Index-Linked Gilts question

valiant24

In the attached screen shot from Yieldgimp, what can "Gross Real Yield" mean, given that the future yield in unknown as it is a function of future RPI/CPI?

Perhaps it is the yield without inflation?  So,for T28 for example, which has a "Gross Real Yield" of 0.49%, the gilt will pay at least that yield if held to maturity?

Thanks 
V

Nebulous2

It's the yield over inflation. If you hold it to maturity you will get inflation plus that amount. 

Edit to add:- if you go to the help centre in yield gimp it gives this definition:

"Similar to gross redemption yield for conventional gilts, this gives an idea of the real yield of an index-linked gilt - or the return in excess of any RPI growth."

valiant24

Nebulous2 said:

It's the yield over inflation. If you hold it to maturity you will get inflation plus that amount. 

Right.  So it's guaranteed not to lose money in absolute terms if held to maturity?

Nebulous2

valiant24 said:

Nebulous2 said:

It's the yield over inflation. If you hold it to maturity you will get inflation plus that amount. 

Right.  So it's guaranteed not to lose money in absolute terms if held to maturity?

Yes - that's it. I've just edited my first post to give the yield gimp definition. 

DRS1

Is it related at all to the Breakeven RPI growth figure shown further along?  So if actual RPI turned out to be 2% for T28 instead of 3.26% would that wipe out the 0.49%?

Nebulous2

DRS1 said:

Is it related at all to the Breakeven RPI growth figure shown further along?  So if actual RPI turned out to be 2% for T28 instead of 3.26% would that wipe out the 0.49%?

You will beat RPI, whatever happens, with those IL gilts at that price. The breakeven RPI growth is the rate RPI needs to be to beat the equivalent conventional gilt. If RPI is less than 3.26% between now and the maturity rate in 2028 a conventional gilt comes out ahead. If it is over 3.26% the IL gilt comes out ahead. 

valiant24

One more question, the answer to which I am struggling to find the answer via Google searching, and to which I have had two different answers from two AI engines(!):

I understand that the coupon on an index-linked gilt is taxable, and that any capital gain is not.
What about the RPI uplift (which comes at the end I think)?

DRS1

With an ILG both the coupon and the maturity value are index linked.  So the indexation on the coupon will be subject to income tax just like the rest of the coupon but the indexation on the maturity value will be free from CGT just like the rest of the maturity value.

aroominyork

For our Japanese viewers, what happens if there is deflation/negative inflation?

masonic

aroominyork said:

For our Japanese viewers, what happens if there is deflation/negative inflation?

What happens when the denominator is larger than the numerator (taken from the T28 prospectus)?

I don't think anyone need trouble themselves with the possibility the cost of living will get cheaper over the next few years. But if the unthinkable happened, it would be equivalent to having invested in funds holding long gilts over the past few years to hedge the risk of annuity rates falling.

aroominyork

So ILGs are an insurance policy against higher than forecast inflation, and like all insurance policies you pay a premium. Presumably for ILGs it works something like - and this is only for illustrative purposes - if inflation is forecast to be 3% then anything between 2.95% and 3.05% is profit for the house. What is the spread and how does it work in practice?