Hargreaves Lansdown and Interactive Investor unlock new gilt issues for DIY investors

Expotter

As reported in the Daily Mail today, investors will now have access to purchase newly issued gilts on the primary market for the first time

https://www.thisismoney.co.uk/money/diyinvesting/article-13117765/Hargreaves-Lansdown-Interactive-Investor-unlock-new-gilt-issues-DIY-investors.html

As far as I understand it, if I hold gilts to maturity I will get the coupon value every year and my original investment back on maturity. But if interest rates drop, could I potentially get a higher return if I sell them before maturity? 
So is buying these directly a good idea? Could it be better than investing in a bond fund instead? Or would it be better to buy them if I just wanted the certainty? 

xylophone

https://www.hl.co.uk/news/what-you-need-to-know-about-buying-government-bonds-gilts

GeoffTF

Expotter said:

As far as I understand it, if I hold gilts to maturity I will get the coupon value every year and my original investment back on maturity. But if interest rates drop, could I potentially get a higher return if I sell them before maturity?

No, you do not get your original investment back on maturity. The maturity value could be more or less than what you paid, and is very unlikely to be equal to what you paid. If interest rates fall more than the market expects, the current market price will rise.

gm0

Sorry GeoffTF.   I think this is a bit misleading.

The point of holding a £100 gilt to maturity is that it is worth the coupons.  And £100 at redemption.
The cash flow is known

It's how bond ladders are made. Known cashflow.  Intermediate central bank interest rate movements be damned.

The price to "buy it" as a fixed cashflow at the start is indeed variable vs the nominal value. Due to the gilt, rate, duration and prevailing interest rates at that moment.  But that is a one off event.  The same is not true at the end for the redemption value.

A linker will have a redemption value with the "inflationary linkage" applied to it the £100 plus inflation (as defined)

Of course the market price you could sell it for along the way will shift with prevailing interest rates vs coupon.  Could be more or less.  Just as the market price of the same bond inside a bond fund would.   Capital value and yield moving against each other.

But the redemption value is the same as when purchased.  Fixed

coyrls

But you will not purchase the gilt at £100, it will be the average of the auction price for the gilt (unlikely to be £100).  In fact buying this way is less certain than buying on the gilt market because at least then you know the price of the gilt prior to making the purchase decision.

GeoffTF

coyrls said:

But you will not purchase the gilt at £100, it will be the average of the auction price for the gilt (unlikely to be £100).  In fact buying this way is less certain than buying on the gilt market because at least then you know the price of the gilt prior to making the purchase decision.

If the gilt has a coupon of 10% and matures in ten years time the price at auction will be much more than the maturity value, in the present market. If the gilt has a coupon of 0.125% and matures in ten years time the price at auction will be much more less the maturity value, in the present market.

george4064

It’s up on the HL website here: https://www.hl.co.uk/shares/ipos-and-new-issues/treasury-2031-gilt-launch

Applications close 4pm today. Personally I don’t like it’s an auction and the price is to be determined after application window closes.

Chances are the admission price will not be 100p, so the yield will be lower or higher than the 4% coupon.

wmb194

george4064 said:

It’s up on the HL website here: https://www.hl.co.uk/shares/ipos-and-new-issues/treasury-2031-gilt-launch

Applications close 4pm today. Personally I don’t like it’s an auction and the price is to be determined after application window closes.

Chances are the admission price will not be 100p, so the yield will be lower or higher than the 4% coupon.

The existing 2031 gilt is trading at 3.95%.

EthicsGradient

GeoffTF said:

coyrls said:

But you will not purchase the gilt at £100, it will be the average of the auction price for the gilt (unlikely to be £100).  In fact buying this way is less certain than buying on the gilt market because at least then you know the price of the gilt prior to making the purchase decision.

If the gilt has a coupon of 10% and matures in ten years time the price at auction will be much more than the maturity value, in the present market. If the gilt has a coupon of 0.125% and matures in ten years time the price at auction will be much more less the maturity value, in the present market.

