Gilts - pricing

Veloflyer

Folks

Bought a heap of ILGs via Bell in a ladder and one that matures in 5 years. Put me right here please.

The value of the gilt fluctuates with the price and the change being the difference over what I paid for them. I assume should I wish to sell them before maturity, then it is advantageous that change is positive - the more the better?

I am also assuming that should I hold all until maturity, any change in value is irrelevant?

leosayer

When you sell an ILG, the value is determined by dirty price which includes accrued interest and uplift from the inflation adjustment. Most platforms only value your gilt holdings at the clean price which doesn't include those factors.

Holding ILGs to maturity gives you the certainty about your real-terms future cashflows to maturity, regardless of what happens to the price in the meantime.

Why are you looking to sell?

ali_bear

If I look at TR46 here http://giltsyield.com/bond/TR46/

It shows clean price 67.34 and dirty price 106.175 (pounds). But there are some with a dirty price up around 190 pounds. This seems like a hefty premium to pay for future certainty? Given that I would eventually get back 100 pounds on it.

QrizB

Given that I would eventually get back 100 pounds on it.

For an IL gilt, you won't get back £100.

You'll get £100 indexed by inflation from the date the gilt was issued.

That could be £200 or more, depending.

ali_bear

Ah right, gotcha. Thanks

So the real terms value is protected from purchase until maturity.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81943188#Comment_81943188

TR46 gilt does not mature for 20 years and gives virtually zero interest in the meantime. The price is low because inflation is assumed to be perhaps 3% and the current 40 year fixed gilt interest rates are around 5.5%. So by buying TR46 you are giving up the alternative of gaining 2.5% more interest. Hence the index linked gilt is considered relatively undesirable which accounts for the low price.

In understanding the behaviour of gilts you should focus on the clean price. Bringing in the dirty price confuses the issue, particularly with IL gilts. You should think in terms of spending £X on your gilt purchase, not y individual gilts at the dirty price.

MarkCarnage

Hence the index linked gilt is considered relatively undesirable which accounts for the low price.

I would reword that a bit. The current price already reflects a break even inflation expectation of about 3.5%. If actual inflation turns out to be say 5% over that period, it will actually turn out to have been desirable to hold the linker. At the end of the day, if the aim is to provide certainty of inflation protection if held to maturity, then go for the linker. The attractiveness of that certainty is represented by the real yield. Which is currently just under 2%, a lot more attractive than it was several years ago and within a longer term 'normal' range.
Key caveat, if you don't hold to maturity, the volatility of outcome may be high.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81943280#Comment_81943280

Yes - my thinking also. I would like the inflation protection and I believe inflation will rise - hence the ILG. The intention is indeed to hold until maturity, but in case of emergencies, is my thinking right as regards valuation - Bell seems to value on dirty price by the by.

MarkCarnage

https://forums.moneysavingexpert.com/discussion/comment/81943339#Comment_81943339

Not sure what your thinking is re valuation? The clean price gives the comparator with conventional gilts re break even inflation etc, but the dirty price is what determines the cash paid or received. Do be careful if holding long dated linkers that you may need to sell before maturity. They can be more volatile than equities….while you do know the (real) value of what you will get at maturity, there can some very bumpy bits in between.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81943508#Comment_81943508

Thanks - to clarify perhaps. I just want to understand what I'd receive if I should sell them. My understanding is that is dirty price x quantity held. At present, 2 of my ILGs are at a higher price than what I bought them for - so quits in then? I do intend to hold until maturity.