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Are gilts too pricey to buy right now?

Gilts, bonds, and interest-bearing shares
GoSeigen
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Re: Are gilts too pricey to buy right now?

#133866

Postby GoSeigen » April 22nd, 2018, 9:16 am

colin wrote:
GoSeigen:
I recently bought £60,000 worth of corporate bonds (not even shares) which are "economically almost exactly the same as gilts" and suffered an economic loss of 100% of that money within three months due to circumstances diverging temporarily from "normal".


Wow! that would be a devastating blow to most people. It would be interesting to learn what the credit rating was of these bonds and which agency gave them the rating?


FredBloggs wrote:I was thinking the exact same thing, there may be a lesson worth sharing here?

I reflect that some of the retail bonds issued have failed too. No wonder the market doesn't seem to have taken off as expected.



Would be happy to discuss another time. I'm not sure it's relevant to to the point, or to this thread.

The lesson is as stated: the only way you can say that shares (or corporate bonds) are the same as gilts without looking a fool is by making narrow and unrealistic restrictions on the periods and manner in which you compare them. Outside of those periods the difference can be devastating.


GS

Alaric
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Re: Are gilts too pricey to buy right now?

#133867

Postby Alaric » April 22nd, 2018, 9:30 am

GoSeigen wrote:The lesson is as stated: the only way you can say that shares (or corporate bonds) are the same as gilts without looking a fool is by making narrow and unrealistic restrictions on the periods and manner in which you compare them.


Shares are demonstrably not the same as Gilts. Corporate Bonds on the other hand are directly comparable and frequently priced by reference to Gilts of a similar profile. Most corporate bonds go through their life cycle of issue to maturity without default, so that usual price and yield comparison is neither narrow nor unrealistic.

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Re: Are gilts too pricey to buy right now?

#133873

Postby johnhemming » April 22nd, 2018, 9:36 am

Soveriegn debt is not risk free.

GoSeigen
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Re: Are gilts too pricey to buy right now?

#133883

Postby GoSeigen » April 22nd, 2018, 10:48 am

The Pope is a Catholic.

GS

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Re: Are gilts too pricey to buy right now?

#133889

Postby johnhemming » April 22nd, 2018, 11:29 am

on some recent comments your last comment was perhaps not as certain as what bears do in the woods.

TheMotorcycleBoy
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Re: Are gilts too pricey to buy right now?

#133937

Postby TheMotorcycleBoy » April 22nd, 2018, 5:24 pm

GoSeigen wrote:Matt, my point was not about buying gilts now, but about having a "rule" which is demonstrably nonsense and can result in missed opportunities.


GoSeigen wrote:So my view: dump the stupid rule; don't buy gilts now


Yes, you're right. Point taken.

GoSeigen wrote:As stated clearly in the past I don't make a case for gilts in the current environment


Yes, I remember you saying that a few posts back.

But anyway, thanks again to you (and everyone else on LF) for helping me and Mel figure this stuff out. Gilts (and corp bonds) are a useful part of a balanced portfolio, but just not for inclusion right now it seems.

I must admit we are having a hell of job figuring out wise investments currently, what with rates being so low, so much money already in gilts, and the recent dramas we've had (e.g. Brexit vote, and the recent market correction we saw earlier in the year).

I'd like to hope that may be the market conditions will improve soon such that the big investors start to redirect their holdings away from gilts and bonds and into equity. Then our stocks should go up, and gilt prices will fall and then we'll be able to start thinking about actually buying some of the damn things! :lol:

Matt and Mel

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Re: Are gilts too pricey to buy right now?

#133974

Postby Bluestone77 » April 22nd, 2018, 9:11 pm

As stated above UK Indexed linked gilts now have a negative real yield. The real yield being around minus 1.5%.
I hold some T42A which I bought around par (100p) several years ago which now sell for around 210p. I plan to hold to maturity.
For this reason, whilst I still hold the T42A, for new purchases I am buying US government TIPS. I see better value here with real yields around plus 0.7%. I use the ETF TIPS for exposure.
Obviously there is more risk here as they are linked to US inflation and there is exchange risk. Also lost is the ability to hold to maturity. Time will tell if TIPS outperforms T42A. This is in a portfolio of approx 70:30 shares : government indexed linked bonds.

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Re: Are gilts too pricey to buy right now?

#134040

Postby TheMotorcycleBoy » April 23rd, 2018, 9:17 am

Bluestone77 wrote:As stated above UK Indexed linked gilts now have a negative real yield. The real yield being around minus 1.5%.
I hold some T42A which I bought around par (100p) several years ago which now sell for around 210p. I plan to hold to maturity.
For this reason, whilst I still hold the T42A, for new purchases I am buying US government TIPS. I see better value here with real yields around plus 0.7%. I use the ETF TIPS for exposure.
Obviously there is more risk here as they are linked to US inflation and there is exchange risk. Also lost is the ability to hold to maturity. Time will tell if TIPS outperforms T42A. This is in a portfolio of approx 70:30 shares : government indexed linked bonds.


Thanks for this remark. An interesting addition to this thread.

