TN25, 1/4% Treasury Gilt 2025

aroominyork

This gilt has been mentioned regularly on this forum and has also featured on some of the investment platforms' biggest traders. I do not know whether it is a factor of high demand, but its price has risen to the point where it is only yielding 4.344% while others maturing during the next year or so are yielding over 4.6%, including the low coupon TG25. Spreads seem small at the moment (much less than the headline £0.20) so if you are using gilts as quasi-cash it's worth keeping an eye on prices.

Linton

Interest is paid 6 monthly?  

aroominyork

Linton said:

Interest is paid 6 monthly?  

Yes, always on gilts. Final coupon is paid on day of maturity.

InvesterJones

aroominyork said:

This gilt has been mentioned regularly on this forum and has also featured on some of the investment platforms' biggest traders. I do not know whether it is a factor of high demand, but its price has risen to the point where it is only yielding 4.344% while others maturing during the next year or so are yielding over 4.6%, including the low coupon TG25. Spreads seem small at the moment (much less than the headline £0.20) so if you are using gilts as quasi-cash it's worth keeping an eye on prices.

Still not a bad deal though - very few gilts beat it for higher rate tax payers in the sub 20 years term (TG25 and marginally T26A), plus you get your money back in just over 6 months.

OldScientist

aroominyork said:

This gilt has been mentioned regularly on this forum and has also featured on some of the investment platforms' biggest traders. I do not know whether it is a factor of high demand, but its price has risen to the point where it is only yielding 4.344% while others maturing during the next year or so are yielding over 4.6%, including the low coupon TG25. Spreads seem small at the moment (much less than the headline £0.20) so if you are using gilts as quasi-cash it's worth keeping an eye on prices.

Bonds with lower coupons with exactly the same time to maturity tend to have lower yields than those with higher coupons because their duration (and hence interest rate sensitivity and risk) is higher. However, the modified duration of TR25 is about 0.65 and higher than that for TN25 (roughly 0.57) since they do not have exactly the same time to maturity. This is also marginally true for the bonds maturing in 2026. The tax advantage of the low coupon bonds may also make them more attractive* and, therefore, the prices higher - by eye, the number of transactions for TN25 (looking at the LSE page) over the last week appears to be higher than for TR25.

*A very rough calculation of the tax on the, effectively, one remaining coupon (the coupon 6 months before maturity is almost entirely paid for in the dirty price) would be 4.854*(1-0.5*0.2) (0.5 for one coupon, 0.2 for 20% tax) = 4.36% (i.e. similar to the yield on TN25). A plausible, although possibly incorrect, explanation.

aroominyork

Indeed, OldScientist, though I just took a glance and was surprised by the extent of price difference. The way I taught myself to think of duration is that a lower coupon has a lower price and that means a lower yield because you have some cash (100.09 - 97.67 = 2.42 for TN25/TR25) which can earn interest elsewhere. I know that does not take sensitivity into full account but it's where I started when the concepts used to make my head spin. How do you calculate modified duration please; is there an online calculator (shame it's not built into here)?

OldScientist

aroominyork said:

Indeed, OldScientist, though I just took a glance and was surprised by the extent of price difference. The way I taught myself to think of duration is that a lower coupon has a lower price and that means a lower yield because you have some cash (100.09 - 97.67 = 2.42 for TN25/TR25) which can earn interest elsewhere. I know that does not take sensitivity into full account but it's where I started when the concepts used to make my head spin. How do you calculate modified duration please; is there an online calculator (shame it's not built into here)?

I'd agree that the difference in yields you posted are surprising. Interestingly, in the days when gilts were taxed at source (IIRC pre-1997 or thereabouts), yields were often quoted net of tax (at multiple different rates).

I've generally used two methods to calculate duration 1) my own code (not helpful to you!) and 2) the excel function mduration. For example using the information for UK T 4.125 01/27 pulled off of tradeweb for 1 July 2024, the modified duration can be calculated as follows

=MDURATION(DATE(2024,7,2),DATE(2027,1,29),4.125%,4.4278%,2)

gives (in libreoffice) 2.3742 (compared to 2.3733 on tradeweb).  There are differences in how this can be calculated, but I reckon '2.37' is probably enough decimal places for most practical purposes.

There is an online calculator at https://dqydj.com/bond-duration-calculator/ but I have not used it beyond a quick play (although I have used a few of the other calculators on that site, so assume it is probably 'sound'). You do have to calculate the years to maturity as a decimal which is slightly annoying for real bonds.

Hoenir

Tax is the denominator. Low coupon Gilts are a byproduct of the QE era. Over time they'll mature and the game will change. 

aroominyork

Hoenir said:

Tax is the denominator. Low coupon Gilts are a byproduct of the QE era. Over time they'll mature and the game will change. 

Thanks, Hoenir. I've sorted them by coupon and made a note to find an alternative way to invest after 2061