A couple of simple gilt questions.. I think!

ChilliBob

Ah okay, not sure what I was getting muddled up with then regarding iweb being better in this instance. Thanks both. 

Johnjdc

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

aroominyork

Johnjdc said:

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

It's interesting. First, put aside the question of whether late October 2025 is the sweet spot for gilt yields, ie the date the market expects the base rate to start falling. A high coupon gilt like TY25 seems a good investment if you do not have to pay tax on the coupon (either your income is within the personal tax allowance or you are tax-wrapped in a SIPP/ISA) but a bad place if you are a 40% taxpayer. So that seems to be reflected in the pricing - lower demand for this gilt (I would not buy it) pushes the price down and hence the gross yield up.

Doctor_Who

Johnjdc said:

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

Not a gilt that's been on my radar due to the coupon value and my requirement to hold in a GIA. In a tax wrapper it does look fairly attractive, and if you intend to hold to maturity your only major variable is the purchase price since both the coupon and redemption price are guaranteed. 

ChilliBob

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Johnjdc

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

True of me - today (or whenever the transfer to HL lands, it left my cash ISA yesterday but no sign yet) I'm buying in an ISA so no problem with the coupon. I really didn't think retail buying was enough to shift the curve... I could be wrong!

Doctor_Who

Johnjdc said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

True of me - today (or whenever the transfer to HL lands, it left my cash ISA yesterday but no sign yet) I'm buying in an ISA so no problem with the coupon. I really didn't think retail buying was enough to shift the curve... I could be wrong!

It would surprise me if it did! Most gilt issues are ~£30-40bn (TY25 being an exception @ ~£17bn), a 1000 retail investors @ £40K each is only £40m, so ~0.1% of the total.

aroominyork

Do institutional investors pay tax on gilt coupons?

cwep2

aroominyork said:

Do institutional investors pay tax on gilt coupons?

No, but there will usually be a level of tax at some point.
Example, institution (e.g. Blackrock) sets up a Gilt fund, people invest in it, fund buys Gilts. They don't pay tax on these, pass on coupons gross to investors. Investors maybe don't pay tax (e.g. inside an ISA) or maybe do (GIA). 
Others maybe the corporate treasury of a large company (e.g. BP) has excess cash and buys short dated Gilts, they will get the coupons gross but pay corporation tax on profits of company as a whole.

The point being that for most institutions they will be indifferent to the capital gain vs coupon part of the return, it will be the overall yield that is the driver of returns.

Delburn

A guess is that the apparent discrepancy has something to do with TY25 being a recent issue.  It was first issued in Jan 23 and there have been a couple more recent auctions by the DMO.  No other 2025 gilts have been auctioned by the DMO this year.

Maybe the market makers are holding a lot of this stock, the market is trying to force the government to pay a premium for new borrowing, and/or the other 2025 gilts are held by less active, buy and hold investors.