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Are gilts too pricey to buy right now?

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

#133771

Postby TheMotorcycleBoy » April 21st, 2018, 5:24 pm

Hi everyone,

As several of you know, we are very new to investing (first equity bought 6 weeks ago). Our aim is to put our savings (about 24k or so) some where more useful than the banks, and our main goal is just steady accumulation of wealth, no fancy speculation or market bets etc. Some equities (individual stocks and tracker funds), some corporate bonds, and some gilts being the general idea.

We did a historic/comparative study looking at gilt prices (in 2005, 2006 and now). The previous dates chosen as to be outside of the financial crisis drama 2007-8 with interest rates at somewhat more "normal" levels.

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.

Prices / yields look worthwhile here:

2,5,8,10yr maturity gilts 14/03/05 4.50% interest
=================================================
2yr 4.5% treasury stk 2007 GB0034040740 99.540000 4.746283
5yr 4.75% treasury stk 2010 GB00B0330274 99.930000 4.763241
8yr 8% treasury stk 2013 GB0008921883 122.410000 4.770933
10yr 3% treasury stk 2015 GB0009031211 61.680000 4.863680

2,5,8,10yr maturity gilts 14/03/06 4.25% interest
=================================================
2yr 5% treasury stk 2008 GB0031734154 100.560000 4.654667
5yr 4.25% treasury gilt 2011 GB00B128F474 98.380000 4.526649
8yr 5% treasury stk 2014 GB0031829509 102.910000 4.570668
10yr 4% treasury gilt 2016 GB00B0V3WX43 95.720000 4.526649


but now..

2,5,8,10yr maturity gilts 21/04/18 (now!!) 0.5% interest
================================================
2yr Treasury 4,3/4% 2020 (TS20) GB00B058DQ55 107.54 0.8300
5yr Treasury 2,1/4% 2023 (T23) Gilt GB00B7Z53659 105.89 1.1980
8yr Treasury 1.5% TG26 2026 GB00BYZW3G56 100.735 1.4510
10yr Treasury 6% 2028 GB0002404191 143.440 1.5890


purchase seems foolish, as all prices are above par, and one priced closest to par, TG26, has a duration (about 7.7) that even a small rise of interest rates will knock it's price further south.

I apologise that this may seem a simplistic question to you all, but we'd really appreciate some confirmation that our thoughts are moving on the right lines.

thanks Mel

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Re: Are gilts too pricey to buy right now?

#133775

Postby johnhemming » April 21st, 2018, 6:04 pm

If you want fixed interest I would buy aviva prefs (I have actually bought the GACA ones- I bought them after the price crashed recently, but haven't sold them yet although I may sell some if they get above 165p. Their yield is somewhere between 5 and 6%.

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Re: Are gilts too pricey to buy right now?

#133777

Postby tjh290633 » April 21st, 2018, 6:10 pm

Melanie, what you are demonstrating is that currently gilts held to maturity offer very low redemption yields. Apart from the TG26, they are all well above par.

I invested in some for my mother-in-law back in the 1980s and I made it a rule never to buy any above par, and some were 12% or 13% nominal. In my view there are none worth buying at the moment. In fact, index-linked gilts tend to have negative redemption yields.

TJH

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Re: Are gilts too pricey to buy right now?

#133791

Postby TheMotorcycleBoy » April 21st, 2018, 7:10 pm

Thanks for these replies,

johnhemming wrote:If you want fixed interest I would buy aviva prefs (I have actually bought the GACA ones- I bought them after the price crashed recently, but haven't sold them yet although I may sell some if they get above 165p. Their yield is somewhere between 5 and 6%.


We did see these, but were put off, since weren't these the shares that were kind of controversial just of late? Didn't Aviva make moves to redeem them?

Is it a done deal, that they won't ever be redeemed, or do you think if they are redeemed, they will be bought back at very advantageous terms?

tjh290633 wrote:Melanie, what you are demonstrating is that currently gilts held to maturity offer very low redemption yields. Apart from the TG26, they are all well above par.

