Short term gilt yields

DRS1

Low coupon gilts with most of the return in the form of CGT free capital gain are most attractive to people who would otherwise be paying HRT (or ART) on their savings income. If you pay 0% tax on your savings income then gilts are less attractive. I suppose if you are skirting the threshold where you start to pay 20% tax you might like a low coupon to keep you under the threshold when a 4 or 5% interest rate might push you over but that seems a bit marginal. ISAs would make more sense but maybe you are maxing out the ISA subscriptions.

masonic

"Yes, to be clear: if base rate is currently 3.75%, and the expected average base rate over the next 12 months is 4.25%, then one would be looking for a 1-year gilt to pay a small premium over 4.25%, not a small premium over 3.75%. If it's priced "rationally", which it may not be."

Indeed, and the most likely path to get there would be four 0.25% rises spread somewhat evenly over the 12 months, ending up at 4.75%. Or it could come from two 0.25% rises early on, such as the next two MPC meetings. But the latter would contradict the current narrative of the committee.

T27A gives a "prediction" of base rate averaging about 4.25% over 9 months, which would likely require the base rate to be 4.5% by late 2026.

When looking at these numbers in combination with the rest of the yield curve, and of ILG yields, it seems much more likely that a more general risk-based repricing of gilts has taken place.

SnowMan

At the moment (5th May last datapoint) the OIS (overnight index swap) forward instantaneous rate at 6 months (i.e. at that point in time) is 4.31%pa and the forward 6 month gilt yield from the yield curve is 4.60%pa so there is a non trivial 0.29%pa differential between rates at the moment.

Not sure I can understand the technical reason for that size of difference.

At 12 months the forward instantaneous rate is 4.53% (OIS) vs 4.58% (gilts). So much closer.

The OIS forward figure at 1 month is 3.74% which is not surprising as the next monetary committee meeting isn't until 18th June (over a month away) so you'd expect it to be close to current base rate of 3.75%.

The OIS forward figure at 2 months is 3.87%pa which suggests to me a roughly 50/50 chance of a 0.25% base rate increase is priced in for 18th June (or more accurately it was at the end of 5th May).

masonic

Interesting that the short end of the OIS instantaneous curve is in an almost triangular formation at the moment and crosses 4% in 4 months, 4.25% in 6 months, and almost gets to 4.5% in 10 months, before falling back to between 4-4.25%.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/81989651#Comment_81989651

This is the comparison of OIS vs gilt forward instantaneous (i.e point in time in both cases) rates (at 5th May)

InvesterJones

Is it possible the gilt premium is accounting for a small amount of political risk? (Change of PM to someone who takes the bond market less seriously for e.g.)

aroominyork

Well, if the price remains "rational" at the time you're about to make the switch back from gilt to STMMF, the gilt would by then have a slightly lower price / higher YTM, which would prevent you from profiting by switching back. Of course, that may or may not happen, and you can continue to look out for opportunities to switch based on future mis-pricing.

If I hold a higher yielding gilt until the time when YTM and STMMF cross over - expecting STMMF to have a higher yield for the remaining months until the gilt's maturity - surely I have gained because I was not receiving the 'under-performing' STMMF rate during those first six-ish months.

(btw, how do I create an extract/quote from a previous post with a grey line down the left? Edit: now inserted above!)

masonic

"(btw, how do I create an extract/quote from a previous post with a grey line down the left?)"

Use the paragraph formatting options (same place as for bullet points and headings)

Enzo_L

(btw, how do I create an extract/quote from a previous post with a grey line down the left?)

I need to know this too @aroominyork . It seems to be within the knowledge of only a select few! 🤔

cloud_dog

https://forums.moneysavingexpert.com/discussion/comment/81990020#Comment_81990020

Most similar to the old editor / quoting 🤗