Longer duration Gilts - anyone?

ChilliBob

That's interesting Linton. If you don't want to sell in the short/medium term and are happy holding a gilt for say 20 years it seems the yield is decent.

From what I can see the short duration - say a couple of years, and this 20 year duration are similar yield, however, the stuff in between is lower yield.

Doesn't quite make sense to me why the relationship isn't more linear and seems more curved (hence the term yield curve!) 

ChilliBob

Alexland said:

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.

See the mental stuff that was happening to bonds not long ago puts me off anything bar holding to maturity and having a degree of certainty! I'm aware equities can be more volatile, but you accept this comes with the additional returns (hopefully) compared to bonds. 

zagfles

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?

If you intend buying an annuity you surely don't want gilts that mature when you buy the annuity, you want ones that mature a decade or two afterwards, so you hedge annuity rates (if the gilt price rises annuity rates fall and vv)

Alexland

ChilliBob said:

See the mental stuff that was happening to bonds not long ago puts me off anything bar holding to maturity and having a degree of certainty!

I can see how bonds will have got a bad reputation from what happened but its worth looking at them with fresh eyes as they are now reasonably priced so a very different proposition.

I dunno if fixing the rate by holding a gilt long term to maturity gives much certainty as you might find if inflation is high or the pound devalues you have locked into a gradual reduction in your global spending power while suffering price volatility along the way.

If you really want bonds to be a rock in your portfolio then I'd suggest looking at shorter duration circa 5 years where there won't be much volatility and the rate of return looks comfortably above inflation.

ChilliBob said:

I'm aware equities can be more volatile, but you accept this comes with the additional returns (hopefully) compared to bonds. 

People forget sometimes it can be a long wait for the enhanced returns from equities to deliver.

We all need to be mentally prepared for the next time we have a decade or more of bonds outperforming equities.

If stock markets continue to climb above my wildest expectations I will continue to lock in those gains by derisking into bonds. We must be due at least a correction soon.

ChilliBob

zagfles said:

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?

If you intend buying an annuity you surely don't want gilts that mature when you buy the annuity, you want ones that mature a decade or two afterwards, so you hedge annuity rates (if the gilt price rises annuity rates fall and vv)

That hadn't even factored into my thoughts to be honest. As bizarre as it sounds I think my pension is the last thing I'd intend to spend - since it's outside my estate. I'd be looking to run down the Gia first, then ISAs etc. It's a good point though, and reminds me, as a totally separate thing, I need to try my head around my wife's Db pension! 

ChilliBob

Alexland said:

ChilliBob said:

See the mental stuff that was happening to bonds not long ago puts me off anything bar holding to maturity and having a degree of certainty!

I can see how bonds will have got a bad reputation from what happened but its worth looking at them with fresh eyes as they are now reasonably priced so a very different proposition.

I dunno if fixing the rate by holding a gilt long term to maturity gives much certainty as you might find if inflation is high or the pound devalues you have locked into a gradual reduction in your global spending power while suffering price volatility along the way.

If you really want bonds to be a rock in your portfolio then I'd suggest looking at shorter duration circa 5 years where there won't be much volatility and the rate of return looks comfortably above inflation.

ChilliBob said:

I'm aware equities can be more volatile, but you accept this comes with the additional returns (hopefully) compared to bonds. 

People forget sometimes it can be a long wait for the enhanced returns from equities to deliver.

We all need to be mentally prepared for the next time we have a decade or more of bonds outperforming equities.

If stock markets continue to climb above my wildest expectations I will continue to lock in those gains and derisking into bonds. We must be due at least a correction soon.

Interesting points as always mate, especially regarding the long term fix and the nature of the economy. I mean, the fixes we (well me) had maturing were nearly always below the easy access rates by the time then matured!

The correction side of things, well, that's a whole different bag eh? Just yesterday my Google feed was filled with something from GS saying they had revised up their S&p prediction for the year, and some other business insider article said yep, correction coming very soon! Even the professionals don't have an agreed consensus, as always .!

Back on track, I'm considering the 2031 bond now, seems like it'd follow on from my TN28 fairly nicely. 

Alexland

ChilliBob said:
The correction side of things, well, that's a whole different bag eh? Just yesterday my Google feed was filled with something from GS saying they had revised up their S&p prediction for the year, and some other business insider article said yep, correction coming very soon! Even the professionals don't have an agreed consensus, as always .!

Yes its always uncertain but the proportion of the market returns attributable to hopes for AI reminds me of how the market was driven by Internet 25 years ago.

In the end investors had often backed too many of the wrong companies AOL etc and it's hard to unwind such overvaluations smoothly.

History doesn't repeat but it rhymes.

Maybe this time it's different.

ChilliBob

This time it's different. 100%.… lol. Supposed to be one of the most dangerous things investors say and believe!

Tricky though, last time I was convinced the US was too 'hot' I started a position in a European index fund to tilt away from the US. Admittidly, not with huge conviction, but turns out it's not increased by much, where as the US or Global index has more so.

It's these uncertainties which make me keep quitr a few years worth of spending in cash or near cash, you never know what's round the corner equities wise. (or indeed in other walks of life) 

OldScientist

zagfles said:

OldScientist said:

ChilliBob said:

Hey guys, 

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?

If you intend buying an annuity you surely don't want gilts that mature when you buy the annuity, you want ones that mature a decade or two afterwards, so you hedge annuity rates (if the gilt price rises annuity rates fall and vv)

The modified duration of the annuity is roughly the life expectancy at purchase divided by two (although the duration actually varies with yield curve and the life table used, hence 'roughly'). So, yes, you are correct, but how long will depend on age. However, any difference in the durations of the gilt and annuity (which are hard to match exactly since you don't actually know the life table or internal yield used for the annuity, although the duration can be estimated by seeing how much the payout rate changes with yields) will lead to changes in the amount of income purchased.