Gilts - pricing

Veloflyer

Been looking on Bell at the gilt offerings they have. Quick Q - I am assuming the prices for older gilts issues are all dirty and include the accrued interest? 

leosayer

AJ Bell shows clean prices for gilts.

For example, AJ Bell currently shows a price of 100.896 for TS29. The link below shows a clean price of 100.93 and a dirty price of 102.36.

https://giltsyield.com/bond/TS29/

DRS1

Clean and dirty make a real difference for index linked gilts.  There are two older ILGs where the quoted clean prices are very close to the dirty prices (T21L and T30I) but the rest can give you a nasty shock if you think you are buying at the clean price and then you see the dirty price.  This page shows you clean and dirty prices

Gilts in Issue - giltsyield.com

Veloflyer

DRS1 said:

Clean and dirty make a real difference for index linked gilts.  There are two older ILGs where the quoted clean prices are very close to the dirty prices (T21L and T30I) but the rest can give you a nasty shock if you think you are buying at the clean price and then you see the dirty price.  This page shows you clean and dirty prices

Gilts in Issue - giltsyield.com

Indeed - which is why I asked the question. For older ILGs,  If Bell shows clean price, I assume when you purchase you will actually be paying the dirty price? - which Bell may not show.

DRS1

I don't know about AJBell but on HL (I am not talking ILGs here - you have to phone up for most of them) you get a choice of buying a number of units or spending an amount of money.  The safest thing is to go for the spend an amount of money option.  But also when you try to do an online deal you should get a short period where they display the price per unit (which should be the dirty price) and if you don't like it you don't have to press buy.  Maybe try that at AJBell with a few phantom trades and see what is shown.

One thing I find with Iweb is that they don't show you anything.  Instead you have to send an order and then they settle it a while later.  So in that case you don't get to see the price at which you are dealing.  I can't say I like that  but I got it for some gilts and something else (INVR) so it may be more to do with Iweb than the instruments you are trying to buy.

Lowtrawler

Veloflyer said:

DRS1 said:

Clean and dirty make a real difference for index linked gilts.  There are two older ILGs where the quoted clean prices are very close to the dirty prices (T21L and T30I) but the rest can give you a nasty shock if you think you are buying at the clean price and then you see the dirty price.  This page shows you clean and dirty prices

Gilts in Issue - giltsyield.com

Indeed - which is why I asked the question. For older ILGs,  If Bell shows clean price, I assume when you purchase you will actually be paying the dirty price? - which Bell may not show.

I believe AJB require you to deal ILG's by phone rather than online. They will quote you both the clean and dirty price as well as advising how much of the dirty price is accrued interest. You can then choose to proceed or not. The dirty price is just the clean price + accrued interest scaled up by the indexation factor from the Debt Management Office.

Secret2ndAccount

There is no nasty shock in the dirty price. Don’t think of buying a certain number of bonds – think of investing a certain amount of money. All the returns are proportionate to the amount of money invested.

Let’s compare today’s dirty price with the underlying inflated price for an example ILG

T29   Issued in 2011.   Matures 2029.  It has an Index Ratio (inflation adjustment) of 1.711. So ‘fair’ price for this would be £171.1  In fact, the Dirty Price is £167.6  so you can get returns slightly ahead of inflation.

If you buy £1000 worth, you get 6 units.  For the next 4 years, you get coupons of 6 x 171.1 x 1/8% which is £12.50 (1/8% of £1000) then you get back 6 x £171.1 = £1027 plus any inflation which occurs between now and then.

Whether you bought 6 @ £167 or 10 @ £100 the returns you receive are the same.

 

This makes it a bit of work to compare the value of two gilts.  T29 is £167, but T28 is £144 despite having the same coupon and only 1 year difference in maturity. So, instead, compare the clean prices:  T28 is £99, and T29 is £98 because you have to wait a bit longer to get your money back. The clean prices make it easy to compare what you get for £100, so you can look at various maturities and coupons without doing a load of maths. The numerical value of the dirty price is almost irrelevant – all the returns are proportionate.

