Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Learning about Gilts

Gilts, bonds, and interest-bearing shares
TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#131693

Postby TheMotorcycleBoy » April 12th, 2018, 2:31 pm

GoSeigen wrote:That's why I don't talk about price in relation to valuing bonds or any other investment, but yield. Yield takes account of all the cashflows and is a much sounder way of thinking about value. I strongly recommend you develop a similar conception of investment.

Yes.

GoSeigen wrote:Regarding low gilt yields, that's life today. Gilt yields may be low, and if you think they are too low, don't hold many gilts.

Agree again. Until I read the next sentence or two of yours, it seemed prudent just to lodge any surplus we have that we don't want any risk on in a no-strings 1.25% BS account e.g.

https://www.shawbrook.co.uk/personal/sa ... sy-access/

GoSeigen wrote:But gilts have the advantages that they are traded in the market and their price goes up when risk assets go down. Gilts had yields of less than 5% since 2007, yet on at least three occasions have returned 20-30% within a single year. So the story is a bit more nuanced that "low yield -- not interesting".

Yes, this is something we need to learn more about!

GoSeigen
Lemon Quarter
Posts: 4350
Joined: November 8th, 2016, 11:14 pm
Has thanked: 1590 times
Been thanked: 1579 times

Re: Learning about Gilts

#131694

Postby GoSeigen » April 12th, 2018, 2:35 pm

Alaric wrote:
GoSeigen wrote:but have borrowed more than any government since WW2 if I am not mistaken.


They've been able to borrow at very low coupons, so the additional amounts to be raised in taxation to pay the interest haven't been that great. Where it could go wrong is in the future if interest rates have risen to more normal historic levels and it needs to refinance as issues mature. That particularly applies to the Index Linked ones if the RPI Index rises dramatically.


Oh I agree, very much. But we didn't hear Osborne advancing this argument pre-2010! Which I guess puts you and me in the "liar" camp, if not the "incompetent" one too!

Also don't forget a large part of UK govt liabilities are now effectively inflation-linked thanks to O's monetarist bent.


GS

EDIT:
P.S. Matt, Melanie, love your enthusiasm for this subject. Hope you don't burn yourselves out too quickly though. Some of these concepts take time to internalise. I spent years learning about bonds -- though I accept your brains may be considerably larger than mine!

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: Learning about Gilts

#131705

Postby johnhemming » April 12th, 2018, 3:29 pm

GoSeigen wrote:I think you should think very hard about what THIS government has done with debt. They gained power in 2010 claiming the UK was "bankrupt" and could not afford any more borrowing (hence "austerity") but have borrowed more than any government since WW2 if I am not mistaken. Their budget is still not balanced and I can only conclude that they were lying back in 2010 or hopelessly inept (or both!). Ironically a labour government may actually improve matters!

Alaric is right about these issues. I have written about this in some detail on my blog. Here is an example
http://johnhemming.blogspot.co.uk/2017/ ... ns-in.html

What the government decided to do was to aim to maintain public expenditure roughly in real terms whilst waiting for growth to close the deficit. That has been called "austerity". It is, however, pretty well what any rational government would do given the situation.

The government did very well out of the reduction in interest rates and refinanced a lot of debt at lower rates. I remember the informal discussions in parliament when the coalition found out that there was a bit of extra money that could be spent.

What John McDonnell has said he wants to do is to borrow vastly more money on a capital basis to nationalise various things. The danger for any government occurs if the interest rates increase on government debt which does not only cause a problem for any debt issuance, but also causes a problem for rolling over debt.

The UKs deficit was of the order of those of the PIIGS. I had some conversations with Lord Andrew Turnbull about this and it was quite clear that our particular difficulties were exacerbated by the then chancellor increasing spending at a rate in excess of the growth of the economy in the early 2000s. I do have the precise details somewhere, but am busy at the moment. You might find them on my blog.

What that did was to put the UK in a worse situation than say Germany or even France when the financial problems hit.

The danger of the McDonnell plan is that it pushes up interest rates on UK debt and that causes material financial problems as the government has to find cuts or tax increases to fill the gap (which they have already probably expanded anyway).

