Low cost gilt fund?

[MrFoolish]

I've never bothered with gilts and have mostly gone down the equity path (though I do hold the corporate bond fund, SLXX). So I don't know much about them.

I'm now tempted to drip feed a bit of cash into gilts to take advantage of them being out of favour (yes, I know things could get worse still, but I like contrarian buys).

Can anyone recommend a low cost gilt fund to add to an ISA or SIPP? What sort of yield would I currently get?

Thanks.

[GoSeigen]

Beats me why anyone would bother paying someone to manage their gilts. Why not just buy them directly? That's what I've always done.

GS

[MrFoolish]

Beats me why anyone would bother paying someone to manage their gilts. Why not just buy them directly? That's what I've always done.

GS

OK, I'm happy to cut out the middle man. Is there a ticker code I can go for in an ISA or SIPP?

[MrFoolish]

I've found this, which is apparently popular on the ii platform:

https://www.ii.co.uk/bonds/ukgovt-of-5- ... 0/LSE:TR25

I've never really looked at gilts before. Would I be right in thinking this one is about 3% above its redemption value, pays about 5% pa on the original price (which is similar to the current price) and would be getting the redemption value back in 2025?

Good buy? Bargepole? Roll the dice?

[Alaric]

Would I be right in thinking this one is about 3% above its redemption value, pays about 5% pa on the original price (which is similar to the current price) and would be getting the redemption value back in 2025?

That's about the size of it. You would be exchanging a capital loss at redemption against an income of 2.5 per 100 nominal every six months.

A website shows a yield to maturity of 3.88%
https://www.sharecast.com/gilt/5_Treasury_Stock_2025
That also shows the "dirty price" of 103.17 which is what you would have to pay as you are required to buy in effect part of the next coupon due.

Whilst a fund of equities is mostly equivalent to holding the individual shares themselves, that isn't always the case with fixed interest and Gilt funds. Rather than hold the Gilts to redemption as an individual investor might, funds will buy and sell so that the average term outstanding is usually about the same.

[GoSeigen]

I've found this, which is apparently popular on the ii platform:

https://www.ii.co.uk/bonds/ukgovt-of-5- ... 0/LSE:TR25

I've never really looked at gilts before. Would I be right in thinking this one is about 3% above its redemption value, pays about 5% pa on the original price (which is similar to the current price) and would be getting the redemption value back in 2025?

Good buy? Bargepole? Roll the dice?

Welcome to the world of gilts MrFoolish!

As you may be noticing, getting data on gilts is not that easy, especially since the demise of the previously most useful site fixedincomeinvestor.co.uk which had some really useful data, and since changes to the Debt Management Office (DMO) web page. Here's a summary of sites I refer to:

1. My broker(s): for real-time quotes to buy and sell. Better to get an actual price than the indicative price quoted on most free sites.
2. DMO website: they are effectively the issuers so the natural starting point for data. They have a wealth of current and historic info.
3. Tradeweb: daily pricing service outsourced by the DMO. Free registration, then they have daily price lists with yields and modified duration. Not sortable but you can export the data.
4. London Stock Exchange (LSE) web site: for daily price information with reasonable historic charts. Most of the basic information about individual gilts is there. Hopeless in other ways e.g. you can get a list of gilts but it's practically worthless.
5. Hargreaves Lansdown: Reasonable list of gilts, sortable, but no yields!


When it comes to choosing gilts the decision is easy (at an amateur level) and boils down to what duration gilt you want to buy. Short duration gilts are less volatile and in most circumstances offer a lower yield (but not now! -- the yield curve is "inverted" now because short-dated gilts yield more than longer dated gilts. This is usually a temporary phenomenon). Long duration gilts are more volatile but generally also yield more.

So you choose your risk, maybe thinking about the yield curve and economic environment, and select a gilt of the appropriate maturity from one of the lists. The coupon is not a major factor except in terms of taxation: the higher the coupon the more of your return will potentially be lost to income tax.


Now looking at the specific (2025 maturity) gilt you chose: if you want exposure to a three-year gilt then why not? The price won't move much compared to longer gilts (unless default comes into play). After three years the gilt matures and you need to reinvest.

