ILGs

Veloflyer

Folks - Apologies for what may be an idiotic question, but is there any scenario where selling an ILG would be more profitable than waiting until it matures?

zagfles

Of course there are. For instance if interest rates rise significantly between today and maturity, you'd be better off selling now and investing in eg a variable rate account or a higher fixed rate after the rate rises. Or if inflation drops to zero you'd be better off selling now and buying flat gilts.

Linton

Depends what you mean by profitable. Yes, in some economic circumstances you may be able to sell a gilt for more than you paid for it. But then you dont get the guaranteed return until maturity. You wont be able to buy a different one with the same return at the same time any cheaper and cover the dealing costs. On the other hand for your particular circumstances you may feel that money now is more valuable to you than a larger return later.

The key difference between equity and gilt pricing is that the former is mainly driven by individual investors different views on future returns. For gilts, future returns from gilts are known exactly. They are almost entirely priced from mathematical calculations based on the overall market interest rates over the same period. Everyone in the market can do the same calculation and come up with the same answer.

Gilts are highly liquid so that any minor variation in pricing would disappear extremely quickly. To make a profit from trading gilts requires speed and large amounts of money not available to a small private investor..

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82169906#Comment_82169906

Understood - thanks. Should have known about the latter.

https://forums.moneysavingexpert.com/discussion/comment/82169915#Comment_82169915

Profitable - simply more money selling it than I would have received at maturity - which I guess explains your first para.

Nebulous2

The price of gilts has fallen dramatically in the last few years. Dunstonh describes it as a once in a hundred years event.

Take a look at the pricing for one - say T32.

T32 charts

It only gives clean pricing in the chart there, but clean pricing is currently £99.20 as per the top of the page.

The all time high is £167.71. It's unlikely to reach these heady heights again before maturity, but the price will continue to fluctuate between now and then. If interest rates fall, and inflation proves 'sticky' it could certainly rise well above what you would pay for it now.

So the option is to stay put and bank a real yield of 1.387% above inflation, get exactly what you bought it for, or be sufficiently tempted by the increase in value to cash in early.

What I think doesn't work is putting money in that you might need before maturity and be a forced seller, potentially after the price has gone down.

DRS1

OK This is an ignorant question but if you look at T27 the clean price is 101.61. Does that mean that because it is over 100 it would be more profitable to sell T27 now than to wait a year for it to mature?

I have never been completely clear what clean prices signify with ILGs.

hara____

https://forums.moneysavingexpert.com/discussion/comment/82170055#Comment_82170055

The clean price helps you understand the real return that you will get (real yield) if you hold to maturity.

In late 2021, the clean price of T27 was 136, so any investor was going to see their principal fall by about 25% in real terms, over the course of 6 years. Of course, the 1.25% coupon would offset that a little.

The figures above are all you would have needed to calculate the real yield. No need to think about the inflation adjustment to the principal, either past or future.

The current 101.61 tells you the real yield is now close to zero. Actually slightly negative, as the coupon won't quite offset the move from 101.61 to 100 at maturity.

Nebulous2

https://forums.moneysavingexpert.com/discussion/comment/82170055#Comment_82170055

The pricing for ILGs seems guaranteed to cause confusion.

There are some real experts on this forum @SnowMan being one that can give all the technical details.

I'll have a bash though. Using the same pricing website I gave earlier - here are the details they give for T27.

T27 Charts

Looking at the top left, the real yield is given as -0.207%

The key thing to remember about real yields for ILGs is that inflation is in addition to that. So holding it for just over a year will return .207% below inflation. You'll still gain by holding it but that gain can't be quantified until inflation for the period is known.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82170055#Comment_82170055

Clean ILG prices signify the price above inflation. In a static world the clean price would remain at 100 thoughout the life of the gilt. This makes life easier as it applies no matter when you buy the gilt - you dont have to account for gains made before you bought.

It wont be more profitable to sell now beause although you get the 1.61 which you could invest at the going fixed rate, you lose the expected rise in the value of the bond until maturity due to inflation and and any coupon paid out in the meantime. A clean price of 101.61 basically is that at which these two outcomes balance.

If this were not the case people would preferentially sell to take advantage of the difference causing the price to adjust back to balance.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82170191#Comment_82170191

I have T27. Perhaps a very simplistic way of looking at things is if inflation rises even a little from the present rate then hold to maturity, if it drops - and I don't pretend to know by how much - then perhaps sell? If I recall right, there was also some break-even inflation rate calculation to decide whether normal gilts or ILGs were the most favourable - dependent on whether you thought future inflation would be higher or lower than that rate.

DRS1

Thanks people for trying to explain it.

I probably go wrong by equating the clean price of an ILG with the clean price of a conventional gilt. With a conventional gilt I can be clear that if the clean price is 101.61 then at maturity there will be a capital loss of 1.61. It is less clear with an ILG but I assume there will still be a loss of some amount - is it 1.61 multiplied by an inflation number? But an inflation number from when up to when - the issue date up to maturity?

Or is the clean figure and its relation to 100 just a complete irrelevance with ILGs because what you get back is the dirty price?

It is sad but true that when I look at @SnowMan's pictorial representations of how ILGs work I think I understand but that understanding escapes me pretty quickly.