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Gilts - recent movements

Gilts, bonds, and interest-bearing shares
zico
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Gilts - recent movements

#294025

Postby zico » March 25th, 2020, 12:49 pm

Would appreciate help and knowledge in understanding what's happened to gilts recently.

My understanding was that they are a counterweight to the stock market, because they are government-backed guarantees to pay fixed-interest, which means their price goes up when investors are nervous and stock markets are down.
However, although Gilts went up steadily between Jan to end-Feb, they then fell steeply from 9th March, reaching a low on 20th March, but have since risen sharply along with the stock market.

I don't understand the recent movements, grateful if someone could explain. (My fund in question is 97% UK Gilts).

Snorvey
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Re: Gilts - recent movements

#294029

Postby Snorvey » March 25th, 2020, 12:59 pm

Without looking at the dates exactly, my take would be......:

they then fell steeply from 9th March, reaching a low on 20th March,

Government announcing massive debt funded support packages.
.
.
.
.

but have since risen sharply along with the stock market.

Government announcing Quantitative Easing (i.e. buying back it's own debt/gilts)

Ooh and interest rates being cut to near zero making Fixed interest more attractive than cash (not by much though!)

Howard
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Re: Gilts - recent movements

#294039

Postby Howard » March 25th, 2020, 1:42 pm

Forgive me for being flippant, but nobody knows the answer to questions like these.

It is a bit like asking: will hemlines be higher or lower next year? And will fashionable men's trousers be wider or narrower?

In retrospect, it is easier to come up with some answers, but even then, they might not be that convincing.

Over years of investing, I have become convinced that it is a bit like participating in the fashion industry ;) .

I have a reasonable proportion of bond funds in my portfolio and have given up trying to work out why they behaved similarly to shares in some periods and differently in others.

The only thing I believe is that bond prices will go down when interest rates go up. But even then this may prove wrong :( !

regards

Howard

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Re: Gilts - recent movements

#294044

Postby tikunetih » March 25th, 2020, 1:52 pm

Expect explicit yield curve control policies to come to the fore in order to ensure the viability of Govt finances:

https://www.investopedia.com/what-is-yi ... ol-4797189


That being the case, expressions of confidence/lack of confidence and views on the inflationary outlook would all be via currency movements.

In terms of general confidence, it'll help that everyone (lots of nations) will be in similar boats, hence previously leftfield/unacceptable policies will be normalised - safety in numbers!

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Re: Gilts - recent movements

#294059

Postby dealtn » March 25th, 2020, 2:42 pm

zico wrote:Would appreciate help and knowledge in understanding what's happened to gilts recently.

My understanding was that they are a counterweight to the stock market, because they are government-backed guarantees to pay fixed-interest, which means their price goes up when investors are nervous and stock markets are down.
However, although Gilts went up steadily between Jan to end-Feb, they then fell steeply from 9th March, reaching a low on 20th March, but have since risen sharply along with the stock market.

I don't understand the recent movements, grateful if someone could explain. (My fund in question is 97% UK Gilts).


I will try to keep it simple, but in reality it's more complicated.

Gilt prices are just like most other markets subject to supply and demand, and to repricing risk. The primary driver of gilt prices is determined by the (government) interest rate curve. For each point in time along the curve you can determine the (zero coupon) interest rate the market deems appropriate to lend money to the government. This will (broadly) depend upon the short term policy rate, the ability of the government to borrow in the immediate term below (or above) this rate, and the "prediction" of the path of this short term rate over time.

So in a broad sense if short term interest rates fall, then short term gilt yields also fall, and gilt prices go up. BUT longer term rates are not influenced by the short term rate alone, but also by the path of this short term rate over time, and furthermore by the risk premium required to lend money for longer to the (government) counterparty.

So, it can be the case that rates are cut (emergency measure) and short gilt yields fall, and prices rise, but also for the opposite to be happening further along the yield curve as the market either expects interest rates will rise more than previously expected (say as a result of inflation rising as a result of the policy response), or as the risk premium rises for lending to the government longer term (they might default), or both.

Gilts are not a counterweight to the stock market in anything other than a general sense. In any period they could both move in the same direction, or opposite.

Its unclear from your post, but I assume you are not 97% invested in Gilts, just that one of your funds has that allocation. Why are you invested in something you don't understand?

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Re: Gilts - recent movements

#294168

Postby mc2fool » March 25th, 2020, 5:33 pm

Howard wrote:Forgive me for being flippant, but nobody knows the answer to questions like these.

It is a bit like asking: will hemlines be higher or lower next year?

Hemlines are a trailing economic indicator. https://en.wikipedia.org/wiki/Hemline_index

colin
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Re: Gilts - recent movements

#294204

Postby colin » March 25th, 2020, 6:58 pm

zico wrote:Would appreciate help and knowledge in understanding what's happened to gilts recently.

My understanding was that they are a counterweight to the stock market, because they are government-backed guarantees to pay fixed-interest, which means their price goes up when investors are nervous and stock markets are down.
However, although Gilts went up steadily between Jan to end-Feb, they then fell steeply from 9th March, reaching a low on 20th March, but have since risen sharply along with the stock market.