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#131743

Postby TheMotorcycleBoy » April 12th, 2018, 6:17 pm

Thanks for all the above comments,

GoSeigen wrote:In my book perpetual is not better: when many people -- especially amateur retail investors -- start thinking this way I sense danger.GS


Yes, certainly with bonds, we're not looked at perpetual (or particularly long-dated) instruments.....as I believe you remarked a few posts back...a good crystal ball would probably be a requirement to make such investments fly.

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: Learning about Gilts

#131745

Postby johnhemming » April 12th, 2018, 6:23 pm

Melanie wrote:a good crystal ball would probably be a requirement to make such investments fly.

It is the "unknown unknowns" that cause people problems.

aka "events Dear Boy"

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#131789

Postby TheMotorcycleBoy » April 12th, 2018, 9:24 pm

GoSeigen wrote:

Regarding low gilt yields, that's life today. Gilt yields may be low, and if you think they are too low, don't hold many gilts. But gilts have the advantages that they are traded in the market and their price goes up when risk assets go down. Gilts had yields of less than 5% since 2007, yet on at least three occasions have returned 20-30% within a single year. So the story is a bit more nuanced that "low yield -- not interesting".

To be clear I am not recommending an overweight allocation of gilts right now...

GS



Which gilts have returned 20-30% in a single year?

We're not assuming that you're 'giving financial advice' and recommending lots of gilt purchases, you're in the clear! ;)

Mel :)

P.S. Matt PM'd you, but not sure if it made its way to you as it appears to be in my outbox, rather than my sent folder!

colin
Lemon Slice
Posts: 663
Joined: December 10th, 2016, 7:16 pm
Has thanked: 24 times
Been thanked: 114 times

Re: Learning about Gilts

#131804

Postby colin » April 12th, 2018, 10:30 pm

Which gilts have returned 20-30% in a single year?


I shares index linked funds both UK and USA in sterling terms both rose in price 20% immediately after the 2016 Brexit referendum vote

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#131838

Postby TheMotorcycleBoy » April 13th, 2018, 6:09 am

1nv35t wrote:
colin wrote:
Which gilts have returned 20-30% in a single year?

I shares index linked funds both UK and USA in sterling terms both rose in price 20% immediately after the 2016 Brexit referendum vote

Longer dated gilts (20+ years) have had yearly % total returns of something like ....

2008 12.9
2009 -1
2010 9.4
2011 21.4
2012 4.8
2013 -7.33
2014 21.1
2015 -0.76
2016 14.34

So two 20%+ in the 9 years to Dec 2016 (I forgot to update my year end records for 2017 :( )

Just confirm what us newbies have understood so far. So looking at the year 2015, are you saying that equities had a given value on average, and the long dated gilts were, for example, trading at par. But post the Brexit vote in 2016, did equities lose appeal to some big investors, who then sold their equity positions and bought up these gilts up pushing up their price by 20% or so?

I guess what I'm needing clarification on is when you folks saying "returns", I tend to think of it in generic terms, so I puzzle (since I don't have the past knowledge of all such economic histories) over whether you are equating returns to bond prices or yields. In other words I did wonder what exactly the 20%-30% hike actually applied to.....but I guessing from what's been said since that you been bond price, as I have tried to exemplify in my above para.

thanks Matt

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: Learning about Gilts

#131850

Postby johnhemming » April 13th, 2018, 8:10 am

As interest rates generally have gone down the price of long dated gilts has gone up, if it is thought that interest rates will go up and as they go up the price of long dated gilts will go down.

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Learning about Gilts

#131859

Postby Alaric » April 13th, 2018, 9:05 am

Melanie wrote: In other words I did wonder what exactly the 20%-30% hike actually applied to.....but I guessing from what's been said since that you been bond price, as I have tried to exemplify in my above para.


It's always values. You take a list of the assets you hold and periodically obtain a calculation of what the proceeds would be if you sold the lot. Repeat at some future date, add in cash from dividends and interest, then compare the results.

