Buying a gilt for the first time - large buy/sell spread?

Frequentlyhere

Hi all,

I'm looking into buying my first gilt (via Halifax Sharedealing).

Just a dummy run for the moment - I'm looking at TG53 which has YTM of approx 5.45% and another 27 years to run to maturity.

As per Halifax (and the same/similar on HL), the sell-buy prices are 43.37 - 43.82.

So my question is - this looks like a circa 1% spread on buying and selling. Is that right? Seems quite steep, any way to reduce it? If I bought £50k+ does it make any difference?

Any other tips on buying via Halifax much appreciated too as I'm new to the world of gilt buying. 

poseidon1

The  spreads are indicative only , until you get a quote for an actual trade.

The quote on TG53 on HL a moment ago was 43.64 on a £3000 trade.

You can get a  better feel for this by looking at LSE daily trades - see link below-

https://www.londonstockexchange.com/stock/TG53/united-kingdom/trade-recap

Interesting to note very few trades in this gilt over the past few days ( only one trade today so far!), so clearly not popular choice amongst gilt investors.

 Are you planning to hold until maturity? If so a long time to wait for a return which might not beat inflation.

Frequentlyhere

Thanks @poseidon1 I was wondering if it might vary when pressing the button, but didn't want to press the button!

Re: holding it, it would be part of the defensive part of my FIRE portfolio, alongside cash savings and gold. Yields have now reached the point where they quite handily exceed what I can get in cash, being a full 1% over, and they also hold the potential benefit of outperforming if/when markets fall hard and/or inflation comes down. Of course that could work against me too if govt. borrowing situation further deteriorates or other factors.

Out of interest, do you feel pessimistic about it beating inflation? Given the long term rate of CPI inflation is 2.83% (apparently, according to AI and with lots variability) it would seem quite a high bar to clear to exceed 5.4% in the long run?  

Anyway, I personally lean towards trying to cater for all scenarios to some extent. If I'm holding stocks, bonds, cash and gold then hopefully something will perform (except for 2022-23 when nothing actually really did!)

masonic

Index linked gilts are an option that will protect you from high inflation. So you should look at the difference in real YTM of an equivalent linker vs your conventional gilt when weighing up, rather than the risk of zero real return.

Frequentlyhere

Hi Masonic, yes I did have a look at that last night - typically came out to approximately 3% at a 30 year duration, which seems probably about right to me if one had to have a stab of inflation over such a long time period.

I lean towards the non-index linked version mostly as it's slightly more transparent what the return will be at least in nominal terms, though I'm open to arguments for sure.

poolboy

The most recent this is money podcast talked about this, I m tempted too.

OldScientist

Frequentlyhere said:

Thanks @poseidon1 I was wondering if it might vary when pressing the button, but didn't want to press the button!

Re: holding it, it would be part of the defensive part of my FIRE portfolio, alongside cash savings and gold. Yields have now reached the point where they quite handily exceed what I can get in cash, being a full 1% over, and they also hold the potential benefit of outperforming if/when markets fall hard and/or inflation comes down. Of course that could work against me too if govt. borrowing situation further deteriorates or other factors.

Out of interest, do you feel pessimistic about it beating inflation? Given the long term rate of CPI inflation is 2.83% (apparently, according to AI and with lots variability) it would seem quite a high bar to clear to exceed 5.4% in the long run?  

Anyway, I personally lean towards trying to cater for all scenarios to some extent. If I'm holding stocks, bonds, cash and gold then hopefully something will perform (except for 2022-23 when nothing actually really did!)

Are you sure AI is picking up UK and not US inflation. According to the BoE inflation calculator (https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator ), prices have risen by 106.9 times since 1900, making an annualised inflation of 106.9^(1/125)=3.8%

Alternatively, according to the same calculator, since 1950 prices have risen by 29.78 times making an annualised inflation of 4.6%.

Starting date makes a lot of difference, while Britain was on the gold standard (i.e., before 1930) longer term inflation tended to be somewhat more benign (i.e., annual inflation fluctuated between positive and negative cancelling each other out, e.g., see https://fred.stlouisfed.org/series/CPIIUKA with a beginning set to 1825).

I note that the BoE calculator uses CPI, while an alternative calculator at https://www.hl.co.uk/tools/calculators/inflation-calculator uses RPI and gives a rate of 5.3% since 1950.

poseidon1

OldScientist said:

Frequentlyhere said:

Thanks @poseidon1 I was wondering if it might vary when pressing the button, but didn't want to press the button!

Re: holding it, it would be part of the defensive part of my FIRE portfolio, alongside cash savings and gold. Yields have now reached the point where they quite handily exceed what I can get in cash, being a full 1% over, and they also hold the potential benefit of outperforming if/when markets fall hard and/or inflation comes down. Of course that could work against me too if govt. borrowing situation further deteriorates or other factors.

Out of interest, do you feel pessimistic about it beating inflation? Given the long term rate of CPI inflation is 2.83% (apparently, according to AI and with lots variability) it would seem quite a high bar to clear to exceed 5.4% in the long run?  

Anyway, I personally lean towards trying to cater for all scenarios to some extent. If I'm holding stocks, bonds, cash and gold then hopefully something will perform (except for 2022-23 when nothing actually really did!)

Are you sure AI is picking up UK and not US inflation. According to the BoE inflation calculator (https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator ), prices have risen by 106.9 times since 1900, making an annualised inflation of 106.9^(1/125)=3.8%

Alternatively, according to the same calculator, since 1950 prices have risen by 29.78 times making an annualised inflation of 4.6%.

Starting date makes a lot of difference, while Britain was on the gold standard (i.e., before 1930) longer term inflation tended to be somewhat more benign (i.e., annual inflation fluctuated between positive and negative cancelling each other out, e.g., see https://fred.stlouisfed.org/series/CPIIUKA with a beginning set to 1825).

I note that the BoE calculator uses CPI, while an alternative calculator at https://www.hl.co.uk/tools/calculators/inflation-calculator uses RPI and gives a rate of 5.3% since 1950.

Thanks OldScientist, you have neatly summarised the trend with regard to longterm inflation.

Despite central banks efforts to remain in the 2% range (Japan being a deflationary exception), we are in my view seeing an ever increasing upward inflationary trend occasioned by adverse geopolitical events (eg Ukraine invasion), Black Swan events ( covid), manipulation and mismanagement of the global financial system ( 2008 financial crash).  Additionally, there will be pressure on price of resources as supplies dwindle, world population increase ( albeit now slowing), and climate change occassioning more destructive weather patterns.

In short, yes I am  a pessimist with regard to future inflation, and skeptical of long term financial modelling based on past inflationary trends.