Long-dated Gilts as an investment

masonic

The yield has not risen this high for no reason. Inflation is the fear driving it and a 5.8% return will not look very attractive if that starts to bite. Base rate was regularly north of 10% during the 1970s through to early 1990s.

PixelPound

https://forums.moneysavingexpert.com/discussion/comment/82133485#Comment_82133485

House Prices were a lot cheaper (relative to the average wage). If we ever got near 10% there'd be a lot of mortgage defaults.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82133546#Comment_82133546

Mortgage affordability stress tests typically use rates of 7-9%. So one would hope not.

During previous periods of high inflation, wage inflation was also high. Some had pay rises twice a year to compensate. Obviously this is also inflationary.

I would also not rule out some sort of help scheme if defaults became a major issue. Again, that would be inflationary and push up bond yields, since it would be funded by borrowing.

For these reasons and others, inflation can be difficult to control and can require a brutal approach such as the well known Volcker shock in the US.

Altior

Domestically, there is nothing that I can see that would cause tptb to rein in spending/borrowing. They will keep going until it pops. The way I see it, the temptation to turn the printers back on will be too strong. They will surely do that instead of defaulting. Leading to devaluation and inflation, as everyone knows.

Probably the one hope people interested in trading long gilts have is that the global equities correction/crash/depression comes first. But will gilts and bonds be immune? Maybe, maybe not. As I've outlined on here before, I don't feel like there is a historical reference point where there have been so many domestic and global economic headwinds coinciding outside of major war. And that is not out of the question, either.

GDB2222

FWIW, I am quite strongly considering an investment in index-linked government stocks. Not very exciting, but they give a return of around 2.5% over the inflation rate. (With some caveats about the way that is measured.)

kempiejon

https://forums.moneysavingexpert.com/discussion/comment/82134410#Comment_82134410

I'm chewing over getting a ladder of UK IL gilts, I have conventional for the next 4 years and think I could add 4 or 5 more years to the end of that which would secure 10 years base income. The 2.5% looks a bit further along the curve I'm looking at ~1.5% real. That plan is based on my confidence that 10 years of equity growth for the rest of the portfolio would allow me to top up some fixed in that time but hopefully capture more growth.

kempiejon

To come back to the point TG61 isn't how I'd look at a long term safe place to park money which I suppose is the received wisdom for gilts. However, buying £1 for 22p looks a deal but 30 years of inflation not my thing.

InvesterJones

I think as soon as you pick a long-dated gilt with the intention of selling it at market value some point in the future rather than maturity you're removing the key benefit of gilts and replacing it with market volatility, which for long-dated, is huge and possibly worse than stocks.

Even if holding to maturity with nominal you're hugely at risk from inflation, and with both nominal and linkers you're hugely at risk from interest rate rises designed to counter inflation.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82134882#Comment_82134882

If holding linkers to maturity, you are locking in a real rate. Yes high inflation will lift interest rates, but inflation will lift the ILG. You might miss out on a period where peak interest rates exceed inflation, but the area under the inflation curve is likely to be greater in that scenario.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82134897#Comment_82134897

Yes, agreed, clumsy wording on my part.