I'm still very jealous of you, purchasing those gilts at such a nice rate, all those years ago!!

Matt

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Re: Are gilts too pricey to buy right now?

#134237

Postby tieresias » April 23rd, 2018, 7:37 pm

AleisterCrowley wrote:Ended up in ING (whatever happened to them?)


ING Direct (UK) was acquired by Barclays who, unsurprisingly, reduced the interest rates offered.

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Re: Are gilts too pricey to buy right now?

#134318

Postby AleisterCrowley » April 24th, 2018, 9:03 am

Barclays? Memory blank about that, ringing a distant bell now. I guess I must have closed immediately and transferred the cash somewhere ....

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Re: Are gilts too pricey to buy right now?

#143329

Postby DiamondEcho » June 3rd, 2018, 7:38 pm

Melanie wrote:We wanted to justify to ourselves that whilst the inclusion of gilts to our portfolio would be useful for purposes of balance, and as a class whose value may well rise if equity prices fall, due their current prices we think that a forthcoming purchase would be a mistake.


I've been considering this too, as I'm at 'about the stage' where traditionally I'd be beginning to rebalance my investments from 100% equities into a growing proportion of bonds. This progressive de-risking/locking-in vs age was something of a mantra* when I worked in the industry back in the 90s. But I've read several articles of late that suggest now would be completely the wrong time to be doing similar, and others suggesting the 'risk-off into retirement' no longer applies at this low interest% time, and in fact is so at the wrong point of the typical 'average conditions' you'd just be throwing money away. Rates should only rise from here, so you'd be paying near the maximum for bond exposure, only to see it fall in value if/when rates rise. So my current thinking is stay 100% in equities until we're nearer the top of the IR% cycle .... no idea how long that might take. Then revisit it and perhaps[?] start a slightly accelerated rebalance. We'll see!

Articles in this regard pop up periodically on Morningstar; useful as they're regarded as professional and reputable http://www.morningstar.co.uk/uk/
Their Investing for Retirement section: http://www.morningstar.co.uk/uk/collect ... ement.aspx
Some investing household name was airing similar thoughts just this week, might have been Warren Buffets partner Charlie Munger or similar. [the source of that would have been https://www.marketwatch.com/ ]

When the time comes I'll also be looking for bond exposure via some low-fee instrument. Maybe a range of durations within a single product whole, I'll see. [I've worked on a fixed-income trading floor and seen the spreads the retail-customer desk put on odd-lots; as a result I would not be looking to buy individual bonds directly from a broker!]


*https://www.marketwatch.com/story/heres-whats-wrong-with-this-popular-asset-allocation-rule-2017-12-20

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Re: Are gilts too pricey to buy right now?

#143387

Postby TheMotorcycleBoy » June 4th, 2018, 6:16 am

DiamondEcho wrote:...you'd just be throwing money away. Rates should only rise from here, so you'd be paying near the maximum for bond exposure, only to see it fall in value if/when rates rise. So my current thinking is stay 100% in equities until we're nearer the top of the IR% cycle .... no idea how long that might take. Then revisit it and perhaps[?] start a slightly accelerated rebalance. We'll see!

Yes, I have to agree with you. Out of curiosity I've been following current prices of a set of gilts of varying maturites for the last month or so....interesting to see how they all jumped a little in price in line with the Italian bond drama.

1nv35t wrote:Short dated bonds (notes/bills) tend to hold their value. If stocks plunge 33% over a year and Bills hold their value then each Bill buys 50% more stock than a year earlier. And often after such a rapid rise in the stock purchase power of Bills, any stock bought with those Bills tends to rise in value relatively rapidly. Worthwhile holding some exposure to that potential opportunity. Even Buffett likes to have 10% highly liquid T-Bills for when opportunities present themselves. And unlike a bank deposit Bills are 100% backed by the State (they can print more money or raises taxes rather than default).

Since Mel and I have a small sums of money to invest/save etc. for liquidity (and a cash buffer), I opened a Ford money flexible saver account, which is protected for our scale of deposits. It attracts 1.22% interest which I guess is either comparable to or exceeds that of short-dated UK gilts. We've have about 33% (10k) of our initial savings/investments there.

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Re: Are gilts too pricey to buy right now?

#143391

Postby GeoffF100 » June 4th, 2018, 7:24 am

Conventional gilts do not look attractive when you can get 2.7% on a five year bank account guaranteed by the FSCS. I have got index linked gilts with coupons of 0.125%, which makes them very tax efficient. The return at the implied inflation rate is not good, but they do provide some insurance. If you want to buy bonds within a tax shelter, the Vanguard Global Bond fund (hedged into GBP) looks a choice to me.

Equities are priced relative to government bonds, e.g. with a dividend discount model. In theory, if the bond yield falls 1%, the equity price should rise to reduce the expected return from equities by 1% too. Companies (and their customers) should also benefit from cheaper borrowing, which should increase company profitability and further propel the share price. Both equity and bond prices are high by historical standards. I do not know which are the more overpriced. Mr Market thinks the prices are just right.


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