I invested in some for my mother-in-law back in the 1980s and I made it a rule never to buy any above par, and some were 12% or 13% nominal. In my view there are none worth buying at the moment. In fact, index-linked gilts tend to have negative redemption yields.

TJH


Yes, the "don't buy above par" was the yardstick we wanted to apply, so thanks for confirming this.

Mel

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Re: Are gilts too pricey to buy right now?

#133793

Postby johnhemming » April 21st, 2018, 7:27 pm

Melanie wrote:We did see these, but were put off, since weren't these the shares that were kind of controversial just of late? Didn't Aviva make moves to redeem them?

Is it a done deal, that they won't ever be redeemed, or do you think if they are redeemed, they will be bought back at very advantageous terms?

It is a long saga that you can read on other threads. I bought some (GACA) at an average price of just over 121p in mid march. They are currently 154-158 and I am not selling at this price. Their yield (GACA) is I think somewhere between 5 and 6% (you can do the calculation). I will probably sell part of my holding if they end up in the 165p price range. They did I think hit over 170p at some stage.

In terms of the element of risk of forced redemption at par Aviva's comments make this unlikely because were it to happen Aviva may end up having to pay compensation because of what they have said.

These also have a vulnerability of an increase in general interest rates

As an investor I can be described as a contrarian. I tend to look for where the market has overreacted to something and I think the market is wrong.

I cannot, of course, promise anything about these or other investments.

Sometimes my investments do very well and sometimes they do awfully.

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Re: Are gilts too pricey to buy right now?

#133795

Postby Dod101 » April 21st, 2018, 7:35 pm

In the FT today, there is an item saying that over the last 118 years, the total returns on equities have been 5.1% pa, on long dated gilts 1.3% and on cash 0.7%. Why on earth would you want gilts or for that matter their near cousin, corporate bonds? It depends on your timescale of course but I am assuming it is say at least 10 years? I have some corporate bond funds, but that is because I need income and buying funds means I do not need to know a lot about the ins and outs of individual corporate bonds.

To answer your question, if interest rates rise, as seems likely, the capital value of gilts is going to fall so as to allow the yield to rise, but I do not know whether gilts are too pricey or not. It depends.

Dod

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Re: Are gilts too pricey to buy right now?

#133797

Postby Wozzitworthit » April 21st, 2018, 8:12 pm

If you don't need any income or capital in the next 10_ years then buy a tracker - FTSE 100 or similar - some might say the market is too high right now - if you agree with that view then drip feed into it - you'll never call it spot on

If that doesn't appeal to you then wait around until something comes up in retail bonds, and buy on issue at par. ( We have some of the "charity" ones that pay between 3.9% and 4.25% ) Keep an eyeon them and offload some/all if the price rises - likewise be prepared to sell if the price heads downwards - all depends on when maturity etc is

You won't get much of a choice though - most of the issues are related to housing or finance - but at least you will learn a lot doing that and by following these boards for background info

A few years back you could get very similar rates from term deposits with banks but those days have gone. We got over 6% with an Icelandic Bank, more than a lot of corporate bonds were paying at the time. The bank went bust but we got everything back incluidng interest with the UK protection scheme

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Re: Are gilts too pricey to buy right now?

#133799

Postby Dod101 » April 21st, 2018, 8:18 pm

Wozzitworthit wrote:A few years back you could get very similar rates from term deposits with banks but those days have gone. We got over 6% with an Icelandic Bank, more than a lot of corporate bonds were paying at the time. The bank went bust but we got everything back incluidng interest with the UK protection scheme


Good luck to you but 6% was of course too good to be true and I think it is unfair that the rest of us should covering such losses. What happened to caveat emptor?

Dod

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Re: Are gilts too pricey to buy right now?

