80% loss in 2 years on 'low risk' Index Linked Gilt

[scrumpyjack]

I notice today the Torygraph points out the incredible loss on an ILG issued less than 2 years ago.

"But how about this for an asset price crash: when issued less than two years ago, the March 2073 Index-Linked Gilt was priced at around £330 per unit of stock; the current price is just £62, or less than a fifth of its value when initially sold.

The effect has been to transform a negative yield of 2.5pc into a positive one of 1.13pc."

No doubt the buyers were pension funds forced to buy such 'low risk' assets by HMG.

Of course some will claim it is simply matching long term liabilities with long term assets, but I really don't think that is much consolation

[mc2fool]

They're not low risk, they're (almost*) zero risk. Those that bought at around £330 knew that if held to maturity they'd be getting a negative (real) yield of 2.5pc, and that hasn't and won't change.

* there is always, of course, the risk of the govt defaulting....

[GeoffF100]

The current market price is irrelevant if they are holding to maturity.

[GoSeigen]

Please don't bring this "price doesn't matter" silliness from equity investing to the bonds forum.

With a bond the market price is everything. There is no yield without a market price. (EDIT: Oh and BTW at issue the market price is the yield obtainable at the chosen par value)

OP: there is a good price to buy gilts and a bad price to buy them. The expression "risk free" has nothing to do with the price/yield/return outcomes. It simply means that gilt-edged securities carry none of the risks associated with more junior bonds and other securities. You still bear market risk if you buy at a stupid price.


GS

[CliffEdge]

2073 wow that's a long time away.

[hiriskpaul]

That would have been one hell of a duration. It still is. Hard to imagine why even institutional investors would want to lock in a large negative real yield for so long. Historically, just rolling over short duration bills (holding cash) would have given better real returns.

Over 50+ years broad equity investments, such as the S&P 500, shine of course, even if bought at the worst possible moment.

[GeoffF100]

OP: there is a good price to buy gilts and a bad price to buy them.

Only with hindsight. If you need to guarantee to pay an index linked sum in the future you have to pay the price, or take a gamble. A life assurance company is not going to be too bothered about the price as long as their customers are will to pay what it takes to get an index linked annuity. There are also many who believe in holding a fixed percentage of bonds irrespective of their price.

[DrFfybes]

I notice today the Torygraph points out the incredible loss on an ILG issued less than 2 years ago.

"But how about this for an asset price crash: when issued less than two years ago, the March 2073 Index-Linked Gilt was priced at around £330 per unit of stock; the current price is just £62, or less than a fifth of its value when initially sold.

It's worse than that - it was down to £72 brielfy in October last year (no idea why ), so the bulk of the loss was in circa 12 months.

[JohnW]

….Oh and BTW at issue the market price is the yield obtainable at the chosen par value…

The market price is in ‘£’s’, and the yield is in ‘%/yr’. How can one be the other? It seems akin to saying ‘distance is speed’.

[dealtn]

They're not low risk, they're (almost*) zero risk.

* there is always, of course, the risk of the govt defaulting....

Unless you have a very specific definition of "risk" this isn't true. You have a large amount of duration risk and exposure to events over that lifetime.

[GeoffF100]

They're not low risk, they're (almost*) zero risk.

* there is always, of course, the risk of the govt defaulting....

Unless you have a very specific definition of "risk" this isn't true. You have a large amount of duration risk and exposure to events over that lifetime.

It is clear from the rest of mc2fool's post (that you have cut out) that he is talking about risk to the maturity value.

[dealtn]

Unless you have a very specific definition of "risk" this isn't true. You have a large amount of duration risk and exposure to events over that lifetime.

It is clear from the rest of mc2fool's post (that you have cut out) that he is talking about risk to the maturity value.

No it is far from clear.

They're not low risk, they're (almost*) zero risk. Those that bought at around £330 knew that if held to maturity they'd be getting a negative (real) yield of 2.5pc, and that hasn't and won't change.

* there is always, of course, the risk of the govt defaulting....

This is the exact and entire quote, if that makes it easier. Risk is introduced in the first sentence and quantified as "low". Next it is postulated to be as low as (almost) zero. The only caveat being a risk of government default.

Nowhere is it considered all the other types of risk of holding such an investment, and I contend (and history has borne this out already) there are multiple other event risks a holder is exposed to over that "duration" - and further there is no guarantee a holder will even make it to 2073 to enjoy the return.

Describing investments such as this as low risk is at best lazy, and worse disingenious.

[Dod101]

The contributors here have more time than I have to argue about this. Presumably the gilt was issued with insurance companies and the like in mind, not the average retail investor. And so, the likely buyer would be deemed a professional and would understand what they were buying and why.

As such it is simply a waste of time and a pointless exercise for us to be discussing it. In any case, it seems we are three years into a 50 year term. A lot can happen in that time.

Dod

[dealtn]

In any case, it seems we are three years into a 50 year term. A lot can happen in that time.

Dod

Exactly. That's why they simply can't be described as low risk.

[mc2fool]

It is clear from the rest of mc2fool's post (that you have cut out) that he is talking about risk to the maturity value.

No it is far from clear.

They're not low risk, they're (almost*) zero risk. Those that bought at around £330 knew that if held to maturity they'd be getting a negative (real) yield of 2.5pc, and that hasn't and won't change.

* there is always, of course, the risk of the govt defaulting....

This is the exact and entire quote, if that makes it easier. Risk is introduced in the first sentence and quantified as "low". Next it is postulated to be as low as (almost) zero. The only caveat being a risk of government default.