 

There is one nuance which some purchasers need to understand. The dirty price also includes uncollected coupon.  When you buy a bond, you immediately become eligible to collect the coupon payments. So I could hold a bond for 5 months, then you buy it just before a coupon is due, and collect the coupon for the whole 6 mths. So the dirty price is boosted by the partial amount of coupon accrued. The seller receives fair value for the coupon they accrued, and the buyer gets back the extra they paid as soon as the next coupon is received. If you are buying a 5 or 10 year maturity paying 1/8% nobody cares. If your bond pays 4% and matures next year, you need to be clear in your head about who exactly is receiving what benefit from the coupon. The system is very fair, but it does lead to dirty prices fluctuating in a slight sawtooth pattern. As I said, small enough to be irrelevant in most cases.

af1963

Other than your own accounting, the nominal price that you paid for each bond is fairly immaterial. You can just choose to buy "£10k of TG36" and the platform will do the sums to work out how many that buys ( at dirty price)

For me, clean price just gives you a way to compare quickly whether each  bond is above or below 'par' and by how much.  For an indexed bond, it will be redeemed at "£100 plus inflation", but the clean price ignores the inflation part ( as well as pro-rata coupons already earned) so you know for example that T41 is trading at a clean price of 75 so you will make a capital gain if held to maturity when the clean price will be 100. 

You can't tell that so easily from looking at the dirty price. T27 is £212 dirty price, T28 is £143, but the apparent difference mostly because T27's dirty price builds in inflation since it was issued in 2006, while T28 only includes inflation since 2018.  Their clean prices are similar at 101 and 99.

(Same for longer dated TG54 and TR8F :  maturity in 2054 and 2055, both coupons 1.25%, and almost identical clean prices at about 80. But TG54 is recently issued so its dirty price is just 86, while TR8F was issued in 2005 so its dirty price of 169 includes 20 years of inflation.)

Edit: the 'surprise' factor of seeing your £10k investment valued (wrongly) at £6K five minutes after trading, is another matter !

tigerspill

Can I ask a question about ILG pricing.  Looking at these, it seems they were trading at a much highher prices not that long ago.
For example - TR41 was trading at over 140 and TRTQ over 150 (clean prices) in December 2021.
I can't understand why so many were buying these at that time and how they expected to get a return?  I must be missing something. 

michaels

tigerspill said:

Can I ask a question about ILG pricing.  Looking at these, it seems they were trading at a much highher prices not that long ago.
For example - TR41 was trading at over 140 and TRTQ over 150 (clean prices) in December 2021.
I can't understand why so many were buying these at that time and how they expected to get a return?  I must be missing something. 

They were the only game in town for certain inflation protection, even if that meant locking in a real terms loss every year if held to maturity. 

But of course that isn't the whole story as they were also held for speculative reasons.

michaels

Lowtrawler said:

Veloflyer said:

DRS1 said:

Clean and dirty make a real difference for index linked gilts.  There are two older ILGs where the quoted clean prices are very close to the dirty prices (T21L and T30I) but the rest can give you a nasty shock if you think you are buying at the clean price and then you see the dirty price.  This page shows you clean and dirty prices

Gilts in Issue - giltsyield.com

Indeed - which is why I asked the question. For older ILGs,  If Bell shows clean price, I assume when you purchase you will actually be paying the dirty price? - which Bell may not show.

I believe AJB require you to deal ILG's by phone rather than online. They will quote you both the clean and dirty price as well as advising how much of the dirty price is accrued interest. You can then choose to proceed or not. The dirty price is just the clean price + accrued interest scaled up by the indexation factor from the Debt Management Office.

AJBell are one of the few that let you trade online or be it at an indicative price, with the actual trade price can vary.  I think you can trade on the phone without incurring extra charges if you want a confirmed price.