with all the coverage of impending market crashes, what are you doing?

Vitor

I'm at a point in life where I need to protect capital I've lightened position in areas that (to me) look toppy - tech, BTC, gold - but have kept a position so as not to miss out completely, basically now only playing with some of the profits. I have liquidated exposure to India where I think Modi has blundered by tying themselves to Russia.

SnowMan

Cus said:

Alexland said:

Cus said:

Which bonds guarantee above inflation returns? I though bond pricing was inherently based on interest rate predictions 

Inflation linked gilts eg TR50 current yielding 2.1% pa above inflation if held until redemption in 2050.
Obviously it could fluctuate in price in the meantime. 
https://www.dividenddata.co.uk/gilts.py?ticker=TR50

Don't you have to pay the dirty price of 132 to own this, and at redemption you only get 100? So that loss is the equivalent of the 2.1% above inflation you get now till then?

Edit: doesn't it say yield of 2.13%? Isn't that just the same rate as current inflation?

This is a diagramatic representation of what you get back if you bought TR50 based on yesterday's closing price. You are paying £131.95 to purchase £190.96 nominal including indexation to date (and not just £100). The future indexation on £190.96 is more than the inflationary increase on £131.95 because the same rate of future indexation is of course being applied to a larger amount and so you are guaranteed a real return. The coupons add to that real return and a small element of the real return assumes you can reinvest the coupons at RPI/CPIH + 2.15% pa, so together it should give you a real return of close to 2.15%pa, the exact percentage depending on the actual coupon reinvestment return.

Note the quoted real yield of 2.13%pa is based on interest being convertible half yearly which is how it is quoted by convention, but my figure of 2.15%pa is the true annual real return 

Cus

Thanks.  My initial thoughts were this:

Your comment:

'You are paying £131.95 to purchase £190.96 nominal including indexation to date (and not just £100). The future indexation on £190.96 is more than the inflationary increase on £131.95 because the same rate of future indexation is of course being applied to a larger amount and so you are guaranteed a real return'

My initial thought was that the reason for the future value being more than the inflationary increase is not due to larger amounts but due to the market based predicted future inflation rates being higher than today's inflation rate being used for the future. i.e the market expects rates to be higher in the long term than current levels.

I worked around the bond markets for 30 years, but never in a trading capacity. Based on those years, my instinct is that nothing is guaranteed, and that buying any debt product that is inherently price driven by today's market sentiment of the future of interest rates and inflation is a gamble of whether one feels they believe interest rates across the future is going to be higher or lower than what the average market sentiment is.  I accept I may be short sighted. That is all.

masonic

The main risk in this case is that future inflation turns out to be low and nominal bond will then return more. Seems like quite a nice problem to have because you won't have the cost of living lifting your income requirements. There is also a minor risk that the official measure of inflation won't adequately reflect your personal inflation rate.

Cus

Agree, but what you get is what the market predicts. If the nominal bond returns more, then it will return what the market expects, so your cost of living increases will hopefully match inflation. But you can't guarantee better.  But you can invest now and hope that things work in your favour 

SnowMan

There are many factors that have affected the real yield that the market is offering and has offered.

If you look at the spot rates (which are the rates for a theoretical zero coupon index linked gilt or conventional gilt) you can see that inflation expectations (the dotted lines at the top of the chart) priced in haven't really changed much in the past 15 years, but real yields priced in (the solid lines at the bottom of the chart) increased from as low as minus 3% to plus 2.5%, but have slightly fallen back in the past few months.

 

Cus

Yes very informative thanks. My gut tells me that the real yields are the market expectation, and there is a disconnect to the inflation expectations. I personally wouldn't bet against a gilt trader.

masonic

Cus said:

Agree, but what you get is what the market predicts. If the nominal bond returns more, then it will return what the market expects, so your cost of living increases will hopefully match inflation. But you can't guarantee better.  But you can invest now and hope that things work in your favour 

No, the return of the index linked bond is determined by formula as a function of RPI/CPIH between two dates. The return of the nominal bond held to maturity is a constant fixed on the date of purchase. Once purchased, the market only has influence if you sell prior to maturity.

Alexland

Cus said:

Yes very informative thanks. My gut tells me that the real yields are the market expectation, and there is a disconnect to the inflation expectations. I personally wouldn't bet against a gilt trader.

Once you have bought the IL gilts at current dirty price you never need to participate in the market again if you hold them to redemption (other than to reinvest the coupon if you are still in accumulation). You just get 2.1% pa above inflation, whatever it happens to be, until 2050.

They are not guaranteed to be the best investment you could possibly make compared to all others but they will give a healthy and predictable return higher than inflation over the years.

phillw

nVidia are dumping a lot of their cash they made into AI companies so that they can buy more products and keep the lights on. There isn't much in the way of value being generated though.

Some people predict a crash because it looks like the dot com bubble and the run up to GFC. It might all be fine.