With fixed income securities, the prices go up when the yield to maturity goes down and vice versa of course.

colin
Lemon Slice
Posts: 663
Joined: December 10th, 2016, 7:16 pm
Has thanked: 24 times
Been thanked: 114 times

Re: Learning about Gilts

#131865

Postby colin » April 13th, 2018, 9:33 am

I guess what I'm needing clarification on is when you folks saying "returns", I tend to think of it in generic terms,


Unfortunately 'returns' from investing are frequently transitory, the day before the Brexit vote the markets assumed we would remain, the currency was high, the stock market was high. As the result became apparent currency and stock markets dived as investors sold pounds and shares, under such panic circumstances the proceeds often flow into Gilts and Dollars, in these cases the return arises almost wholly from the rise in capital value of Gilts and US Treasuries, so should you happen to hold them you can sell all or some immediately for the new higher price and buy into the equities that have fallen for the new lower price, all investors know this and may use Gilts and Dollars to manage risk,( this insurance comes at a cost) the prices of Gilts and US Treasuries gradually fell back again over the following weeks as the market digested the consequences of what had happened and put the money back into shares and more slowly the currency has risen relative to the Dollar
You really ought to be quite familiar with this sort of thing and the behavior of financial markets since the 1929 wall street crash before you commit any real money to financial markets, there are a multitude of books available to educate yourselves which if you are serious about investing you should study, just search the reviews on Amazon books and buy books which cover a broad range of strategies, spend a year reading and thinking or at least until such time that you know what you have to do.
Though given the nature of your posts so far I do wonder why you don't just feed your surplus savings into a work place pension and get an immediate and permanent return from your employers contribution?

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#131975

Postby TheMotorcycleBoy » April 13th, 2018, 2:39 pm

colin wrote:Though given the nature of your posts so far I do wonder why you don't just feed your surplus savings into a work place pension and get an immediate and permanent return from your employers contribution?

Hmm...

In your opinion what differentiates people who post here, who presumably make private investments, (and who possibly "started with initially small amounts" of capital, and arguably had limited initial experience), and those you should perhaps stick to maxxing out on workplace pensions.

Net worth?? If so, please quantify!

I'm not trying to be confrontational. Just curious. I have amassed several w/p pensions over time (I'm 50 now and the total accumulated value is probably about 180k now.).

colin wrote:You really ought to be quite familiar with this sort of thing and the behavior of financial markets since the 1929 wall street crash before you commit any real money to financial markets, there are a multitude of books available to educate yourselves which if you are serious about investing you should study, just search the reviews on Amazon books and buy books which cover a broad range of strategies, spend a year reading and thinking or at least until such time that you know what you have to do.


I do read a heck of a lot. And I'm reading more. In an ideal world me and Mel would have read everything we could already, and know all the strategies already....but we don't, so we continue reading, and we joined discussion groups (this one!) to further educate ourselves.

Much as I appreciate a lot of your replies, this latest smacks rather of "don't do this until you know how do this !!!" Chicken and an egg?

FWIW. My father started buying the odd share or two, about 30 odd years ago. He's never dabbled in any discrete corp bonds or gilts to my knowledge. The shares he has bought have always been of the "safe" (hmm!) boring firms, e.g. National Grid, Legal and General, Balfour Beatty. He has never ever gone for massive growth, he looks at the FT from time to time (but quotes little more than just P/E and dividend yield). He now has 250k in there plus, and basically only sells when he wants some extra cash (usually to help out the improverished extended family!).

Sorry about the above rant! I'm hoping that you are still willing to assist me and Mel familiarising with this sort of thing and the behavior of financial markets.....

Matt

colin
Lemon Slice
Posts: 663
Joined: December 10th, 2016, 7:16 pm
Has thanked: 24 times
Been thanked: 114 times

Re: Learning about Gilts

#132031

Postby colin » April 13th, 2018, 7:05 pm

"don't do this until you know how do this !!!" Chicken and an egg?


sorry I honestly do not know what to write , before i invested any money I read book after book until such time that i felt I was ready . All I have done is to suggest that you do what I did which was to give myself the necessary grounding and education before I invested real money. somethings you just have to get right first time, there is no chicken and egg situation here.

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#132032

Postby TheMotorcycleBoy » April 13th, 2018, 7:06 pm

colin wrote:under such panic circumstances the proceeds often flow into Gilts and Dollars, in these cases the return arises almost wholly from the rise in capital value of Gilts and US Treasuries, so should you happen to hold them you can sell all or some immediately for the new higher price and buy into the equities that have fallen for the new lower price,

Ok, thanks. This sounds like good advice.

colin wrote:all investors know this and may use Gilts and Dollars to manage risk,( this insurance comes at a cost)

Ok, thanks again. But what cost exactly is it worthwhile to pay? In other words given the interest rates are very low at present, is now a particularly good time to even consider purchasing gilts since presumably they are currently quite high priced (over par)?

