higher returns. 

dunstonh

Gilts are cheap it says, but are they?



The red line is income reinvested (ie total return).   However, the blue line is unit price with income distributed.     In general, gilts unit price shouldn't go up much as the vast majority of the return is income.  It is still 7% higher than 1995.  The 90s early to mid 90s were low as was pre-credit crunch.

So, we are back in the ballpark after a long period of inflated values but they are not cheap.

Here is the same chart without as much compression (caused by the red total return line).  it shows unit price only

We know that post credit crunch was an artificially high level that was going to unwind at some point.  However, if you strip out the post credit crunch period, it doesn't appear cheap or expensive but within normal range.

GeoffTF

dunstonh said:

Gilts are cheap it says, but are they?

We know that post credit crunch was an artificially high level that was going to unwind at some point.

...

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However, if you strip out the post credit crunch period, it doesn't appear cheap or expensive but within normal range.

Interest rates are lower than they have been since 2008, but they were higher before that:

https://www.propertyinvestmentproject.co.uk/property-statistics/uk-interest-rate-history-graph/

Before 1950, long term bond yields were usually lower than they are now:

https://fred.stlouisfed.org/series/LTCYUK

Linton

I would disagree that gilts are cheap.  Rather I think they are fairly priced for them to do the job they are supposed to do for small investors.  This is particularly true of index linked gilts which are trading close to par and so seem to be a sensible option for cautious investors.

CoolGeek123

Sorry for asking basic questions...but wanted to understand before I make a decision:
The TR28 gilt has the running yield as 5.55% and price as 108 GBP.  Let's say, I invest 5000 GBP to buy this security. Will I get assured returns for next 5 years (2023 to 2028) at 5.55% on my investment? On Dec 2028, will the principle be returned to me? Will the principle returned be 100 GBP per bond or the bond price I paid? 
How to find out the YTM (to maturity) of TR28?

GeoffTF

CoolGeek123 said:

Sorry for asking basic questions...but wanted to understand before I make a decision:
The TR28 gilt has the running yield as 5.55% and price as 108 GBP.  Let's say, I invest 5000 GBP to buy this security. Will I get assured returns for next 5 years (2023 to 2028) at 5.55% on my investment? On Dec 2028, will the principle be returned to me? Will the principle returned be 100 GBP per bond or the bond price I paid? 
How to find out the YTM (to maturity) of TR28?

The running yield is not the YTM (AKA redemption yield). You can find the redemption yield by setting up a free account here:

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

CoolGeek123

I logged into the tradeweb site, but could not find a way to see the YTM?
Can you please post the breadcrumb or the steps?

Linton

CoolGeek123 said:

Sorry for asking basic questions...but wanted to understand before I make a decision:
The TR28 gilt has the running yield as 5.55% and price as 108 GBP.  Let's say, I invest 5000 GBP to buy this security. Will I get assured returns for next 5 years (2023 to 2028) at 5.55% on my investment? On Dec 2028, will the principle be returned to me? Will the principle returned be 100 GBP per bond or the bond price I paid? 
How to find out the YTM (to maturity) of TR28?

The running yield is the interest as a % of the current price. At maturity £100 is returned. So you get a good interest rate but will make a capital loss at maturity. The YTM takes both of these into account.

JohnWinder

‘The TR28 gilt has the running yield as 5.55% and price as 108 GBP.  Let's say, I invest 5000 GBP to buy this security. Will I get assured returns for next 5 years (2023 to 2028) at 5.55% on my investment?’

Yes, that’s my understanding. The coupon is 6%, which is paid on £100, so if you buy it for £108, then you’ll get 100/108 of 6% ie 5.55%.

‘On Dec 2028, will the principle be returned to me? Will the principle returned be 100 GBP per bond or the bond price I paid? ’

Yes, but it’s principal, not principle because it’s the ‘main part’ not a foundation of belief. 

‘How to find out the YTM (to maturity) of TR28?’

Be a bit careful with bond terminology, like YTM. Some definitions and calculations of this term include the coupon payments being reinvested in the bond, and some don’t. I’ll guess that tradeweb does not include coupon reinvestment.

‘I logged into the tradeweb site, but could not find a way to see the YTM? Can you please post the breadcrumb or the steps?’

Before you go to tradeweb find the ISIN for the bond which is GB0002404191 because that’s how they’re  listed on tradeweb. On tradeweb, from the left menu choose ‘closing prices’, which opens up ‘FTSE gilt closing prices’. Select the date of purchase (as this is an input into the yield calculation). From the ‘security type’ pull down menu, select ‘conventional’ and hit ‘submit’. Find your GB0002404191 from the list. Read the yield.

Another way is to use the ‘yield’ function in a spreadsheet program like Numbers or Excel. This is more versatile because you can choose your own ‘buy price’ to model possible returns.