Index-linked gilt, inflation uplift

aroominyork

I've just received my first T29 coupon payment and the DMO's site (https://www.dmo.gov.uk/data/ExportReport?reportCode=D5I) nicely shows how it is calculated. I hold 45283 units so *0.125% coupon, 50% of that (6-monthly coupon) *1.70874 (index ratio) = £48.36, the amount credited. My question is whether taking the percentage change in index ratio from last autumn's coupon shows the RPI uplift applied in this 12 month period, ie 1.70874/1.63188 = 4.71%.

SnowMan

Yes that is the lagged RPI uplift from the coupon a year ago to the coupon now. Expressed in another way based on the lagged RPI index a year ago and now

The uplift is 405.69/387.44 - 1 = 4.71%

where 405.69 = interpolated June/July RPI for 2025 (= 9/30 x 404.5 + 21/30 x 406.2)

and 387.44 = interpolated June/July RPI for 2024 (= 9/30 x 387.3 + 21/30 x 387.5)

And the indexation since issue of 1.70874 for the Sept 2025 coupon = 405.69/237.42 where 237.42 is the lagged RPI at issue which is interpolated from the August/September 2011 RPI (= 236.1 x 8/30 + 237.9 x 22/30) 

And the indexation of 1.63188 for the Sep 2024 coupon = 387.44/237.42

aroominyork

SnowMan said:

Yes that is the lagged RPI uplift from the coupon a year ago to the coupon now. Expressed in another way based on the lagged RPI index a year ago and now

The uplift is 405.69/387.44 - 1 = 4.71%

where 405.69 = interpolated June/July RPI for 2025 (= 9/30 x 404.5 + 21/30 x 406.2)

and 387.44 = interpolated June/July RPI for 2024 (= 9/30 x 387.3 + 21/30 x 387.5)

And the indexation since issue of 1.70874 for the Sept 2025 coupon = 405.69/237.42 where 237.42 is the lagged RPI at issue which is interpolated from the August/September 2011 RPI (= 236.1 x 8/30 + 237.9 x 22/30) 

And the indexation of 1.63188 for the Sep 2024 coupon = 387.44/237.42

Thanks for simplifying it, mate 

aroominyork

I'm still struggling the understand ILG price movements and their variance from nominal gilts. This is for nominal TG29 in blue (0.5%, maturing 31/1/2029) and ILG T29 in green (0.125%, maturing 22/3/2029). Why has TG29's price risen while T29's is flat? 

InvesterJones

aroominyork said:

I'm still struggling the understand ILG price movements and their variance from nominal gilts. This is for nominal TG29 in blue (0.5%, maturing 31/1/2029) and ILG T29 in green (0.125%, maturing 22/3/2029). Why has TG29's price risen while T29's is flat? 

(re posting now I realise that's return being charted)

Expectations of inflation have reduced? Therefore don't need to ask so much yield for nominal gilts to cover it, resulting in higher prices.

aroominyork

InvesterJones said:

aroominyork said:

I'm still struggling the understand ILG price movements and their variance from nominal gilts. This is for nominal TG29 in blue (0.5%, maturing 31/1/2029) and ILG T29 in green (0.125%, maturing 22/3/2029). Why has TG29's price risen while T29's is flat? 

Expectations of inflation have reduced? Therefore don't need to ask so much yield for nominal gilts to cover it, resulting in higher prices.

I'm not sure that captures it all. This shows that TG29's clean price is £90.26 so it is marching inexorably towards £100 during the next three and a bit years, with a YTM of 3.758%. This shows that ILG T29's real yield (ie return over inflation) is 0.802%. Although the BoE expects inflation to return to 2% in 2027, I do not think its forecast has improved so much that an ILG would show no price movement over 12 months... something else seems to be going on in the weeds.

SnowMan

It is because you appear to be plotting the clean price of T29 rather than the dirty price. The dirty price goes up roughly by the increase in the clean price plus the inflation uplift over the period. 

Obviously the nominal return you achieve is measured by the dirty price increase (plus allowance for coupons) not the clean price increase. And that's what should be compared with TG29.

Dirty price of T29 at 17/11/2024 = 160.470306 (actually at 15th as 17th is a Sunday)

Dirty price of T29 at 17/11/2025 = 167.568998

So return is approximately

= 100 x (167.568998/160.470306 - 1) + (0.125 x 100/97.8) 

where 97.8 is the clean price of T29 at 17th November 2024

= 4.42% + 0.13% = 4.55%

aroominyork

The one year situation makes sense. What confuses me is the more recent price movement. I bought T29 on 15 August 2025: 25,684.85 units for a total cost of £42,700. The dirty price today is £167.445 giving a value of £43,008, an increase of 0.72% over three months. Over the last three months, nominal TG29 has increased 1.2%. What accounts for the difference; was it a reduced expectation forecast during mid-October? And equally, what accounts for the increase on ILG price at the left-hand side of the chart? The basic question is whether anything other than changing inflation expectations accounts for variances in price movements between nominal and index-linked gilts that have similar maturity dates? (I realise the chart shows clean prices, but I think it demonstates the general point...?)

masonic

Index linking is having a negative effect over the course of this month due to a month on month decrease in RPI. But this will be a minor effect.

What I'm confused about is why you'd expect the short term price of IL vs nominal gilts to be synchronised. Perhaps if you explain what you expected it will reveal the faulty assumption.

aroominyork

I expected them to move out of synch when there is an actual unexpected change in inflation for the previous period, or change in projected inflation for the future period to maturity. What we see here is a shift of about 1.4% between early September and early November. Does that suggest a sudden expectation of inflation increasing by about 0.4%pa less than previously expected in the period to maturity (early 2029)?

SnowMan

aroominyork said:

The one year situation makes sense. What confuses me is the more recent price movement. I bought T29 on 15 August 2025: 25,684.85 units for a total cost of £42,700. The dirty price today is £167.445 giving a value of £43,008, an increase of 0.72% over three months. Over the last three months, nominal TG29 has increased 1.2%. What accounts for the difference; was it a reduced expectation forecast during mid-October? And equally, what accounts for the increase on ILG price at the left-hand side of the chart? The basic question is whether anything other than changing inflation expectations accounts for variances in price movements between nominal and index-linked gilts that have similar maturity dates? (I realise the chart shows clean prices, but I think it demonstates the general point...?)

The mid dirty closing price of T29 on 14th August was 165.981 and the mid dirty closing price at close on 15th August was 165.8523. The closing mid dirty price at 18th November was 167.4881. Using the 15th figure that's a return of 0.99% (= 167.4881/165.8523 - 1) over the period. Add in the coupon (no coupon was paid on the conventional gilt in this period) that takes you up to about 1.06% return. So that is quite close to the conventional gilt. And the difference could no doubt be explained by things like the implied inflation changing slightly over the period, and the actual inflation uplift over the 3 months etc etc. 

If you paid 42,700 for 25,684.85 nominal that is equivalent to a dirty price of 166.25 (= 42,700/25684.45) so perhaps the price increased on 15th November until you bought it and and then fell back at close.

When you are trying to explain very small differences like this you have to be precise in comparing like with like.