But then again, interest rates were low too in the years prior to Brexit.

As an example I've just made a brief study of the gilt TG26's prices.

from
http://www.londonstockexchange.com/exch ... PUKGT.html

23/6/2016 99.95
26/8/2016 108.23
Now 101.3 (with yield of 1.39)

so perhaps now, or maybe after the May interest rate announcement is actually a reasonable enough time to buy them.

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#132035

Postby TheMotorcycleBoy » April 13th, 2018, 7:20 pm

colin wrote:
"don't do this until you know how do this !!!" Chicken and an egg?


sorry I honestly do not know what to write , before i invested any money I read book after book until such time that i felt I was ready . All I have done is to suggest that you do what I did which was to give myself the necessary grounding and education before I invested real money. somethings you just have to get right first time, there is no chicken and egg situation here.

I apologise too. I was probably a bit trigger happy with my response. Often like that on a friday afternoon before home time.

I appreciate that there is a lot to learn, and we are trying to learn it. We spent quite a while prior to buying our first equities. We read "The Naked trader" and "how to pick quality shares". God knows how good they are, but as I'm sure you're aware there's 100s of books on Amazon etc. My wife spent ages perusing 5 year deep annual reports from firms, and picking up news. We are trying our best!

We even consider buying some Tesco stock a month back and are now kicking ourselves, that we were too cautious, because we'd read about the recent history of them hiding debt etc.

And I know what you mean when you said until such time that i felt I was ready . The thing is, me and my wife, are also both more than capable of procrastinating forever too! :D

Please accept my apology for snapping at you earlier.

Matt

GoSeigen
Lemon Quarter
Posts: 4350
Joined: November 8th, 2016, 11:14 pm
Has thanked: 1590 times
Been thanked: 1579 times

Re: Learning about Gilts

#132066

Postby GoSeigen » April 13th, 2018, 11:39 pm

Melanie wrote:As an example I've just made a brief study of the gilt TG26's prices.

from
http://www.londonstockexchange.com/exch ... PUKGT.html

23/6/2016 99.95
26/8/2016 108.23
Now 101.3 (with yield of 1.39)

so perhaps now, or maybe after the May interest rate announcement is actually a reasonable enough time to buy them.


This is a refreshingly open-minded, evidence-based way of looking at things.

The average retail investor looks at gilts and the 1.39% yield and says there is no way they can make any money from them. If I had a pound for each amateur investor who wrote off gilts in the past ten years I'd be very wealthy indeed. You asked when gilts returned 20%. Maybe your study above gave you some ideas but looking at gilts I held in that time:

1. Consols (undated gilts) rose from around 55p to 100p when they were called a couple of years back and paid 4.5%pa interest on my purchase price to boot. I make that more than 100% gain over my holding period.
2. In 2011, 4.5% 2027 yield fell from c4.5% to c2.5% handing holders a 20% capital gain inside a year plus the 4.5% running yield.
3. The same 2027 gilt repeated the trick in 2014 with yields falling from 3.5% to 1.5%.
4. 4.25% 2055 through mid 2016 saw yields fall from 2.7% to 1.1%, with more than 30% return for holders.

These 20-30% figures are gains on initial invested capital for a purchase at the initial yield and sale at the final yield. [This is what I always mean by "return".]


Again, I reiterate I am not making a case for gilts right now, just making the point that they have had their place, and who knows, may be useful again in future. As I have often said, I doubt the bull market is over because I still see little evidence that gilts are loved by retail investors ["dumb money"]. My impression is they have mainly been held by professionals. Happy to be corrected though.


What is great to see here is people interested in actually studying this stuff and understanding bonds. Bonds are fundamental to investing. Everything is a variety of bond, so if one is mathematically inclined and can get one's head around them, a grounding in bonds is a fantastic advantage. Who cares if you can just read a Warren Buffett book and pick a couple of promising stocks? This is about actually understanding how stuff works, which I think is valuable and rewarding in its own right.

