Longer duration Gilts - anyone?

ChilliBob

Hey guys, 

I, as I'm sure a few of you also, hold some short term Gilts as proxys for fixed savings accounts, if held to maturity.

Just wondering if anyone holds any much longer term Gilts. I'm toying with the idea of something like TG46 for example. Lowish coupon of 0.875 and a current yield to maturity of almost 4.5%.

I get that convention wysdom would say if cash can be locked up for 20 years you'd be better off investing, but, there's not many people who'd be 100% equities besides an emergency fund.

I tend to keep a decent amount in conventional fixes, and I figure in even a couple of years those rates are probably going to be more like 2.5-3% vs the 5+ we have now.

Just wanted to get others views on this really, only just looked into it and still mulling over the pros and cons in my head and in relation to the rest of my portfolio 

InvesterJones

Depends why you're holding bonds really - the often stated reason is as a diversifier so that in the circumstances you need access to the money and equities are down you don't have to crystallise the loss. For that, long terms bonds held to maturity don't work, better to have short term and then renew when they mature.

For investments sake, then as you say, equities are better long term.

kempiejon

A ladder of maturities is an idea I mulled over. Might yet pop some cash into it. Part of pension planning so I do not have to sell. I have short term gilts maturing 2024, 25 and 26, I also have a fixed term savings account maturing this year. I can see the benefit of sums maturing in 2027, 2028 and 2029 as I move into retirement and start living of my investments to know there is say half my expected drawdown maturing in each of those year, I won't need to sell in a down market or dip into capital if dividends are halted. It's an idea I had for my lump sum when I take the SIPP.

As each issue matures add another at the end of the term. I am not sold on much further out than 5 or 6 years out.

ChilliBob

I do have a ladder already with TN25, T26A, TN28. I guess I was just thinking beyond that. The one I listed, for example, has a fairly low coupon and good ytm. Some more like 6-15 years don't seem as good.

The more logical part of me tells me I should just add to the global index I have. But I know I'd be keeping a balance in fixed cash, which I'd have to pay tax on anyway.. For 20 years though, hmm, I'd be 62 by then! 

Hoenir

I currently use the IGLT ETF.  With the yield inversion that exists. Provides a good balance. 

zagfles

The only long term gilts I'd consider are index linked ones, flat gilts have inflation risk and personally I think equities are safer investments over a timespan of decades. I have some long term IL gilts I intend to use to buy an annuity in maybe 10 years time. 

ChilliBob

I've tried to get my head round linkers a few times. The concept sounds stupidly simple, and great, then you watch some YouTube videos and I end up more confused!

As regards a etf ad mentioned above, my main motivation is the tax free capital gain and small coupon - to minimize any tax due. An etf wouldn't have that benefit if unwrapped, as mine would be. Perhaps a great idea for some with different circumstances though  

OldScientist

ChilliBob said:

Hey guys, 

I, as I'm sure a few of you also, hold some short term Gilts as proxys for fixed savings accounts, if held to maturity.

Just wondering if anyone holds any much longer term Gilts. I'm toying with the idea of something like TG46 for example. Lowish coupon of 0.875 and a current yield to maturity of almost 4.5%.

I get that convention wysdom would say if cash can be locked up for 20 years you'd be better off investing, but, there's not many people who'd be 100% equities besides an emergency fund.

I tend to keep a decent amount in conventional fixes, and I figure in even a couple of years those rates are probably going to be more like 2.5-3% vs the 5+ we have now.

Just wanted to get others views on this really, only just looked into it and still mulling over the pros and cons in my head and in relation to the rest of my portfolio 

Maturing gilts have a number of purposes, so here are a few things to think about
1) Do you need to meet a known liability in 20 years. For example, to use to the proceeds to buy an annuity or something else?
2) Will the income from the coupon form a useful part of retirement spending?
3) If annualised inflation runs at higher than about 4.5% over the next 20 years and consequently degrades the purchasing power of the gilt, will this cause a problem for your plans?
4) Is it likely that you would be forced to sell before maturity?
5) You mentioned in another post about minimising CGT (assuming the money is outside ISA/pension) which is a thought.
6) There is no guarantee that equities will return more than 4.5% in nominal terms over the next 20 years (I don't have the nominal figures to hand, but note that historically UK shares have had a few 20 year periods of negative real returns). But who knows!

ChilliBob

OldScientist said:

ChilliBob said:

Hey guys, 

I, as I'm sure a few of you also, hold some short term Gilts as proxys for fixed savings accounts, if held to maturity.

Just wondering if anyone holds any much longer term Gilts. I'm toying with the idea of something like TG46 for example. Lowish coupon of 0.875 and a current yield to maturity of almost 4.5%.

I get that convention wysdom would say if cash can be locked up for 20 years you'd be better off investing, but, there's not many people who'd be 100% equities besides an emergency fund.

I tend to keep a decent amount in conventional fixes, and I figure in even a couple of years those rates are probably going to be more like 2.5-3% vs the 5+ we have now.

Just wanted to get others views on this really, only just looked into it and still mulling over the pros and cons in my head and in relation to the rest of my portfolio 

Maturing gilts have a number of purposes, so here are a few things to think about
1) Do you need to meet a known liability in 20 years. For example, to use to the proceeds to buy an annuity or something else? - **No! 
2) Will the income from the coupon form a useful part of retirement spending? **No! 
3) If annualised inflation runs at higher than about 4.5% over the next 20 years and consequently degrades the purchasing power of the gilt, will this cause a problem for your plans? **Probably not
4) Is it likely that you would be forced to sell before maturity? ** No
5) You mentioned in another post about minimising CGT (assuming the money is outside ISA/pension) which is a thought. **Yep, that's certainly a goal
6) There is no guarantee that equities will return more than 4.5% in nominal terms over the next 20 years (I don't have the nominal figures to hand, but note that historically UK shares have had a few 20 year periods of negative real returns). But who knows! **Indeed, million dollar question. Clearly I believe they will - it I'd not have the bulk of my £ sitting in global index funds! 

Some really useful points, given my answers above! 

I think it's made me consider a ladder with more rungs, rather than one with three close together and one 16 years after..!

Cheers! 

Alexland

ChilliBob said:

I get that convention wysdom would say if cash can be locked up for 20 years you'd be better off investing, but, there's not many people who'd be 100% equities besides an emergency fund.

I was 100% equities with an emergency fund during the 'return free risk' period of bonds but am now circa 25% bonds overall using a fund in my workplace pension. This week I switched the kids JISAs out of an index fund into a multi-asset fund to lock in some gains and reduce volatility. I still have my LISA, SIPP and the kids SIPPs as 100% equities.

We are all getting older and there is no need to take so much risk with recent stock market gains and now bonds are more attractive.

I get the advantage of holding bonds directly and how with a bond fund you are never really assured of the return as new bonds replace old ones etc but I still prefer the simplicity of holding them via a fund.

Linton

If you buy gilts to protect your money and gain interest you must plan to hold until maturity. Before then the price can be very volatile. Possibly out weighing the interest gained. So ISTM that holding long dated gilts is pointless since they are likely to be far from maturity if you want to sell in the short/medium term.

Unless of course you have some other reason to hold gilts.