Apparent large loss after buying index linked gilt

Lowtrawler

incus432 said:

On a related issue, what is the explanation for the rapid recent change in price and yield on TR26? 

There is less than 9 months to maturity of TR26 and the inflation element is always 3 months in arrears. It means the inflation protection is no longer a significant element in the price and it is priced similar to conventional's. The effective total coupon is approximately 3.8% which can be compared to TY25 or TG26 which offer about 4.2% and 3.75% respectively. The market had been expecting interest rates to fall more rapidly and as that view has changed, the price has fallen to give a higher yield.

You tend to see fairly big swings in pricing in the final year but the reality is dealing costs / spreads will tend to make trading during this period uneconomic unless you are an institutional holder. When purchasing individual IL Gilts, it is always best to consider them as a purchase to maturity unless you are an expert on the bond markets.

incus432

Lowtrawler said:

incus432 said:

On a related issue, what is the explanation for the rapid recent change in price and yield on TR26? 

There is less than 9 months to maturity of TR26 and the inflation element is always 3 months in arrears. It means the inflation protection is no longer a significant element in the price and it is priced similar to conventional's. The effective total coupon is approximately 3.8% which can be compared to TY25 or TG26 which offer about 4.2% and 3.75% respectively. The market had been expecting interest rates to fall more rapidly and as that view has changed, the price has fallen to give a higher yield.

You tend to see fairly big swings in pricing in the final year but the reality is dealing costs / spreads will tend to make trading during this period uneconomic unless you are an institutional holder. When purchasing individual IL Gilts, it is always best to consider them as a purchase to maturity unless you are an expert on the bond markets.

Thanks for that.

I intend to hold to maturity so am most interested in the total return at that point. I need to be able to compare figures for IL and conventional options (and consider tax on the coupons)

How did you arrive at the 3.8% figure above? Is that based on a particular RPI estimate? 

Lowtrawler

incus432 said:

Thanks for that.

I intend to hold to maturity so am most interested in the total return at that point. I need to be able to compare figures for IL and conventional options (and consider tax on the coupons)

How did you arrive at the 3.8% figure above? Is that based on a particular RPI estimate? 

If you look at the gilts yield page I previously linked, it gives you the Implied RPI growth and the real yield. Adding the 2 together gives you the expected yield:

https://giltsyield.com/bond/inflation/

Incidentally, when owning IL Gilts, you should not be interested in the total return, only the real yield. What you are buying is a guaranteed return versus inflation - the real yield. At the point of purchase, you may want to consider expected yield compared to conventionals and also consider if the implied RPI growth is above / below your own view. This could help inform a view on whether you wish to purchase an equivalent conventional. However, most IL Gilt purchasers are simply wanting insurance against inflation with a guaranteed real yield.

LateGenXer

incus432 said:

Having read that HMRC note I am starting to seriously regret buying these gilts in a GIA.  Sorting out the tax due looks like a nightmare.  I may look into selling before the next coupon and just putting the money in to a BS account.

Calculating the tax is not a nightmare, but I found the accrued income rules subtle and error prone.  I went through the process last year, and wrote a calculator that now makes the whole exercise painless.  See:

• https://lategenxer.streamlit.app/Accrued_Income_Calculator
• https://github.com/LateGenXer/finance/blob/main/accrued_income.md

So I hope sorting tax will no longer deter you from holding gilts. Personally I found gilts to be so much better than bond funds -- not only it's more tax efficient, but one can also control duration, and decent yields (for now.)