Nowhere is it considered all the other types of risk of holding such an investment, and I contend (and history has borne this out already) there are multiple other event risks a holder is exposed to over that "duration" - and further there is no guarantee a holder will even make it to 2073 to enjoy the return.

Describing investments such as this as low risk is at best lazy, and worse disingenious.

As GeoffF100 correctly stated, I was talking about "if held to maturity". Sorry if you think that wasn't clear.

[dealtn]

No it is far from clear.


This is the exact and entire quote, if that makes it easier. Risk is introduced in the first sentence and quantified as "low". Next it is postulated to be as low as (almost) zero. The only caveat being a risk of government default.

Nowhere is it considered all the other types of risk of holding such an investment, and I contend (and history has borne this out already) there are multiple other event risks a holder is exposed to over that "duration" - and further there is no guarantee a holder will even make it to 2073 to enjoy the return.

Describing investments such as this as low risk is at best lazy, and worse disingenious.

As GeoffF100 correctly stated, I was talking about "if held to maturity". Sorry if you think that wasn't clear.

Well I am sorry if I am not making myself clear but even IF held to maturity there are both a lot of risks on that timeline, and even on arrival you might not get what you expect. If that risk can't be seen perhaps consider what could happen IF

The definition of inflation changes over that 50 years.

The rules on CGT change

A wealth tax is introduced

Redemption rules of the issuer change limiting the amount that can be repaid.

Bear in mind the issuer is the primary legislator in the country, and will remain so over the life of the investment

...

That's before considering those risks you seem to want to ignore during the holding period which are even greater.

[RockRabbit]

As GeoffF100 correctly stated, I was talking about "if held to maturity". Sorry if you think that wasn't clear.

Well I am sorry if I am not making myself clear but even IF held to maturity there are both a lot of risks on that timeline, and even on arrival you might not get what you expect. If that risk can't be seen perhaps consider what could happen IF

The definition of inflation changes over that 50 years.

The rules on CGT change

A wealth tax is introduced

Redemption rules of the issuer change limiting the amount that can be repaid.

Bear in mind the issuer is the primary legislator in the country, and will remain so over the life of the investment

...

That's before considering those risks you seem to want to ignore during the holding period which are even greater.

Generally the terms 'risk-free' and 'zero risk', as applied to US and UK government debt, specifically refer to default risk. Other risks (which are numerous as you suggest) have nothing to do with the 'risk free' term.

[mc2fool]

As GeoffF100 correctly stated, I was talking about "if held to maturity". Sorry if you think that wasn't clear.

Well I am sorry if I am not making myself clear but even IF held to maturity there are both a lot of risks on that timeline, and even on arrival you might not get what you expect. If that risk can't be seen perhaps consider what could happen IF

The definition of inflation changes over that 50 years.

The rules on CGT change

A wealth tax is introduced

Redemption rules of the issuer change limiting the amount that can be repaid.

Bear in mind the issuer is the primary legislator in the country, and will remain so over the life of the investment

...

That's before considering those risks you seem to want to ignore during the holding period which are even greater.

The definition of inflation will change (in 2030) and that's already known and was so from issuance, and if it changes again it is very unlikely to affect any gilt already in issue (as it didn't with the 2030 change when it was announced). Similarly the chances of the government simply changing the redemption amount is pretty near zero. The whole point of gilts is that they are a contract that offers a totally known quantity to maturity.

Taxes are exogenous changes that don't affect the security itself. If you want you could add to your list the "risk" that the investor goes from being a BRT to an HRT thereby reducing their net return from the coupon, but I don't consider that a risk of the gilt.

There are no risks during the holding period if you hold to maturity. If you do that you can totally ignore the vagaries of the market during its life and will still get exactly what you expected on the day you bought it.

I fully agree that they are not low risk if you don't hold to maturity, but that's not what I'm referring to.

[scrumpyjack]

The contributors here have more time than I have to argue about this. Presumably the gilt was issued with insurance companies and the like in mind, not the average retail investor. And so, the likely buyer would be deemed a professional and would understand what they were buying and why.

As such it is simply a waste of time and a pointless exercise for us to be discussing it. In any case, it seems we are three years into a 50 year term. A lot can happen in that time.

Dod

I'm glad my pension is not being managed by the 'professionals' who bought these ! (i.e. a guaranteed negative return of 2.5% each year for 50 years)

[CliffEdge]

It is clear from the rest of mc2fool's post (that you have cut out) that he is talking about risk to the maturity value.

No it is far from clear.

They're not low risk, they're (almost*) zero risk. Those that bought at around £330 knew that if held to maturity they'd be getting a negative (real) yield of 2.5pc, and that hasn't and won't change.

* there is always, of course, the risk of the govt defaulting....

This is the exact and entire quote, if that makes it easier. Risk is introduced in the first sentence and quantified as "low". Next it is postulated to be as low as (almost) zero. The only caveat being a risk of government default.

Nowhere is it considered all the other types of risk of holding such an investment, and I contend (and history has borne this out already) there are multiple other event risks a holder is exposed to over that "duration" - and further there is no guarantee a holder will even make it to 2073 to enjoy the return.

Describing investments such as this as low risk is at best lazy, and worse disingenious.

do you mean disingenuous, I agree with disingenious (though I've never heard the word it seems a good synonym for not very clever, but then it may be who knows, for example I won nothing this month with a full holding but YMMV).