#133815

Postby AleisterCrowley » April 21st, 2018, 9:39 pm

I had a fair chunk in Kaupthing.
Ended up in ING (whatever happened to them?)
Anyone could open an account, so no qualms about getting my money back when the Icelandic banks failed.
The FSCS is funded by levies on firms anyway, not general taxation

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Re: Are gilts too pricey to buy right now?

#133828

Postby Alaric » April 21st, 2018, 10:44 pm

Dod101 wrote:In the FT today, there is an item saying that over the last 118 years, the total returns on equities have been 5.1% pa, on long dated gilts 1.3% and on cash 0.7%.


Isn't that "real" return, in other words adjusted downwards by a prices index? As far as gilts and cash are concerned, present day values are negative as witnessed by the negative real yields on UK Indexed.

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Re: Are gilts too pricey to buy right now?

#133830

Postby GoSeigen » April 21st, 2018, 10:57 pm

Melanie wrote:Thanks for these replies,

johnhemming wrote:If you want fixed interest I would buy aviva prefs (I have actually bought the GACA ones- I bought them after the price crashed recently, but haven't sold them yet although I may sell some if they get above 165p. Their yield is somewhere between 5 and 6%.


We did see these, but were put off, since weren't these the shares that were kind of controversial just of late? Didn't Aviva make moves to redeem them?

Is it a done deal, that they won't ever be redeemed, or do you think if they are redeemed, they will be bought back at very advantageous terms?

tjh290633 wrote:Melanie, what you are demonstrating is that currently gilts held to maturity offer very low redemption yields. Apart from the TG26, they are all well above par.

I invested in some for my mother-in-law back in the 1980s and I made it a rule never to buy any above par, and some were 12% or 13% nominal. In my view there are none worth buying at the moment. In fact, index-linked gilts tend to have negative redemption yields.

TJH


Yes, the "don't buy above par" was the yardstick we wanted to apply, so thanks for confirming this.

Mel


Melanie,


The Aviva preference shares will never be redeemed because they are irredeemable. (They have no redemption terms.) They are subject to reduction of capital at par value -- currently they are trading far above par -- though there is doubt whether a reduction of capital shareholder resolution could ever attract the required votes.

Re: gilts, note first they are debt not shares, so a completely different beast to the Aviva securities. Second, there is no logical reason (other than taxation maybe) not to buy gilts above par. Par for debt is an arbitrary figure as you should have discovered by now. It is no more than an artifact of prevailing yields at issue. Further, in creating a solid rule based on market price you are focussing on two cashflows (purchase price and redemption value) and forgetting all the other interest cashflows. Not smart for a bond investor. Yield, on the other hand, encapsulates both capital values and income.

Further, if yields are relatively high and likely to fall, you will have a return in excess of your purchase yield. That's why you could buy TR4Q 4.25% 2055 gilts a few years back yielding 4.25% and trading at a few pence over par (which you have been told is a no no) and could sell them recently at 195p for 100% profit, as my parents did.

Do you really want a rule which prevents you buying something at 105p which might trade in a short time at almost double that price? I think you guys can be more sophisticated than that.


Good luck.

GS

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Re: Are gilts too pricey to buy right now?

#133831

Postby Alaric » April 21st, 2018, 11:06 pm

GoSeigen wrote:Re: gilts, note first they are debt not shares, so a completely different beast to the Aviva securities.


In terms of what the investor will receive under normal circumstances they are almost exactly the same, not "completely different" and the prices an investor might pay will be comparable.

In one you get a fixed income of £ X for ever, or until the Company offer a voluntary or forced repayment. On the other you get a fixed income of £ Y per year ( X being greater than Y) and a fixed return of £ 100 per £ 100 nominal at a pre-determined date. When the pre-determined date is a long way in the future and if the Company is not trying to force repayment in the near future, there's little practical difference.

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Re: Are gilts too pricey to buy right now?

#133835

Postby GoSeigen » April 21st, 2018, 11:42 pm

Alaric wrote:
GoSeigen wrote:Re: gilts, note first they are debt not shares, so a completely different beast to the Aviva securities.


