Bond ladder and money market funds

Justso65

Hi

I've been using lategenxer.streamlit.app to simulate a bond ladder to get me from 61 to state pension age and a DB pension.

The bond ladder tool uses prices in £ however, when I do a trade preview on interactive investor they seem to quote the prices as the same number but in pence.  So whereas the bond ladder tool may quote, for example, £99.50 for a particular product interactive investor quote around 99.5 pence.  Anyone know why this is the case?

I've also been investigating the Royal London Money market fund as an alternative.  Considering the administration in compiling a bond ladder is it not just easier to use a money market fund like the Royal London one ?  What advantages would a bond ladder offer over a money market fund and vice versa ?

My motivation is to de-risk the period up to SP age knowing the way I invest the money I need for that period will not give the potential returns of other investment options.

Many thanks as always for any replies, JS.

SouthCoastBoy

I just use a MMF for money I need in the next 6 years, currently it is tracking above inflation but I imagine that will soon change, so I will start losing money in real terms. I have never really got my head round the nuances of bonds, and therefore i'm not particularly confident in investing in them.

BobR64

The key difference as I see it is that with a bond ladder you are locking in the yields at the time of purchase.

If this is simply to cover income for a few years (i.e., a "collapsing" ladder) there isn't really any administration once you have set it up.

Hoenir

Justso65 said:

  So whereas the bond ladder tool may quote, for example, £99.50 for a particular product interactive investor quote around 99.5 pence.  Anyone know why this is the case?

Gilts are normally traded in £1 of nominal value. I.E. an institution will be looking to purchase a £1 million of nominal stock as opposed to wishing invest precisely £995,000. 

Bond yields are fixed to maturity. MMF are short term and rates on offer can fluctuate considerably. Short term rates are normally lower than longer term rates. Fixing for the longer term has a degree of risk hence the premium. 

zagfles

Are you talking about a gilts ladder (ie govt bonds)? The advantage of a gilts ladder, particularly an index linked gilts ladder, is you know what you'll get at every maturity. With a MM fund, like with savings account, you don't have a clue, as it'll depend on future interest rates and inflation. 

Hoenir

zagfles said:

 The advantage of a gilts ladder, particularly an index linked gilts ladder, is you know what you'll get at every maturity. 

No the return on indexed linked gilts is not guaranteed to be positive. A common misconception. Highly dependent upon on the future of level of interest rates. 

Lowtrawler

Hoenir said:

zagfles said:

 The advantage of a gilts ladder, particularly an index linked gilts ladder, is you know what you'll get at every maturity. 

No the return on indexed linked gilts is not guaranteed to be positive. A common misconception. Highly dependent upon on the future of level of interest rates. 

Yes, it appears a poor choice of words. With conventional gilts, you know exactly what you are getting at every coupon date and every maturity. It means you are purchasing a fixed yield if you hold for the life of the bond.

With an index-linked gilt, you know that each coupon payment and maturity will return an amount linked to inflation. At the moment, all index-linked gilts can be purchased guaranteeing a positive real return and if you hold for the life of the bond, you are guaranteed that level of real return. However, because inflation is unknown, you don't know the monetary amount. You only know how the value will move in relation to inflation.

Justso65

zagfles said:

Are you talking about a gilts ladder (ie govt bonds)? The advantage of a gilts ladder, particularly an index linked gilts ladder, is you know what you'll get at every maturity. With a MM fund, like with savings account, you don't have a clue, as it'll depend on future interest rates and inflation. 

Gilts, yes.  I am more inclined to certainty of returns in the interim until SP age knowing to get this I need to hold the gilts to maturity.

DRS1

If you are doing this outside a pension or an ISA then a big difference will be the tax treatment.  No CGT on the gilts.

SVaz

I looked seriously at building a Gilt ladder but I’ve stuck with a MMF,  it’s a gamble but as long as interest rates stay above 3% for the next 5 years then it’s about even. 

zagfles

Hoenir said:

zagfles said:

 The advantage of a gilts ladder, particularly an index linked gilts ladder, is you know what you'll get at every maturity. 

No the return on indexed linked gilts is not guaranteed to be positive. A common misconception. Highly dependent upon on the future of level of interest rates. 

Future level of interest rates is completely irrelavent.  At MATURITY, like I said, the real terms value is guaranteed (subject to a few months indexation lag). Before maturity, the value will depend on market conditions, interest rates, inflation etc. But at maturity, market forces, interest rates etc are not relevant. That's the whole point of every bond, the maturity amount is known (in real terms in the case of IL gilts).