Short term gilt yields

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 🤗

aroominyork

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

Thank you!

TheTelltaleChart

"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.

Suppose you buy a gilt with YTM 4.3%, when an STMMF is paying 3.75%. The yield on the STMMF rises gradually, eventually exceeding the YTM on the gilt, at which point you swap to the STMMF. Will that give you a higher return than holding the STMMF throughout?

Not necessarily. At the point you sell the gilt, its current YTM may be more than 4.3% (the YTM when you bought it), in which case, your return on the gilt, for the period you've held it, will be less than 4.3% (because 4.3% is the gilt's known return over its whole remaining lifetime, so if it has a higher return over one part of that time (viz. after you sell it), it must have a lower return over the other part (viz. before you sell it)). And this lower return from the gilt could be higher or lower than the return from holding the STMMF over the same period.

It's also possible that the yield on the STMMF will never (before this gilt matures) exceed the YTM of the gilt. In which case, you would never swap back to the STMMF, according to your plan. In this case, will you get a higher return by holding the gilt than the STMMF?

Again, not necessarily. It depends. If rates have just risen slower than the "expectation" implied by the current price of the gilt, and perhaps the STMMF's yield has never exceeded 4.25%, then yes. But not if rates rise very fast; imagine they march rapidly up to 6% (I'm not saying this is plausible), but that the yield on the gilt always remains higher because its price falls continuously. By holding the gilt to its maturity, you will get the 4.3% you were expecting, but the STMMF could have gained you more.

There are no simple tricks here, where you can gain by swapping between assets based on mechanical rules. Any gains require taking a view about assets being mis-priced, and betting on your view. I say "betting", but it is not exactly reckless; we are talking about quite small differences in returns, since this is about very short-term gilts.

aroominyork

I agree it is a small punt on slower than anticipated rate rises and I am comfortable with that. I am not planning on swapping assets - the idea was more conceptual and you have nicely summarised possible traps. I expect to make a SIPP withdrawal before end of FY to use up most of the basic rate tax band so the 07/03/2027 maturity suits me nicely.