In terms of what the investor will receive under normal circumstances they are almost exactly the same, not "completely different" and the prices an investor might pay will be comparable.

In one you get a fixed income of £ X for ever, or until the Company offer a voluntary or forced repayment. On the other you get a fixed income of £ Y per year ( X being greater than Y) and a fixed return of £ 100 per £ 100 nominal at a pre-determined date. When the pre-determined date is a long way in the future and if the Company is not trying to force repayment in the near future, there's little practical difference.


"In terms of what the investor will receive under normal circumstances" are the key words here. "Normal circumstances" includes:
-the issuer has declared every dividend
-the issuer is solvent
-the company's yields have not diverged from government yields since purchase
-the issuer has not repurchased your shares in a tender or otherwise in difficult economic times
-new taxes have not been levied on dividends
-new taxes have not been levied on shares
-there has been no fraud

You'll note I did not make this massive caveat in my post.

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".

But of course that could never happen to you.

GS

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Re: Are gilts too pricey to buy right now?

#133837

Postby Alaric » April 22nd, 2018, 12:42 am

GoSeigen wrote: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".


The risks of investing in a single Corporate Bond are similar to investing in a single share. Worse even as you don't have the potential upside.

I would be reluctant to go above £5000 for an initial investment in an ordinary share. But fish in the junk bond market you either get a semi-decent return or totally burnt.

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Re: Are gilts too pricey to buy right now?

#133842

Postby TheMotorcycleBoy » April 22nd, 2018, 6:19 am

Wozzitworthit wrote:If you don't need any income or capital in the next 10_ years then buy a tracker - FTSE 100 or similar - some might say the market is too high right now - if you agree with that view then drip feed into it - you'll never call it spot on

Agreed. We are currently looking for a "World Equities Index Tracker". That is, rather than tracking FTSE100 it tracks positions weighted as per market cap in several world markets.

Know of any decent ones? Even better ones which can be purchased on IWeb?

Wozzitworthit wrote:If that doesn't appeal to you then wait around until something comes up in retail bonds, and buy on issue at par. ( We have some of the "charity" ones that pay between 3.9% and 4.25% ) Keep an eyeon them and offload some/all if the price rises - likewise be prepared to sell if the price heads downwards - all depends on when maturity etc is

Yes, we've been frantically searching for, a lot of junky looky ones (e.g. various finance/leaning firms). The most decent ones we've found are from BT and Tesco, both of which saw a price rise at tail of last week, presumably after the discovery that rates probably won't rise in the next or 2 months. I think we should wait around personally.

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Re: Are gilts too pricey to buy right now?

#133843

Postby Dod101 » April 22nd, 2018, 6:29 am

Alaric wrote:
Dod101 wrote:In the FT today, there is an item saying that over the last 118 years, the total returns on equities have been 5.1% pa, on long dated gilts 1.3% and on cash 0.7%.
Isn't that "real" return, in other words adjusted downwards by a prices index? As far as gilts and cash are concerned, present day values are negative as witnessed by the negative real yields on UK Indexed.


Quite possibly although I was reading the item on a train journey and have since thrown away the paper! The fact is though that whilst in the short term you may do well with gilts, in the longer term you will almost certainly do better with equities.

Dod

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Re: Are gilts too pricey to buy right now?

#133844

Postby TheMotorcycleBoy » April 22nd, 2018, 6:36 am

GoSeigen wrote:Further, in creating a solid rule based on market price you are focussing on two cashflows (purchase price and redemption value) and forgetting all the other interest cashflows. Not smart for a bond investor. Yield, on the other hand, encapsulates both capital values and income.

Yes, we agree.

However, the yields right now, are too small (we think).