But does the government ever issue conventional gilts with coupons wildly different from the market borrowing rate for the length of the gilt? Guides say

The coupon rate usually reflects the market interest rate at the time of first issue of the gilt. As a result, there is a wide range of coupon rates available – reflecting how rates of borrowing have varied in the past.

dmo-guide-to-gilts-2010.pdf (londonstockexchange.com)

There can be a small variation, because the coupon will be set at a round number, and between the initial planning and the auction, interest rates may move a bit, but the "10%" and "0.125%" examples don't seem realistic for today, or worth mentioning.

GeoffTF

EthicsGradient said:

GeoffTF said:

coyrls said:

But you will not purchase the gilt at £100, it will be the average of the auction price for the gilt (unlikely to be £100).  In fact buying this way is less certain than buying on the gilt market because at least then you know the price of the gilt prior to making the purchase decision.

If the gilt has a coupon of 10% and matures in ten years time the price at auction will be much more than the maturity value, in the present market. If the gilt has a coupon of 0.125% and matures in ten years time the price at auction will be much more less the maturity value, in the present market.

But does the government ever issue conventional gilts with coupons wildly different from the market borrowing rate for the length of the gilt? Guides say

The coupon rate usually reflects the market interest rate at the time of first issue of the gilt. As a result, there is a wide range of coupon rates available – reflecting how rates of borrowing have varied in the past.

dmo-guide-to-gilts-2010.pdf (londonstockexchange.com)

There can be a small variation, because the coupon will be set at a round number, and between the initial planning and the auction, interest rates may move a bit, but the "10%" and "0.125%" examples don't seem realistic for today, or worth mentioning.

I gave extreme values for illustration. Here are some recent auctions:

https://www.dmo.gov.uk/media/ck0lon4n/pr301123.pdf

They mostly look fairly near the interest rates that were current. 0⅞% Green Gilt 2033 (which was a reissue of an existing gilt) is an obvious exception. Here is the prospectus for that gilt:

https://www.dmo.gov.uk/media/0owhybli/prosp250123.pdf

JohnWinder

'if I hold gilts to maturity I will get the coupon value every year and my original investment back on maturity. '

'Sorry GeoffTF.   I think this is a bit misleading.

The price to "buy it" as a fixed cashflow at the start is indeed variable vs the nominal value.

But the redemption value is the same as when purchased. '

There seems to me to be some unresolved disagreement here about 'getting original investment back', and gm0 might step in to argue her view, explain it or retract it, in fairness to the original questioner.

We all agree the price to buy the bond is likely to be anything other than £100 because they're auctioned in a moving interest rate environment. But £100 is not excluded as a buy price.

The redemption price will be £100.

So to answer the original question, surely it is 'probably not, could be more or less'. I saw no explanation for why GeofTF's explanation was misleading.

'So is buying these directly a good idea?'

That is such a personal matter. As a minimum, if interest rates are low, it seems not a good idea. But as it's a perfectly predictable investment with guaranteed returns, it seems a great idea. It carries the risk of government default (tiny over shorter periods), and that you need to sell, before redemption, when the price is down (only the individual would know that risk).

'Could it be better than investing in a bond fund instead? Or would it be better to buy them if I just wanted the certainty? '

Could be. Single bonds are very similar to funds, with the important distinction that a bond gets closer to maturity every day, ie, its 'duration' or time to maturity (which are similar) head to zero. A bond fund maintains a largely unchanging duration such as 8 years or 20 years. Why is that important? Because when interest rates change, the price of bonds (single or in funds) change, and the longer the duration the bigger the value change with interest rate changes. That won't matter to you with single bonds if you hold to maturity, but one can't hold a bond fund to maturity because it never matures - old bonds continually being replaced by new bonds.

Bond funds do recover their prices after interest rate rises trash their prices, but it takes a duration or so to happen.