GS

TheMotorcycleBoy
Lemon Quarter
Posts: 3245
Joined: March 7th, 2018, 8:14 pm
Has thanked: 2222 times
Been thanked: 587 times

Re: Learning about Gilts

#132223

Postby TheMotorcycleBoy » April 14th, 2018, 7:28 pm

GoSeigen wrote:
Melanie wrote:As an example I've just made a brief study of the gilt TG26's prices.

from
http://www.londonstockexchange.com/exch ... PUKGT.html

23/6/2016 99.95
26/8/2016 108.23
Now 101.3 (with yield of 1.39)


GoSeigen wrote:This is a refreshingly open-minded, evidence-based way of looking at things.

Thanks. That TG26 one, was the only one I studied. I'm going to continue with this by choosing some other examples.

I recently discovered this site, which generates nice historical reports on gilt issues, and lists issue date as well, a datum which I'd struggled to find elsewhere.

https://www.dmo.gov.uk/data/pdfdatarepo ... Code=D2.1E

What I want to get an idea of, is the relationship between the returns that people could have made (e.g. around the Brexit event) and a gilt's characteristic properties (maturity, coupon, purchase price/yield, issue date), so that we can figure out what of the currently available gilts could be useful to us in provision of a buffer against similar events.

GoSeigen wrote:The average retail investor looks at gilts and the 1.39% yield and says there is no way they can make any money from them.

GoSeigen wrote:Maybe your study above gave you some ideas...

Indeed yes. I have to say that we are both very grateful to everyone's patience on this and other subjects. As you've all pointed out, holding gilts is an interesting insurance policy against the descent of equity prices.

GoSeigen wrote:Again, I reiterate I am not making a case for gilts right now, just making the point that they have had their place, and who knows, may be useful again in future.

Are you implying that me and Mel buying gilts right now, is not a good idea? Are they generally overpriced at the moment?

Using TG26 as an example, sinking a bunch of money that I was going to mainly place into a 1.25% savers account into these gilts does even now seem like a reasonable idea since the yield is still better that the saver account, and as said could profit further if a "Brexit style" event happens.

But having said that, the above gilt would tie down the money possibly for 8 years, so perhaps we'd be better off finding something with slightly less maturity/duration?

Anyway, should we hold fire for now (wait and see if gilt prices fall?) or is purchasing a gilt at "an acceptable price slightly over par", with some kind of yield (1.2-1.4%) a reasonable insurance policy for us from now for the next few years?

GoSeigen wrote:What is great to see here is people interested in actually studying this stuff and understanding bonds.

Definitely. I'm finding studying bonds really interesting, and I'm surprised how rich a topic it is. In fact when me and Mel first decided to try our hand at investment in general I think we both considered that it would turn out to be a boring chore. It is currently turning out to be quite the reverse!

Matt

AleisterCrowley
Lemon Half
Posts: 6381
Joined: November 4th, 2016, 11:35 am
Has thanked: 1880 times
Been thanked: 2026 times

Re: Learning about Gilts

#132232

Postby AleisterCrowley » April 14th, 2018, 8:40 pm

I'm finding these threads very interesting and useful- thanks to GS,alaric, colin, jh et al and M&M of course!

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: Learning about Gilts

#132248

Postby johnhemming » April 14th, 2018, 10:50 pm

I don't personally think this is a good time to be investing in gilts. The prices could easily shift downwards.

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: Learning about Gilts

#132286

Postby johnhemming » April 15th, 2018, 8:20 am

Which is a good point. To me I feel that with Gilts at a low yield there is more of a risk of a capital downside than upside and that this overwhelms the yield. Some organisations have to buy them for regulatory reasons.

Hence even if historically there is good evidence for a mixed portfolio with some short term bonds I would leave it until the yield ticked up a bit.

I had sold almost all of my fixed interest until the Aviva first statement when I bought some GACA. I see some space for the yield to tick down on these at which point I may sell.

Mark Taber's helpful page on financial prefs has yields of around 5.5%
https://www.fixedincomeinvestments.co.u ... nominated/

Bloombergs helpful page on gilts has yields under 2%
https://www.bloomberg.com/markets/rates ... t-bonds/uk


Return to “Gilts and Bonds”

Who is online

Users browsing this forum: No registered users and 8 guests