8yr Treasury 1.5% TG26 2026 GB00BYZW3G56 100.735 1.4510
10yr Treasury 6% 2028 GB0002404191 143.440 1.5890


are the only half decent ones, but their yields are only 0.23 and 0.35 higher than what we could currently receive on a Ford-Money saving account (which is FSCS protected since it would be bank deposits). And we can remove the cash from there whenever we like.

The issue for us, with the above gilts, is that, on the proviso that interest rates may well rise in the next year or 2 (I think they will post-brexit and post-trump, due improvement in economic conditions), then the market prices of those gilts above will fall (presumably) and hence we'll end up sticking with them till redemption. Hence my current thinking does focus somewhat on v. low yields, and purchase vs redemption price.

GoSeigen wrote:Further, if yields are relatively high and likely to fall, you will have a return in excess of your purchase yield. That's why you could buy TR4Q 4.25% 2055 gilts a few years back yielding 4.25% and trading at a few pence over par (which you have been told is a no no) and could sell them recently at 195p for 100% profit, as my parents did.

Indeed. But in the current day we have the reverse scenario - long dated gilts priced high (the 10yr bond is currently at 143).

(I do totally agree with you, that there were scenarios in the past where gilts did very well for people, e.g. some of the examples that you and others have mentioned, but I don't see that as being right now.)

GoSeigen wrote:Do you really want a rule which prevents you buying something at 105p which might trade in a short time at almost double that price?

Well, no of course not. However, first off TR4Q now trades at 167, and further in the recent events (Brexit), we did see the jumps in price, you know you saw my study, however for a 20-year gilt, they were only 20 bp......which compared against the current purchase price of TR4Q is no way near double.

Matt

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Re: Are gilts too pricey to buy right now?

#133854

Postby Wozzitworthit » April 22nd, 2018, 8:00 am

Melanie wrote:
Wozzitworthit wrote:If you don't need any income or capital in the next 10_ years then buy a tracker - FTSE 100 or similar - some might say the market is too high right now - if you agree with that view then drip feed into it - you'll never call it spot on

Agreed. We are currently looking for a "World Equities Index Tracker". That is, rather than tracking FTSE100 it tracks positions weighted as per market cap in several world markets.

Know of any decent ones? Even better ones which can be purchased on IWeb?

Wozzitworthit wrote:If that doesn't appeal to you then wait around until something comes up in retail bonds, and buy on issue at par. ( We have some of the "charity" ones that pay between 3.9% and 4.25% ) Keep an eyeon them and offload some/all if the price rises - likewise be prepared to sell if the price heads downwards - all depends on when maturity etc is

Yes, we've been frantically searching for, a lot of junky looky ones (e.g. various finance/leaning firms). The most decent ones we've found are from BT and Tesco, both of which saw a price rise at tail of last week, presumably after the discovery that rates probably won't rise in the next or 2 months. I think we should wait around personally.



Amongst others I have

Vanguard – World High Div Yld ETF - VHYL - The "High Yield" being an overall 1 to 3% - it's all relatiove !!

However, over the weekend I read about Vanguard FTSE All World - VWRL which I am going to have a look at
Have a look at both and see if either fits the bill

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Re: Are gilts too pricey to buy right now?

#133856

Postby colin » April 22nd, 2018, 8:15 am

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?

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Re: Are gilts too pricey to buy right now?

#133861

Postby GoSeigen » April 22nd, 2018, 8:52 am

Melanie wrote:
GoSeigen wrote:Do you really want a rule which prevents you buying something at 105p which might trade in a short time at almost double that price?

Well, no of course not. However, first off TR4Q now trades at 167, and further in the recent events (Brexit), we did see the jumps in price, you know you saw my study, however for a 20-year gilt, they were only 20 bp......which compared against the current purchase price of TR4Q is no way near double.

Matt


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

As stated clearly in the past I don't make a case for gilts in the current environment -- even those trading below par which bizarrely the proposed rule would allow you to buy even though they are exactly the same price (i.e. yield) as the ones above par!


So my view: dump the stupid rule; don't buy gilts now. Those statements are not contradictory.

GS


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