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

granta

Alexland said:

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.

Thanks for the insights. I am (very)slowly learning about bonds/gilts with a view to switching a % to more defensive assets. My recent thread  Bond ETF suggestions — MoneySavingExpert Forum

In light of your discussions about the gilt you mentioned and holding until 2025, what are your thoughts about holding an index-linked fund such as Royal London Short Duration Global Index Linked M Inc Fund factsheet | Trustnet  ?

Does it provide the same end result as buying a single gilt?

Alexland

granta said:

In light of your discussions about the gilt you mentioned and holding until 2025, what are your thoughts about holding an index-linked fund such as Royal London Short Duration Global Index Linked M Inc Fund factsheet | Trustnet  ?

Does it provide the same end result as buying a single gilt?

Generally you don't get as much control or certainty with owning a bond fund (via OEIC or ETF) because the portfolio is churning as shorter dated ones get redeemed and longer dated ones get purchased and so there is no natural exit point for you as an investor other than selling the fund units at current market prices for the portfolio whatever they might be at the time.

If you own the IL gilts directly then you can buy ones that align with the periods you will need the money so there is no risk on what the market price will be at the time. You should also see the price volatility reduce (not that it matters if you never plan to sell in the market) as the gilt gets closer to redemption.

granta

Thanks, that makes sense theoretically. I'm not confident I understand enough to buy a single gilt yet so perhaps a fund will have to be a compromise but I will start learning more about gilts now.

Alexland

granta said:

Thanks, that makes sense theoretically. I'm not confident I understand enough to buy a single gilt yet so perhaps a fund will have to be a compromise but I will start learning more about gilts now.

I'm still learning too and it's quite a mindset change after being anti-bond (for good reason) for so many years. I have to thank masonic for some of the PM chat we have been having about them recently in helping me test my understanding of the mechanics of owning them directly.

I don't know if this is the top of the equities market / bottom of the gilt market but it seems a good enough time to make the switch and derisk.

I still have to pinch myself to check I am not dreaming that it's only going to take less than half my current pension valuations in my 40s (even after the pension sharing order withdrawal) to build an IL gilt latter that will cover my current spending rate from age 55 for the rest of my life.

I never expected to have as much income in retirement as now looks possible. I am starting to wonder if I should cut back on heavy pension contributions and retire even earlier. I'm keen to find some volunteer work to keep me occupied for a few decades as the greatest satisfaction I know is being useful and helping people.

Linton

granta said:

Alexland said:

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.

Thanks for the insights. I am (very)slowly learning about bonds/gilts with a view to switching a % to more defensive assets. My recent thread  Bond ETF suggestions — MoneySavingExpert Forum

In light of your discussions about the gilt you mentioned and holding until 2025, what are your thoughts about holding an index-linked fund such as Royal London Short Duration Global Index Linked M Inc Fund factsheet | Trustnet  ?

Does it provide the same end result as buying a single gilt?

It is not the same, though possibly close enough. ...

When you buy an individual gilt you should aim to hold until maturity.  If you do so there is no risk whatsoever, your returns (either in terms of £ or £ value) are fixed absolutely at the time you buy.  In the meantime there could be wide variations.  This is why you would create a ladder.

This certainty does not apply to bond funds. When you sell, some of the underlying bonds will be close to maturity others could be far from it.  So, depending on the bond fund average duration, you will get some volatility.  For example during 2022 the RL bond fell by 5%.  This was of course an extreme case and may not be repeated in your lifetime.

tigerspill

Alexland said:

granta said:

In light of your discussions about the gilt you mentioned and holding until 2025, what are your thoughts about holding an index-linked fund such as Royal London Short Duration Global Index Linked M Inc Fund factsheet | Trustnet  ?

Does it provide the same end result as buying a single gilt?

Generally you don't get as much control or certainty with owning a bond fund (via OEIC or ETF) because the portfolio is churning as shorter dated ones get redeemed and longer dated ones get purchased and so there is no natural exit point for you as an investor other than selling the fund units at current market prices for the portfolio whatever they might be at the time.

If you own the IL gilts directly then you can buy ones that align with the periods you will need the money so there is no risk on what the market price will be at the time. You should also see the price volatility reduce (not that it matters if you never plan to sell in the market) as the gilt gets closer to redemption.

This an other threads on ILGs has been fascinating - and I am still trying to learn about ILGs.

I totally understand your comment on these funds.

Most of the discussions on ILGs have tended to be about long term ownership.  The examples used have been something like T50 or T56 ILGs - maturing in 25 or 30ish years (I assume).

I am trying to understand the options for ILGs in the shorter term - let's say an ILG ladder starting in 2030 for the following 10 years.  I don't really want to hold this in savings accounts so looking for an alternative that is fairly safe and at keeps up with inflation.
Is this a sensible option to look at for that sort of time frame?  If so, what ILGs might I look at to achieve this?  Is it as simple as looking at ILG's maturing at 2030, 2031 ...... 2039?  Are there still choices to be made for each year in what to purchase?

