Which short dated gilt(s) would you buy right now and why?

Aminatidi

Not sure how a wealth manager is relevant here?

I could go stick the lot in a tracker or a multi asset fund but the underlying issue there is I don't want the lot in equities and I'm not sure I want to be paying 1% of AUM to a "wealth manager" forever.

Open to being persuaded but it feels like the answer to a different question

Linton

Which bonds to buy depends very much on why you want to buy vbonds at all.  The OP has stated that they want to be able to sell at any time without risk of significant capital loss.  So no requirement, for example, to diversifiy away from equity for the long term.

Under those circumstances I think a ladder of short dated gilts as suggested by @QrizB would be most appropriate.  Personally I would not bother as the values involved are likely to be trivial compared with the size of the equity holdings.

Aminatidi

@Linton not sure I understand what you mean by "the values involved are likely to be trivial compared with the size of the equity holdings" could you elaborate a little please?

Qyburn

What does HL charge for buying and holding Gilts?

ColdIron

Qyburn said:

What does HL charge for buying and holding Gilts?

£11.95 to buy & sell

1. GIA £0 pa
2. ISA 0.45% pa capped at £45
3. SIPP 0.45% pa capped at £200

OldScientist

Aminatidi said:

I have a six figure sum sat in HL that I want a degree of certainty with as a "barbell" to my global tracker.

Individual low coupon gilts appeal as there's a guaranteed return if held until maturity and the tax benefits as this is an unwrapped account as my ISA limit is used up and will be pretty much every year for the foreseeable.

I don't envisage needing the money but I like having the optionality of "simply" selling the gilt rather than money being locked away like it is in a fixed term savings account.

Where I'm struggling is deciding which one(s) to buy and how long to "lock in" the return for especially with uncertainty about rates.

Appreciate people will have differing views on this and there isn't really a "right" answer so I'd like to hear those views.

I think these are the gilts I'd be considering.

TN24 0 1/8% Treasury Gilt 2024
TN25 0 1/4% Treasury Gilt 2025
T26 0 1/8% Treasury Gilt 2026
TN28 0 1/8% Treasury Gilt 2028

As others have said, it depends on quite what you want to achieve. Assuming that the following are considerations:
1) 'Not too much change' in capital value in the event of needing to sell before maturity
2) A 'reasonable' return
3) Simplicity

1) TN28 has the longest maturity and hence the longest duration. According to tradeweb, the modified duration is 4.2, so a 1 percentage point change in interest rates will see a 4.2% change in price (if rates increase, the price will decrease and vice versa). TN24 has the shortest maturity (modified duration is 0.4 and therefore price will not change much if yields change).

2) The nominal return on TN28 with yield to maturity of 4.5% is almost guaranteed (yield to matuirty relies on reinvestment of the, small, coupons so changes in price between now and maturity will affect the realised rate of return by a small amount). The nominal return on a series of shorter term gilts, e.g. buying TN24 now, then TN25, etc. will depend on what happens to interest rates/yields in the meantime. Forward rates (see https://www.bankofengland.co.uk/statistics/yield-curves and explanations) indicate that the market is 'expecting' a drop in rates over the next 4 years or so (this is implied from current yields and is not a prediction, but, as I've seen it described elsewhere, a 'betting line' for future changes in yields).

3) Buying the longest term gilt is simplest (only one transaction in 5 years), constructing a rolling ladder or buying a new gilt when the old one matures involves a transaction every year or so. A short maturity gilt fund (e.g., iShares UK Gilts 0-5yr UCITS ETF) might be more straightforward than a rolling ladder, but could involve more distributions (and hence more tax).

Bobajobbob

I hold TN24, TN25 and T26 at the moment as a more tax efficient alternative to fixed or instance access savings accounts. They can be liquidated if necessary but otherwise if held to maturity are giving a net yield of c 5% which given current market conditions/risks seems to be a good place to park some cash alongside longer term equity investments.

aroominyork

masonic said:

TG61, albeit 0.5% coupon, is the ultimate lazy option.

masonic said:

Short dated gilts don't ever offer the benefit of material negative correlation with equities, while long dated normally do. So as defensive assets to balance against equities in a portfolio, they are less useful and would require a lower % equities for equivalent volatility reduction. This is a drag on long term returns.