I don't understand the recent movements, grateful if someone could explain. (My fund in question is 97% UK Gilts).

Might also have something to do with currency movements with gilts being sold to buy US treasuries, but to find out you would need to compare gilts and treasuries of the same maturity. But don't expect to find simple reasons for such short term market movements such rationalisations are usually manufactured .

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Re: Gilts - recent movements

#294208

Postby Lootman » March 25th, 2020, 7:09 pm

colin wrote:
zico wrote:Would appreciate help and knowledge in understanding what's happened to gilts recently.

My understanding was that they are a counterweight to the stock market, because they are government-backed guarantees to pay fixed-interest, which means their price goes up when investors are nervous and stock markets are down.
However, although Gilts went up steadily between Jan to end-Feb, they then fell steeply from 9th March, reaching a low on 20th March, but have since risen sharply along with the stock market.

I don't understand the recent movements, grateful if someone could explain. (My fund in question is 97% UK Gilts).

Might also have something to do with currency movements with gilts being sold to buy US treasuries, but to find out you would need to compare gilts and treasuries of the same maturity. But don't expect to find simple reasons for such short term market movements such rationalisations are usually manufactured .

I will offer one more theory. At the height of a crisis, correlation goes to 1, meaning that things that typically move in a contrary direction decide to all get into bed together, in a dash for cash.

So in the earlier part of this equity decline, gold and governments did well. Then they all went down the toilet together. In a crisis cash is king, especially USD.

Since late last week this 100% correlation has dissipated, which some might say presages a recovery.

Howard
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Re: Gilts - recent movements

#294221

Postby Howard » March 25th, 2020, 7:50 pm

dealtn wrote: Why are you invested in something you don't understand?



Mischievous question - forgive me ;) .

Do you understand what you are investing in?

Hopefully you don’t have investments in any FTSE 100 companies? Could you explain, for example the ins and outs of Astra Zeneca’s balance sheet? (Warning, Terry Smith thinks it’s rubbish) Why do the most “expert” investors sometimes back companies with poor balance sheets? Warren Buffett bought Tesco at just the wrong time because he obviously didn’t understand their business (although they might be a good investment now?) Am I right in thinking that most active fund managers do worse than relevant indexes over a long time frame?

I must have been doing the wrong thing for 30 years now, because I don’t think I’ve understood any company I have ever invested in nor any bond fund. :(

For example I invested in index-linked bonds (because a firm called Ruffer had a lot) and a few years ago they all went up when the experts thought with low inflation, they should have gone down. I sold a few and invested in some companies which did quite well.

I have far too many investments in my portfolio, but it is very well diversified. At the moment, many of my single company shares are suffering much less than most of my Investment Trust investments (Run by experts who claim they understand bonds and equities). I can give examples if required.

Sorry to be flippant. I do understand risk and minimise it with diversification. And I invest in companies that I like and which appear to be well run but like most investors, I have made some expensive mistakes!

My conclusion is that one must invest in things one doesn’t understand. Otherwise we’d all have our money in cash under the bed. (Not a bad idea at the moment - but we’d probably worry which currency would be best?)

Any contrary views would be welcome. :)

regards

Howard

PS I suppose it's worth adding that my investment performance has been pretty good, because I haven't paid for any expert advice. So I've probably earned 1-2% more per year than an investor who paid someone who claimed to understand bonds etc.

zico
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Re: Gilts - recent movements

#294266

Postby zico » March 25th, 2020, 9:44 pm

dealtn wrote:
Gilts are not a counterweight to the stock market in anything other than a general sense. In any period they could both move in the same direction, or opposite.

Its unclear from your post, but I assume you are not 97% invested in Gilts, just that one of your funds has that allocation. Why are you invested in something you don't understand?


Thanks for the explanation. To clarify, as part of a Halifax pension fund with 7 different funds, I've got one called Halifax Gilts & Fixed Interest which is 96.5% invested in UK Gilts, 1.9% in Money Market, 1.7% in Global Fixed Interest and a rather intriguing minus 0.1% in Alternative Investment Strategies.

It's certainly a fair question as why I've invested in something I don't understand! I wanted to get out of share-based funds last Friday, and chose the Gilts fund as a more stable (and hopefully counterweight) fund rather than just going into cash, because cash is just too dangerous long-term.
(The Gilts fund had increased 4% during the big market slide, so I wasn't just going completely blind into Gilts).
As it turns out, the Gilts fund has become volatile in the last couple of weeks, joining in with the market slide, and I was lucky enough to buy them on Friday at their 2020 low, so they've rebounded in line with the share-based funds that I sold out of.

dealtn
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Re: Gilts - recent movements

#294355

Postby dealtn » March 26th, 2020, 9:00 am

Howard wrote:
dealtn wrote: Why are you invested in something you don't understand?



Mischievous question - forgive me ;) .

Do you understand what you are investing in?



Well I certainly understand every asset class I am invested in. Is it possible to understand the minutiae of every company? I would suggest unlikely.

(A fair number of FTSE100 companies, but more outside that index - and no AZN)


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