Bear in mind, this is more to help me better understand ILGs so I can make a better informed choice in what I might do.
I am thinking both unwrapped in a GIA and ISAs.

OldScientist

Cus said:

Thanks, confusing. What I can't get my instinct around is that what I think you are saying is that if I buy it today, someone is selling me that gilt with a guarantee that I will beat inflation no matter what happens if I hold till 2050. What's in it for the seller? Surely there must be a 'guess of the future inflation rate' so that if you think it's less overall than what the market thinks today then you win, otherwise you lose?  

The reduction of confusion is ostensibly why the clean prices exist - everything can then be done in real terms. For example, excluding coupons, clean price at maturity (i.e., 100)/clean price at purchase gives the price return. For a gilt with a coupon the real yield is approximately the total real return (the actual total real return will be unknown since the prices at which coupons are reinvested are unknown in advance).

For both nominal and inflation linked gilts the government gets to borrow money today that they will repay in the future, while the issue of ILGs is an indication that the government will not attempt to inflate debt away (one of the reasons why they were introduced).

The difference in yields between nominal gilts and ILG of the same maturity is the breakeven rate (called 'implied inflation' by the BoE and 'expected inflation' by the US treasury), i.e., if realised inflation is higher than the breakeven rate it will be better to hold an inflation linked gilt, while it would be better to hold the nominal gilt if inflation is less than the breakeven rate. Of course, which choice would have been best is only known in hindsight.

For the retail investor holding an inflation linked gilt to maturity provides known real cashflows (2 coupons per year plus maturing value) but unknown nominal cashflows

Holding a nominal gilt to maturity provides known nominal cashflows but unknown real cashflows.

Which of those is appropriate depends on the application.

Alexland

tigerspill said:

I am trying to understand the options for ILGs in the shorter term - let's say an ILG ladder starting in 2030 for the following 10 years.  I don't really want to hold this in savings accounts so looking for an alternative that is fairly safe and at keeps up with inflation.
Is this a sensible option to look at for that sort of time frame?  If so, what ILGs might I look at to achieve this?  Is it as simple as looking at ILG's maturing at 2030, 2031 ...... 2039?  Are there still choices to be made for each year in what to purchase?

Bear in mind, this is more to help me better understand ILGs so I can make a better informed choice in what I might do.
I am thinking both unwrapped in a GIA and ISAs.

There are IL gilts with shorter dates but they tend to have lower real yields.

https://www.dividenddata.co.uk/index-linked-gilts-prices-yields.py

For example T29 has a real yield of only 0.7% pa and you could buy it on iWeb for just a £5 trade per account with no ongoing charge but you would need to decide if you wanted to reinvest coupons.

https://www.markets.iweb-sharedealing.co.uk/bonds-and-gilts-centre/details/?csid=2630299

aroominyork

Alexland said:

tigerspill said:

I am trying to understand the options for ILGs in the shorter term - let's say an ILG ladder starting in 2030 for the following 10 years.  I don't really want to hold this in savings accounts so looking for an alternative that is fairly safe and at keeps up with inflation.
Is this a sensible option to look at for that sort of time frame?  If so, what ILGs might I look at to achieve this?  Is it as simple as looking at ILG's maturing at 2030, 2031 ...... 2039?  Are there still choices to be made for each year in what to purchase?

Bear in mind, this is more to help me better understand ILGs so I can make a better informed choice in what I might do.
I am thinking both unwrapped in a GIA and ISAs.

There are IL gilts with shorter dates but they tend to have lower real yields.

https://www.dividenddata.co.uk/index-linked-gilts-prices-yields.py

For example T29 has a real yield of only 0.7% pa and you could buy it on iWeb for just a £5 trade per account with no ongoing charge but you would need to decide if you wanted to reinvest coupons.

https://www.markets.iweb-sharedealing.co.uk/bonds-and-gilts-centre/details/?csid=2630299

But bear in mind that between February 2030 and February 2031, RPI will be move to being calculated using CPI including owner occupiers' housing costs (CPIH). Historical data suggests that will result in a c.0.9% lower return on ILGs. T29 is the last ILG to mature before the switch is made, althugh an ILG like TR31 maturing in August 2031 will mostly benefit from the current RPI methodology. 

Alexland

aroominyork said:

But bear in mind that between February 2030 and February 2031, RPI will be move to being calculated using CPI including owner occupiers' housing costs (CPIH). Historical data suggests that will result in a c.0.9% lower return on ILGs. T29 is the last ILG to mature before the switch is made, althugh an ILG like TR31 maturing in August 2031 will mostly benefit from the current RPI methodology. 

With the shorter dated gilts the dirty market price is close to the current redemption value so you aren't getting rewarded for locking your money away and taking the volatility risk during ownership. When building a ladder there are various trade fees and market spread costs so it all becomes a bit less worthwhile.