The OP has started another thread about his portfolio but I am posting this because you raise an interesting point about the purposes of bonds which, for many less experienced DIY investors, can be confusing. For many people bonds are simply meant to be the less volatile part of the portfolio if they do not have the stomach for extreme equity swings even if investing for the long term. For those in or approaching drawdown bonds might be in the middle bucket they would access in c.2-5 years if equities fall. Your own interest in bonds - if forced to buy them - would be in the context of your 100% equity portfolio, hoping long dated bonds would rise in price during an equity crash, giving you the opportunity to sell bonds high and buy equities low. For the OP (and me) having seen long dated gilts fall 50% since late 2021, they are not right. 

Horses for courses, but the bond race includes runners who are sprinters, stayers and steeplechasers.

Aminatidi

Agreed I don't believe I'm looking at anything remotely long dated.

This portion of my portfolio isn't about correlation it's about safety and known guaranteed returns 👍🏻

masonic

aroominyork said:

masonic said:

TG61, albeit 0.5% coupon, is the ultimate lazy option.

masonic said:

Short dated gilts don't ever offer the benefit of material negative correlation with equities, while long dated normally do. So as defensive assets to balance against equities in a portfolio, they are less useful and would require a lower % equities for equivalent volatility reduction. This is a drag on long term returns.

The OP has started another thread about his portfolio but I am posting this because you raise an interesting point about the purposes of bonds which, for many less experienced DIY investors, can be confusing. For many people bonds are simply meant to be the less volatile part of the portfolio if they do not have the stomach for extreme equity swings even if investing for the long term. For those in or approaching drawdown bonds might be in the middle bucket they would access in c.2-5 years if equities fall. Your own interest in bonds - if forced to buy them - would be in the context of your 100% equity portfolio, hoping long dated bonds would rise in price during an equity crash, giving you the opportunity to sell bonds high and buy equities low. For the OP (and me) having seen long dated gilts fall 50% since late 2021, they are not right. 

Horses for courses, but the bond race includes runners who are sprinters, stayers and steeplechasers.

I think that's a slight misunderstanding of my reasoning, you have the opportunistic part 100% correct, but I would not buy into the asset class just in the hope of making a quick buck from price movements. I've previously held bonds in my portfolio for most of the 18 years I've been investing. I did not include them because I had any short-medium term need to draw down my investments or take an income from them. They were included for the same reason they are included in multi-asset funds: to reduce the overall risk of my portfolio without sacrificing too much of the returns. In order words the application of Modern Portfolio Theory and an attempt to place my portfolio closer to the efficient frontier. 

The use of cash or cash-like investments (short-dated bonds) for this purpose is sub-optimal, because essentially all you are doing is diluting equities. Whereas, an asset that is negatively correlated with the rest of my portfolio would partially counteract a fall in equities, giving me a bit more bang for my buck. As I strongly believe in the long-term outperformance of equities vs fixed interest, it is better for me to dilute these as little as possible, so naturally I will select the more 'concentrated' form of bond for my portfolio. As I still have a long investment horizon, I hope to outlive the bond I select, and so the only time I would sell it is when it worked in my favour. Most likely that would be when rebalancing into equities, but it might not happen at all. Hence my comment about it being the ultimate lazy option... it may well just sit there untraded until it matures, it will gradually derisk over its lifetime, and I will not need to play the game of laddering it.

I won't revisit the story of my selling up my previous bond holdings, but suffice it to say bonds are a little different than equities, in that you know exactly when they will expire and their cashflows over their lifetime. That means when you observe the effect of central banks slashing interest rates to next to nothing for a decade, you can anticipate what will happen when things go back to normal. When the returns from bonds are pulled forward into capital gain, then someone needs to pay for that. Now they have. We're back at nominal bond returns at around their long term average.

A second factor, that I alluded to above, is that the Treasury has shown its hand in relation to long bonds. Pension funds get into a perilous position when long bonds fall too far as a result of liability driven investment. Additionally the cost of government borrowing rockets. So this mitigates the downside risk when yields are still quite high.

There is a danger in investing of being overly influenced by recency bias. If you look at TG61 itself, it has fallen over 70% since issuance. You might conclude, such an investment is incredibly unsafe based on its past performance, when it would be better to consider the range of possible outcomes for it from here, and what would need to occur for a repeat performance from where we are now.