Index Linked Gilts

[CliffEdge]

Please forgive me if this has been discussed before but I did a search and couldn't find the answer.

I have recently discovered that there are bonds (gilts) issued by the governement that are linked to the rate of inflation.

Simply if you buy £100 worth of these gilts then their value will keep pace with inflation until the date that they mature.

Is this correct and if so what is the catch as I would have thought they were a no-brainer for preserving capital value?

Are these gilts available at HL or iWeb for example?

[mc2fool]

The catch right now (or at least, last I looked) is that most (all?) index linked gilts are currently trading at a premium and offering negative real redemption yields.

The DMO used to publish current prices & yields etc, but they seem to have reorganised their website and I don't have the time to dig around to find where that data is now ... maybe someone else can provide a link.

[argoal]

This article on Monevator will explain the problem that Mc2Fool mentions and other potential issues.

http://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/

Monevator is a great source of information and ideas for investors of all levels of experience.

[Bluestone77]

Indexed Linked Gilt yields can be found in the link:
https://www.fixedincomeinvestor.co.uk/x ... oupid=3540
Typically Real Yields are around MINUS 1.5-1.6% for the longer dated ones. This is against RPI.
If you hold to maturity this is your return.
It is analogous to the old National Savings Indexed Linked Bonds - would you invest in an issue if the interest rate was RPI minus 1.6% ??
Indexed linked gilts may still be a good return but only if the RPI significantly exceeds interest rates over the time frame.

[Bluestone77]

I should have added that most brokers will allow you to buy/sell IL Gilts but often you have to telephone rather than use internet dealing, but often you only get charged the internet dealing commission.
I currently hold T42A in my HL SIPP and Halifax ISA:
https://www.hl.co.uk/shares/shares-sear ... 25-il-2042
https://m.londonstockexchange.com/excha ... ml?lang=en

If you do decide to trade you need to familiarise yourself on the difference between the clean and dirty prices as these can be significantly different for IL Gilts.

[colin]

US TIPS offer a positive yield and these days one can buy currency hedged ETF funds, though the real yield may only just be positive after costs.

[CliffEdge]

Many thanks for your replies.

I have done quite a bit of reading via the links you posted. Still don't entirely understand. Quite a lot more complicated than my NS&I ILCs, which is a bit disappointing.

There is an IL Gilt which matures March 24 2024. Its quoted yield is -1.784. Does this mean its real yield i.e. if inflation were 3.784% until 2024, its yield would be 2%? If inflation soared to 20% would its yield be around 18%?

Its price is quoted as 111.4. Does this mean that for £111.4 I could buy £100 worth inflation proofed until 2024? But if it was issued say in 2003 it would already have acquired increased value over the original £100? How do you find out its present day value?

[CliffEdge]

Now even more confused.

RPI when the gilt was issued in Oct 2012 was 245.6. RPI in June 2018 was 281.5. So the value of £100 of this gilt is now at least 281.5/245.6 which is £114.6. But you can buy it for £111.4, so how can the future yield be negative?

Is it because of income tax?

[Alaric]

so how can the future yield be negative?

Is it because of income tax?

Nothing to do with tax.

What you should do is look at the yield on a fixed gilt maturing at around the same time. The real yield is going to be approximately the money yield minus the assumed rate of inflation, so it can be negative without too much difficulty when interest rates are down in the 1% to 2% range. It's RPI inflation as well, which is more the genuine measure of price movements than CPI.

The other factor is that fixed gilts actually pay you some interest every year, whilst on many Indexed Gilts you can get as little as 0.1%.

Another way of looking at these is to check what you pay and what you get if inflation were to be 0% until maturity. When using the RPI Index, be aware to that some Indexed Gilts have an eight month delay in their rules.

[GoSeigen]

Many thanks for your replies.

I have done quite a bit of reading via the links you posted. Still don't entirely understand. Quite a lot more complicated than my NS&I ILCs, which is a bit disappointing.

This is hardly surprising, as ILCs are not negotiable instruments i.e. they do not have a variable price at which they trade from day to day.

There is an IL Gilt which matures March 24 2024. Its quoted yield is -1.784. Does this mean its real yield i.e. if inflation were 3.784% until 2024, its yield would be 2%? If inflation soared to 20% would its yield be around 18%?

No. Yield is calculated from market price on a particular date. You have given no indication of what the market price would be and why and on which date so we cannot guess what the yield would be.

If you meant to ask whether the return on your investment would be approximately 2% and 20% respectively then yes, that is the idea. But note that yield and return do not mean the same thing in the bond world. When you read about bonds you have to pay careful attention to the words being used to avoid immediate befuddlement!

Its price is quoted as 111.4. Does this mean that for £111.4 I could buy £100 worth inflation proofed until 2024?

Yes, 100% of the nominal issue value.

But if it was issued say in 2003 it would already have acquired increased value over the original £100? How do you find out its present day value?