Not intended as any sort of advice, but short gilts (<5 years) are where I have started buying. To me the yield curve inversion is a red flag for the longer gilts in the short term.

Good luck.

GS
P.S. With regard to accrued interest, you are not "compelled" to pay accrued interest on a bond. The price you pay is the price you pay (including all costs). What happens with the accrued interest is that often prices are quoted with the notional accrued interest backed out: a so-called "clean price". There are two main reasons for this: 1. because you have to pay tax on accrued interest so the value is explicit in the trade contract (under the Accrued Income Scheme rules) and 2. interest accrues daily so backing it out means the quoted clean price remains constant if nothing else changes; it helps with comparing prices from day to day, especially if yields are high. But always remember that the dirty price is the one you will pay. Note that preference share prices are normally quoted dirty: they pay dividends so they are not subject to Accrued Income Scheme tax rules.

[MrFoolish]

I suppose if I take a relaxed view that all the information is in the price, I can just buy a gilt and let it sit in an ISA? It will pay a coupon and there's no tax to worry about. I could forget about it and eventually get back the redemption price. Or if I get lucky I could sell it for a quick profit. Obviously the economy could go down the toilet and it might be a terrible investment. But there's no work to do once I've bought it?

[GoSeigen]

I suppose if I take a relaxed view that all the information is in the price, I can just buy a gilt and let it sit in an ISA? It will pay a coupon and there's no tax to worry about. I could forget about it and eventually get back the redemption price. Or if I get lucky I could sell it for a quick profit. Obviously the economy could go down the toilet and it might be a terrible investment. But there's no work to do once I've bought it?

Correct. Known information is in the price but there are dumb times to buy them, like when their yields are zero or negative!

GS

[gpadsa]

popular on the ii platform
https://www.ii.co.uk/bonds/ukgovt-of-5- ... 0/LSE:TR25

that must be no.6 in https://www.ii.co.uk/advanced-investing/bonds-gilts

The same table is shown in a FT personal finances article this weekend about buying gilts that is worth a look. It's inferior to GS's advice/explanation above though viewtopic.php?p=540370#p540370

Should investors brave the gilts horror show?
https://www.ft.com/content/79ee2bc5-3d1 ... b8e5e88954

[the answer is apparently "buy some gilts but keep a chunk in cash"]

gpadsa

[mc2fool]

A couple of points to add to GS's sources-of-info list.

The Tradeweb site gives the most comprehensive info, but, as GS says, their online tables are fixed so the most useful thing to do is export the data to .CSV (there's a button to do that) and suck it into a spreadsheet. There are, however, two small issues with it:

Firstly, it doesn't give the LSE tickers (e.g. TR25), only the ISINs. Further, as I found out with II, some brokers don't take ISINs, only TIDMs (EPICs, e.g. TR25) or SEDOLs. However, the SEDOL is embedded in the ISIN, so if you want you can add a SEDOL column and in row 2 put =MID(C2,5,7) and then extend that to all rows. (You can find the SEDOLs on the HL site but I find it convenient to have them directly in the spreadsheet.)

Secondly, the prices shown are yesterday's close (provided you downloaded after 12noon, the day before if earlier), and if you want the redemption yield on the buy price your broker is quoting right now then you can add a column containing in row 2 =YIELD(TODAY(),F2,E2/100,G2,100,2,3) and extend that to all rows, and then you can overtype the Clean Price (column G) with the buy price your broker is quoting. (Or, if you prefer, add a new column for broker price and use that instead of Gn).

HTH.

[MrFoolish]

Thanks for all the comments. I'm still undecided on whether to buy any gilts. Might try a test purchase in my account, to check out the mechanics, but not click the final BUY button.

[dealtn]

I suppose if I take a relaxed view that all the information is in the price, I can just buy a gilt and let it sit in an ISA? It will pay a coupon and there's no tax to worry about. I could forget about it and eventually get back the redemption price. Or if I get lucky I could sell it for a quick profit. Obviously the economy could go down the toilet and it might be a terrible investment. But there's no work to do once I've bought it?

