Index-Linked Gilts question

GeoffTF

zagfles said:

So how do funds operate? Do they hold till maturity and then buy 10 year gilts? Or do they sell eg 2 years before maturity and buy 8 year gilts?

If it is an index tracker, it holds all the gilts to maturity and buys all the new issues in their market weights. A positive or negative cash balance can be avoided by creating or redeeming units.

masonic

aroominyork said:

masonic said:

What about the iShares up to 10 year ILG fund? Effective duration is quite reasonable at 4 years.

iShares' factsheet states effective maturity of 5.24%.

What was the date of the factsheet? I got the info from the iShares website, which is kept updated. Effective duration will zigzag as ILG mature, and others come into the 10 year scope.

aroominyork

April 2025 - below.

https://www.ishares.com/uk/individual/en/products/331735/ishares-up-to-10-years-index-linked-gilt-index-fund-uk today shows 5.08 years. Maybe you looked at the yield by mistake?

masonic

aroominyork said:

April 2025 - below.

https://www.ishares.com/uk/individual/en/products/331735/ishares-up-to-10-years-index-linked-gilt-index-fund-uk today shows 5.08 years. Maybe you looked at the yield by mistake?

Turns out I managed to look up the iShares Up To 10 Years Gilt Index fund by mistake (index, not index linked). Doh!

aroominyork

Back to the question of ILG index funds vs. individual ILGs. If you do not hold them to maturity, is the potential variance – the gain or loss caused by the clean price not following a straight line towards par – the same as with conventional gilts or do other factors come into play?

masonic

aroominyork said:

Back to the question of ILG index funds vs. individual ILGs. If you do not hold them to maturity, is the potential variance – the gain or loss caused by the clean price not following a straight line towards par – the same as with conventional gilts or do other factors come into play?

They have the same characteristics of conventional gilts, but with index linking layered on top. To some extent the interest rate sensitivity would be dampened by rising interest rates being associated with rising inflation, but it doesn't take much duration to overwhelm that if selling before maturity.

Linton

aroominyork said:

Back to the question of ILG index funds vs. individual ILGs. If you do not hold them to maturity, is the potential variance – the gain or loss caused by the clean price not following a straight line towards par – the same as with conventional gilts or do other factors come into play?

The price of any bond is fixed when you buy and fixed ( in either £ or real terms)  at maturity. Between those 2 fixed points the price is solely determined by the markets.

The main driver of the IL bond market is the interest rate for regular bonds. Clearly if interest rates were higher than expected inflation people would prefer to invest in the regular bonds and hence the price of IL bonds would decrease. If interest rates were low IL gilts would be seen as good investments and so more people would buy them pushing the price up.

IIRC prior to the recent bond crash long dated IL gilts were trading at a clean price of around £180. Once interest rates rose above expected inflation  the IL price quickly dropped to below par.

aroominyork

Linton said:

aroominyork said:

Back to the question of ILG index funds vs. individual ILGs. If you do not hold them to maturity, is the potential variance – the gain or loss caused by the clean price not following a straight line towards par – the same as with conventional gilts or do other factors come into play?

The price of any bond is fixed when you buy and fixed ( in either £ or real terms)  at maturity. Between those 2 fixed points the price is solely determined by the markets.

The main driver of the IL bond market is the interest rate for regular bonds. Clearly if interest rates were higher than expected inflation people would prefer to invest in the regular bonds and hence the price of IL bonds would decrease. If interest rates were low IL gilts would be seen as good investments and so more people would buy them pushing the price up.

IIRC prior to the recent bond crash long dated IL gilts were trading at a clean price of around £180. Once interest rates rose above expected inflation  the IL price quickly dropped to below par.

Or even £395 for a very long dated 2073 ILG.

PS  You say “Clearly if interest rates were higher than expected inflation people would prefer to invest in the regular bonds and hence the price of IL bonds would decrease.” Is that correct? If interest rates are say 5% and inflation is forecast at 2%, people would still buy linkers if they wanted to protect against inflation being higher than forecast. They would not be foregoing the return that regular gilts offer.

Linton

aroominyork said:

Linton said:

aroominyork said:

Back to the question of ILG index funds vs. individual ILGs. If you do not hold them to maturity, is the potential variance – the gain or loss caused by the clean price not following a straight line towards par – the same as with conventional gilts or do other factors come into play?

The price of any bond is fixed when you buy and fixed ( in either £ or real terms)  at maturity. Between those 2 fixed points the price is solely determined by the markets.

The main driver of the IL bond market is the interest rate for regular bonds. Clearly if interest rates were higher than expected inflation people would prefer to invest in the regular bonds and hence the price of IL bonds would decrease. If interest rates were low IL gilts would be seen as good investments and so more people would buy them pushing the price up.

IIRC prior to the recent bond crash long dated IL gilts were trading at a clean price of around £180. Once interest rates rose above expected inflation  the IL price quickly dropped to below par.

Or even £395 for a very long dated 2073 ILG.

PS  You say “Clearly if interest rates were higher than expected inflation people would prefer to invest in the regular bonds and hence the price of IL bonds would decrease.” Is that correct? If interest rates are say 5% and inflation is forecast at 2%, people would still buy linkers if they wanted to protect against inflation being higher than forecast. They would not be foregoing the return that regular gilts offer.

The £385 figure comes from old IL bonds using dirty pricing. This changed some time ago.

Almost all IL bonds are bought and traded by pension companies. What a private investor would do is pretty irrelevant,

masonic

Pension companies would be buying them for an income stream to match inflation linked liabilities. So probably not going to switch to nominal based on guesses about future inflation. Or at least I'd hope not.

Though if a pension fund cashed in a few years ago and sat in cash, then bought back recently, they'd be quids in.