Why buy gilts at issue?

Cococatdog

Hi - just curious really, I have an account with ii and they have just emailed to say I can apply for a new gilt being issued.  It's a brand new one as far as I can tell.  However - it's being launched by syndication which means the price isn't set in advance, so my question is why would anyone do that?  Since you don't know what price you'll be paying, you can't calculate the yield to know whether you want it or not.   

Or are the issue prices always more or less par?

poseidon1

I always apply at 1st issue to avoid dealing charges, accrued income  and hopefully acquire at par or just below.

The involvement of syndicated purchasers have been a benefit in this regard  in ensuring I end up acquiring  below par.

Had a quick look at the terms for the new issue, 5.25% ( nominal) pretty decent but redemption in 2041 a bit to long for my appetite.

Cococatdog

That's interesting.  And I agree - if you happen to want a gilt maturing in 2041 and you plan to hold to maturity, then if you know you're paying par then maybe 5.25% looks ok. But you don't know what the issue price is until after you've bought it - so what if it ends up being £120?  Then it's no longer 5.25% on your investment, it's 4.375%, and you've got a £20 capital loss over the life of the gilt to factor in as well?

wmb194

Cococatdog said:

That's interesting.  And I agree - if you happen to want a gilt maturing in 2041 and you plan to hold to maturity, then if you know you're paying par then maybe 5.25% looks ok. But you don't know what the issue price is until after you've bought it - so what if it ends up being £120?  Then it's no longer 5.25% on your investment, it's 4.375%, and you've got a £20 capital loss over the life of the gilt to factor in as well?

Don't worry, it won't. It'll go for about the prevailing market rate for the duration of the bond so just keep an eye on that. For the moment 5.25% is bang on and that's why it's being pitched at this rate.

Cococatdog

I guess I just don't understand why they don't just say "we're issuing it at par" if it's certain to go for par give or take an insignificant margin.  But never mind - there's plenty more things I don't understand so happy to leave it at that!

GeoffTF

Cococatdog said:

I guess I just don't understand why they don't just say "we're issuing it at par" if it's certain to go for par give or take an insignificant margin.

It is tax payers' money. The Debt Management Office has to get the best price that they can for the gilts.

wmb194

Cococatdog said:

I guess I just don't understand why they don't just say "we're issuing it at par" if it's certain to go for par give or take an insignificant margin.  But never mind - there's plenty more things I don't understand so happy to leave it at that!

Because it would risk a failure to sell them. Better to auction them knowing that the market will roughly land at whatever the prevailing rate is.

saajan_12

Cococatdog said:

I guess I just don't understand why they don't just say "we're issuing it at par" if it's certain to go for par give or take an insignificant margin.  But never mind - there's plenty more things I don't understand so happy to leave it at that!

What's an insignificant margin? UK Gilts are very liquid, meaning market forces will set the issue price at the fair price. Its like having money in an easy access savings account with a variable rate.. if you don't like it you can move your money out aka sell the gilt.