Gilts Question

Richmmm5645

I am looking at getting some exposure to Gilts in my SIPP. There are two IA sectors for Gilts:

UK GILTS

UK INDEX LINKED GILTS

What is the difference between these sectors?

Tnx Rich

Richmmm5645

Been doing some more reading and I would be grateful if people could tell me the differences between these additional IA sectors:

Sterling Corporate Bonds

Sterling High Yield Bonds

Sterling Strategic Bonds

TIA....Rich

gabiieve

I don't have a quick and easy answer. Will just recommend the book Smarter Investing by Tim Hale. I read it in January and now understand all the terminology around funds. It has a UK focus as well, so very useful for UK investors

MK62

All listed here......https://www.theia.org/industry-data/fund-sectors/definitions

aroominyork

Richmmm5645 said:

Been doing some more reading and I would be grateful if people could tell me the differences between these additional IA sectors:

Sterling Corporate Bonds

Sterling High Yield Bonds

Sterling Strategic Bonds

TIA....Rich

Sorry to hear you've had a TIA. That might explain your questions.

(Slightly) more seriously, you need to do more reading to avoid asking questions which basically say "please explain bonds to me".

Aegis

Richmmm5645 said:

I am looking at getting some exposure to Gilts in my SIPP. There are two IA sectors for Gilts:

UK GILTS

UK INDEX LINKED GILTS

What is the difference between these sectors?

Tnx Rich

Put very simply, UK gilts are conventional gilts with a fixed rate of interest (called a coupon), while index-linked gilts are linked to a measure of inflation so that the coupon and the redemption value both increase with inflation. As such, with everything being equal, the index-linked gilts are lower risk than the conventional ones, but the corollary is that they can cost considerably more in terms of either capital value or the expected yield. This isn't the case if inflation is negative over the term of your holding, but that is a very rare phenomenon over the longer term.

JohnWinder

Put very simply, UK gilts are conventional gilts with a fixed rate of interest (called a coupon), while index-linked gilts are linked to a measure of inflation so that the coupon and the redemption value both increase with inflation. As such, with everything being equal, the index-linked gilts are lower risk than the conventional ones, but the corollary is that they can cost considerably more in terms of either capital value or the expected yield. This isn't the case if inflation is negative over the term of your holding, but that is a very rare phenomenon over the longer term.’

To offer some mild buffing of that…
Gilts and linkers are both fixed rate, ie the coupon rate is established at issue and doesn’t change; what changes with the linker is the face value (up or down according to inflation/deflation) so that the coupon amount goes up or down but its percentage of the face value is unchanged.
Yes, linkers are lower risk because they remove the risk of unexpected inflation; non-linkers have some inflation protection built in to the yield because we all expect there to be some inflation in future and thus will not lend to bond issuers unless some of the yield is to account for this expected inflation. If inflation turns out to be as expected the linker and non-linker are equally rewarding; with unexpected inflation the linker wins, but with lower than expected inflation the nominal bond wins.
We need to be careful comparing yields of linkers with non-linkers, since the yield of the linker is an inflation adjusted yield whereas the non-linker yield is a nominal yield (like the yield of a stock or stock fund). A stock fund returning 5%/year sounds good until you read inflation is 5%/year - you’re going nowhere. A linker yielding zero %/year sounds bad against a nominal bond yielding 5%/year until you read inflation is 5%/year - neither is more rewarding than the other (tax issues aside).

Richmmm5645

The previous plan for my SIPP was to transition from largely equities to more bonds, in the final years before retirement.

I kept asking my old IFA about bonds, he just said stick to equities and cash. That was a few years ago and he has now retired. Now I keep hearing that bonds are coming back from 30% losses over the past two years, So I would like some safe growth to balance the rest of my SIPP.

However, when I look at the recent perfomance graphs of Gilt funds, I dont see much improvement in their performance. I see corporate bonds increasing, but I understand they are riskier than Gilts.

Aegis

Richmmm5645 said:

The previous plan for my SIPP was to transition from largely equities to more bonds, in the final years before retirement.

I kept asking my old IFA about bonds, he just said stick to equities and cash. That was a few years ago and he has now retired. Now I keep hearing that bonds are coming back from 30% losses over the past two years, So I would like some safe growth to balance the rest of my SIPP.

However, when I look at the recent perfomance graphs of Gilt funds, I dont see much improvement in their performance. I see corporate bonds increasing, but I understand they are riskier than Gilts.

Have you considered buying some conventional gilts outright? If you stagger the payments annually, you can "lock away" cash in a safe home, get a small return, and not worry at all about any possible benefits of trading gilts for profit.

As an example, if you look at the T25 gilt, right now it trades at £96.43, so there is a built-in guaranteed return of £3.57 per gilt at maturity. In addition, you get the coupon, which is based on 2% nominal,  therefore it is currently the equivalent of 2.079%. Not bad for an 18 month term, about the equivalent of 4.3% AER in cash savings.

aroominyork

T25 currently yielding 4.563% https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Aegis

aroominyork said:

T25 currently yielding 4.563% https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Yep - confusingly they are quoting the redemption yield as the yield, while with bonds they ideally should show both redemption and running yields, or at least specify clearly which they are using. In essence, the figure they are quoting includes the effect of the capital uplift to £100 at maturity. For the gilt to be paying a running yield of 4.5%, the current trading value would need to be under £50, so it's obvious if you know what you're looking at, but could be very confusing to anyone unsure of the difference between running and redemption yields.