More likely (depending on your definition) if the economy went down the toilet, interest rates would fall, making your investment good, not terrible.

I think you need a bit more time to understand Gilt investing.

[MrFoolish]

More likely (depending on your definition) if the economy went down the toilet, interest rates would fall, making your investment good, not terrible.

I think you need a bit more time to understand Gilt investing.

No doubt. And a crystal ball would be quite handy too.

[Inv101]

As a novice investor in this field, can I ask why buy gilts in preference to blue chip corporate bonds (GSK, Tesco, etc) offering higher yields? Obviously there is nominally a greater risk of default, but is that not more theoretical than real?

[GoSeigen]

As a novice investor in this field, can I ask why buy gilts in preference to blue chip corporate bonds (GSK, Tesco, etc) offering higher yields? Obviously there is nominally a greater risk of default, but is that not more theoretical than real?

I think most people would say there is a place for both. The interest in gilts is because they have been very poor value for a long time and investors are reconsidering them.

One obvious advantage of gilts over corporate bonds is their tighter spread and huge liquidity.

GS

[Alaric]

As a novice investor in this field, can I ask why buy gilts in preference to blue chip corporate bonds (GSK, Tesco, etc) offering higher yields? Obviously there is nominally a greater risk of default, but is that not more theoretical than real?

There's also the risk of downgrade which is relevant if the intention isn't to hold until maturity. Supposedly Blue chip companies have been known to run into serious difficulties, seemingly unexpected, notwithstanding a clean audit bill of health. You mention Tesco, but didn't that have an accounting scandal some while ago?

[mc2fool]

As a novice investor in this field, can I ask why buy gilts in preference to blue chip corporate bonds (GSK, Tesco, etc) offering higher yields? Obviously there is nominally a greater risk of default, but is that not more theoretical than real?

There's also the risk of downgrade which is relevant if the intention isn't to hold until maturity. Supposedly Blue chip companies have been known to run into serious difficulties, seemingly unexpected, notwithstanding a clean audit bill of health. You mention Tesco, but didn't that have an accounting scandal some while ago?

Methinks there were some serious unexpected difficulties and an accounting (can't count!) scandal with HMG a few weeks ago which resulted in a downgrade of gilts.

(Sorry, absolutely not intending to bring politics into the board, just amused at that contrast between gilts and corporate bonds given recent events!)

[JohnW]

As a novice investor in this field, can I ask why buy gilts in preference to blue chip corporate bonds (GSK, Tesco, etc) offering higher yields? Obviously there is nominally a greater risk of default, but is that not more theoretical than real?

I’m not the wizard on corporate bonds the way I am on cat food brands, but if the bond market is perfectly efficient then your theory will hold: the greater risk (of default) will come with greater returns. If suddenly corporate bonds, paying more than gilts, became less risky to the gilt level, then gilt money would move from gilts to corporates thus pushing up the price and down the returns until it matched the return/risk level of gilts, n’est pas?
No fool believes the market is perfectly efficient, but are you smart enough to exploit any inefficiency in the market (knowing what you’re doing, and other than by luck)? Not me.
So why gilts not corporates? Keep it simple. If you want more risk and return, buy more equities and less bonds. Don’t bother with corporates whose risk rating you have to understand, and which may change if the company has a massive data leak and is hit with ransom ware. Of course, there no sin in doing corporates, but you don’t need to bother if you want the returns they offer; just get more equities.

[Alaric]

Of course, there no sin in doing corporates, but you don’t need to bother if you want the returns they offer; just get more equities.

There's also the muddy waters of higher yielding equities. These may not offer much prospect of capital growth because all the earnings and perhaps more are being paid out in the form of dividends. Unlike Corporate Bonds, you may be saying goodbye to much of the capital invested. It's a benchmark of sorts to compare the dividend yield to the corporate bond yield when both are on offer for the same Company.

[JohnW]

Is there any capital growth with bonds? They’re issued for £100 and they redeem for £100. They’re a contract to pay you back your money, and give you some interest. I told you my area is cat food.