Gilt Ladder building tool questions

Pat38493

A while ago on a thread someone (apologies I am not sure who) posted a page with a tool that someone developed to select a gilt ladder.

https://lategenxer.streamlit.app/Gilt_Ladder

Can anyone who knows about Gilt ladders comment on whether the data this is using is current as the help page for this tool seems to be empty?

I am also not sure how to interpret the results, so maybe posters here could help.  I put in that I wanted to have £30K per year over 10 years starting 1st April 2025.  Savings rate 4% marginal tax rate 20%.  Index linked.

The tool says that I need to invest £293K.

If I am interpreting this right, I would need to purchase the rollowing bonds today in various quantities:
TR26
T29
TR31
T33
TRTQ

Further, I need to already set aside £29K in cash for the first year.

Is that what it is telling me or am I misunderstanding something there?  Does this look correct?

Also - when I read the linked pages, it says my bond ladder has to be diversified because I don't want interest rates to be too high or too low or whatever when they are redeemed - that confuses me because I though thte whole point of buying individual bonds is that you know exactly what you are going to get and when, so you don't care what markets or interest rates are doing at the redemption time?

I also need to read up again about clean and dirty pricing as I remember reading some threads about it but I can't remember now.

leosayer

Clean price = the price quoted on most broker websites which doesn't include interest accrued from the previous coupon to the next one. 

Dirty price = the price you will pay to buy a gilt which will include the accrued interest that you are buying. In other words, it doesn't matter if you only buy the bond a week before the next coupon xd date - you are buying the entitlement to receive the full (6 month) coupon.

Thanks for posting this. I am trying to create a gilt ladder calculator on google sheets and finding it really difficult.

michaels

WE had a thread on this where oldscientist amongst others were really helpful and I managed to build something in excel - then found the online resource above which does it all for you.  If does pull updated prices daily as it once broke and I chatted to the developer on their github page.

The 4% is what you forecast that any 'cash' will learn where a bond expires before the draw down date, obviously this is not index linked so it may be that the real return on cash during these periods is lower (or higher) than the model output assumes.  For example the 29k put aside for your first withdrawal in x months (plus any coupons due by then) may not be worth £30k on the planned withdrawal date depending on what the real return on cash over the x months turns out to be.

LateGenXer

I wrote this tool.

Can anyone who knows about Gilt ladders comment on whether the data this is using is current as the help page for this tool seems to be empty?

The tool output states how hold data is:

• "Using gilts in issue on the close of 25 April 2024."
• "Using prices from 26 April 2024, 16:35 (BST)."
• "Using published RPI until March 2024."
  

Savings rate 4%

4% is high.  It's the same as saying that BoE will keep interest rates at least for 4% for 10 years. If you follow the link on the (?) icon next to "Cash interest rate",  it will show what the mark expects to be the BoE interest rate for the 10 years, and it goes below 4% over several years.

And with this high figure the tool is effectively ignoring many indexed linked gilts because it anticipates they won't yield as much. 

Interest rate should be a low figure -- an underestimation -- because if one uses a overestimation the tool will just conclude one might as well leave all in cash!

I'll add a warning about this.

Is that what it is telling me or am I misunderstanding something there?

Yep, your interpretation was right otherwise.

Also - when I read the linked pages, it says my bond ladder has to be diversified because I don't want interest rates to be too high or too low or whatever when they are redeemed - that confuses me because I though thte whole point of buying individual bonds is that you know exactly what you are going to get and when, so you don't care what markets or interest rates are doing at the redemption time?

That Fidelity article explains other bond investment strategies besides ladders.  It states that bond maturities should be diversified.  Ladders maturities are diversified, so it's not inconsistent.

Ladders make sense when you know exactly how much and how long you want to consume.  But people might invest in individual bonds for other reasons besides knowing exactly what and when they'll get.   If people want to invest in gilts for the longer term, then ladders are not ideal.


BTW I recently added more recommended reading on https://github.com/LateGenXer/finance/tree/main/gilts#recommended-reading 

LateGenXer

Oh, and if anybody wants to make a spreadsheet, there's a link for one posted in Lemon Fool in the references too.

Pat38493

LateGenXer said:

I wrote this tool.

Can anyone who knows about Gilt ladders comment on whether the data this is using is current as the help page for this tool seems to be empty?

The tool output states how hold data is:

• "Using gilts in issue on the close of 25 April 2024."
• "Using prices from 26 April 2024, 16:35 (BST)."
• "Using published RPI until March 2024."
  

Savings rate 4%

4% is high.  It's the same as saying that BoE will keep interest rates at least for 4% for 10 years. If you follow the link on the (?) icon next to "Cash interest rate",  it will show what the mark expects to be the BoE interest rate for the 10 years, and it goes below 4% over several years.

And with this high figure the tool is effectively ignoring many indexed linked gilts because it anticipates they won't yield as much. 

Interest rate should be a low figure -- an underestimation -- because if one uses a overestimation the tool will just conclude one might as well leave all in cash!

I'll add a warning about this.

Is that what it is telling me or am I misunderstanding something there?

Yep, your interpretation was right otherwise.

Also - when I read the linked pages, it says my bond ladder has to be diversified because I don't want interest rates to be too high or too low or whatever when they are redeemed - that confuses me because I though thte whole point of buying individual bonds is that you know exactly what you are going to get and when, so you don't care what markets or interest rates are doing at the redemption time?

That Fidelity article explains other bond investment strategies besides ladders.  It states that bond maturities should be diversified.  Ladders maturities are diversified, so it's not inconsistent.

Ladders make sense when you know exactly how much and how long you want to consume.  But people might invest in individual bonds for other reasons besides knowing exactly what and when they'll get.   If people want to invest in gilts for the longer term, then ladders are not ideal.


BTW I recently added more recommended reading on github.com/LateGenXer/finance/tree/main/gilts#recommended-reading 

Thanks for posting and welcome.

This is helpful information especially about the interest rates I have entered.

I doubt that I will follow this strategy entirely for my bridging period to State pensions and DB but I might look into partially doing it to cover the basic expenses.

Interestingly, at the moment at least, the results are that the amount I need to spend to get my required income is pretty close to the back of a napkin approach of just multiplying the amount you need in today's real terms by the number of years - I am not sure if that's usually the case but it seems to be the case at the moment.

LateGenXer

Interestingly, at the moment at least, the results are that the amount I need to spend to get my required income is pretty close to the back of a napkin approach of just multiplying the amount you need in today's real terms by the number of years - I am not sure if that's usually the case but it seems to be the case at the moment.

Right, at the moment real yields (that is, the yield in real terms) are near zero.   This can be seen on the Yield column of https://www.yieldgimp.com/index-linked-gilt-yields

This was not always the case: during the low interest rate periods of the last decade real yields were negative, that is, one would need to pay significantly more than £1 now to get a inflation adjusted £1 far in the future.

Pat38493

LateGenXer said:

Interestingly, at the moment at least, the results are that the amount I need to spend to get my required income is pretty close to the back of a napkin approach of just multiplying the amount you need in today's real terms by the number of years - I am not sure if that's usually the case but it seems to be the case at the moment.

Right, at the moment real yields (that is, the yield in real terms) are near zero.   This can be seen on the Yield column of https://www.yieldgimp.com/index-linked-gilt-yields

This was not always the case: during the low interest rate periods of the last decade real yields were negative, that is, one would need to pay significantly more than £1 now to get a inflation adjusted £1 far in the future.

Great - thanks for developing this tool by the way it is awesome!