[... next post:]

RPI when the gilt was issued in Oct 2012 was 245.6. RPI in June 2018 was 281.5. So the value of £100 of this gilt is now at least 281.5/245.6 which is £114.6.

You mean that redemption price would have been adjusted for inflation, right? At redemption this value can be calculated using the index as you did above. Before the redemption date the redemption price has to be estimated. Typically this is done using a fixed assumed value of inflation over the life of the bond, normally 3%pa. From that redemption value and assumed interest cashflows the yield of the bond is calculated. Then the figure you see for real yield on fixedincomeinvestor.co.uk and elsewhere is the yield minus the 3% assumed inflation.

Inflation of course will turn out different to a constant 3%, so the earned return at maturity will of course be different to the calculated yield at purchase.

But you can buy it for £111.4, so how can the future yield be negative?

Is it because of income tax?

Income tax is ignored in calculations so you can discount that. But I don't understand your question. "future yield" is not a term I am familiar with.

GS

[Bluestone77]

Its price is quoted as 111.4. Does this mean that for £111.4 I could buy £100 worth inflation proofed until 2024?

No. The 111.4 will be the CLEAN price, i.e. without inflation adjustment. What you have to pay is the DIRTY price, i.e. with inflation adjustment.
Formula:
Inflation adjusted dirty price = (Index Ratio x real clean price) + (Index Ratio x real Accrued Interest).
Most stockbrokers valuations show only the 'clean' price of the particular bond. When you buy an index linked bond at that time you have to pay the adjustment for RPI to the person you buy from. The contract note will show the clean price and the accrued inflation.
For your 2024 IL gilt the clean price as you state is around 111. The dirty price is around 128. See:
https://uk.webfg.com/gilt/United_Kingdo ... _Gilt_2024

[GoSeigen]

Its price is quoted as 111.4. Does this mean that for £111.4 I could buy £100 worth inflation proofed until 2024?

No. The 111.4 will be the CLEAN price, i.e. without inflation adjustment. What you have to pay is the DIRTY price, i.e. with inflation adjustment.
Formula:
Inflation adjusted dirty price = (Index Ratio x real clean price) + (Index Ratio x real Accrued Interest).

Bluestone777 is correct. Some of my comments applied only to old-style linkers. New-style calculations are different.

A key location for information is here:

https://www.dmo.gov.uk/data/gilt-market ... ked-gilts/

GS

[GeoffF100]

I have just bought a new style linker with iWeb. I paid the dirty price, of course. The iWeb valuation used the clean price, showing a whopping great instant "loss". AJ Bell did the same, but they corrected their software when I complained about it. Their valuations now correctly use the dirty price. When I complained to iWeb, they said that the problem was "industry wide" and that they would not fix their software. I am not impressed, and have lodged a complaint. HL used to show the correct buy and sell prices on their website, but they now show the bid and offer clean price, but still label them as "buy" and "sell".

You can now get the clean and dirty prices from here:

https://reports.tradeweb.com/account/login/

(Free to non-commercial users.)

[ChrisNix]

Instead of replacing RPI (contractually difficult), Govt indicating it would like RPI amended to be closer to CPI: https://citywire.co.uk/funds-insider/ne ... +Afternoon

Will be interesting to observe pricing impact.

[GoSeigen]

Instead of replacing RPI (contractually difficult), Govt indicating it would like RPI amended to be closer to CPI: https://citywire.co.uk/funds-insider/ne ... +Afternoon

Will be interesting to observe pricing impact.

Tory government?? I'd have thought if they were offering to pay more on these things investors would be delighted and even offer to pay the legal fees to have them changed...


GS

[GeoffF100]

Instead of replacing RPI (contractually difficult), Govt indicating it would like RPI amended to be closer to CPI: https://citywire.co.uk/funds-insider/ne ... +Afternoon

Will be interesting to observe pricing impact.

Tory government?? I'd have thought if they were offering to pay more on these things investors would be delighted and even offer to pay the legal fees to have them changed...

They are proposing to pay less, not more. All very unfair, because we the higher payout was factored in the price when we bought.

[GoSeigen]

Instead of replacing RPI (contractually difficult), Govt indicating it would like RPI amended to be closer to CPI: https://citywire.co.uk/funds-insider/ne ... +Afternoon

Will be interesting to observe pricing impact.

Tory government?? I'd have thought if they were offering to pay more on these things investors would be delighted and even offer to pay the legal fees to have them changed...

They are proposing to pay less, not more. All very unfair, because we the higher payout was factored in the price when we bought.

Ha ha, just checking...

So they have worked so hard battling the inflation demon, even when there was not the slightest prospect of inflation -- then surprise! they discover that reducing income is just as bad because contracts have to be rewritten and NO-ONE wants to take the income cut!

I realise this is about changes to inflation measures, but it's all part of the bigger narrative IMO...

GS