Anyone buying gilts right now?

Hoenir

Inflation is projected to rise agan in the coming months. BOE is unlikely to react to short term noise. Be something far more fundamental. 

barbuda

Hi,
Just looking at;
TG50 at a price of £34.48 matures in 2050 and has a 0.625% coupon, bought within ISA.
I am trying to get my head round yields, coupons, yield to maturity, and last but not least dirty prices, ho hum....

If I spent £10k buying TG50 @  £34.48, then I would have 290 gilts, each with a 0.625% coupon.
Each gilt would pay £100 x 0.625% pa, = 62.5p each
62.5p x 290 = £181.25 pa for 25 years = £4,531 total received by 2050.

The price of the gilt will rise to £100 by 2050, though not necessarily exponentially...so in 2050 I would make £100 less £34.48 = £65.52 profit per gilt x 290 = £19,000 profit.

If I add the £4,531 to £19,000 then the total gain is £23,351 over 25 years, so each year (averaged out), I would make £934 profit on an investment of £10k, which is a not too shabby average 9.34% pa profit each year for 25 years.

I know there may be periods where the price stagnates or falls, but it has to be £100 in 2050.
I am trying to keep things simple, but am I missing the obvious?
Cheers

SnowMan

barbuda said:

Hi,
Just looking at;
TG50 at a price of £34.48 matures in 2050 and has a 0.625% coupon, bought within ISA.
I am trying to get my head round yields, coupons, yield to maturity, and last but not least dirty prices, ho hum....

If I spent £10k buying TG50 @  £34.48, then I would have 290 gilts, each with a 0.625% coupon.
Each gilt would pay £100 x 0.625% pa, = 62.5p each
62.5p x 290 = £181.25 pa for 25 years = £4,531 total received by 2050.

The price of the gilt will rise to £100 by 2050, though not necessarily exponentially...so in 2050 I would make £100 less £34.48 = £65.52 profit per gilt x 290 = £19,000 profit.

If I add the £4,531 to £19,000 then the total gain is £23,351 over 25 years, so each year (averaged out), I would make £934 profit on an investment of £10k, which is a not too shabby average 9.34% pa profit each year for 25 years.

I know there may be periods where the price stagnates or falls, but it has to be £100 in 2050.
I am trying to keep things simple, but am I missing the obvious?
Cheers

You are missing the effect of compounding of interest. The gross redemption yield on TG50 is about 5.45% currently. So you would really only earn about 5.45%pa (gross).

If by comparison you put £100 into a savings account earning 5.45%pa AER over 25 years (if that was possible), you would after 25 years have £377 (= 100 x 1.0545^25). But you can't say your gain is £277 (= 377 - 100) and therefore your return each year is 277/25 /100 = 11%pa. Your return is of course 5.45%pa.

barbuda

Hi, thanks for that..
So are you saying that although there would be £23,351 profit on a £10k investment, instead of saying it earned 9.34% pa it should really be interpreted as 5.45% compounded? 

https://curvo.eu/backtest/en/market-index/ftse-100?currency=gbp

The chart shows FTSE 100 compounded at 5.21% over 25 years, so a definite 5.45% might not be too bad...
Food for thought.

barbuda

Hi Ian,
Yup I could be pushing daisies up, but the investment could trundle on if in a Sipp, and £33k will always look better than £10k ;-)
Might be a really boring investment but I might be tempted.. 

seacaitch

With the current policy mix, my guess is that long-dated yields head higher - so better value, perhaps significantly so, awaits the patient.

So no long-dated for me yet.

InvesterJones

barbuda said:

Hi, thanks for that..
So are you saying that although there would be £23,351 profit on a £10k investment, instead of saying it earned 9.34% pa it should really be interpreted as 5.45% compounded? 

https://curvo.eu/backtest/en/market-index/ftse-100?currency=gbp

The chart shows FTSE 100 compounded at 5.21% over 25 years, so a definite 5.45% might not be too bad...
Food for thought.

Does that chart show dividends reinvested? If not, you can add another 3+% to the annualised return. 

brucefan_2

IanManc said:

barbuda said:

Hi Ian,
Yup I could be pushing daisies up, but the investment could trundle on if in a Sipp, and £33k will always look better than £10k ;-)
Might be a really boring investment but I might be tempted.. 

Oh I don't think it's a boring investment. I've been keeping an eye on TG50 myself. I've been buying much shorter dated low coupon gilts recently, as a replacement for maturing NS&I Savings Certificates because you can no longer cash in the new issues of them during the term, whereas you can always sell gilts in an emergency and the taxable income is tiny.

If you don't mind me asking, which shorter dated low coupon gilts have you been interested in?

EthicsGradient

InvesterJones said:

barbuda said:

Hi, thanks for that..
So are you saying that although there would be £23,351 profit on a £10k investment, instead of saying it earned 9.34% pa it should really be interpreted as 5.45% compounded? 

https://curvo.eu/backtest/en/market-index/ftse-100?currency=gbp

The chart shows FTSE 100 compounded at 5.21% over 25 years, so a definite 5.45% might not be too bad...
Food for thought.

Does that chart show dividends reinvested? If not, you can add another 3+% to the annualised return. 

Yes, reinvested. Compare with Chart Tool | Trustnet (set start date to May 2000). With reinvestment, total growth around +250%, and you can add the FTSE 100 index itself to the chart (under 'Indices'), and it shows the same. You can then switch the chart basis to 'without income reinvested', and the index growth drops to just +50% (there's a glitch in the ETF data during Oct 2001 which means its unreinvested returns around that point show a false sudden drop).

SnowMan

barbuda said:
So are you saying that although there would be £23,351 profit on a £10k investment, instead of saying it earned 9.34% pa it should really be interpreted as 5.45% compounded? 

Yes essentially it is a 5.45%pa return, the compounding is just important in the sense that you need to allow for it to make the return figure meaningful and comparable with other savings/investments of different terms.