Gilts verses Bank Deposit Accounts

[billG]

Hello,
A fair proportion of my portfolio is in stocks and want to offset that with some safe investment(s). Looking at short term (up to 5 years) UK government bonds the returns are stunning but I guess they tick the box as relatively safe investments. However if I look at the best buy tables in the UK for banks term or notice deposit accounts it would appear they offer a much better return. You could build a ladder of these and achieve a better return. However most of these organisation are not high street names (little banks etc.) but they are covered by the government protection up to £85K for each organisation so in theory they are as safe as say Gilts. So as far as retail investors (us) why would we want to purchase shortish term (up to 5 years) Gilts if we planned to hold until maturity? Am I missing something here?
Thanks for your help,
BillG

[tjh290633]

Have you looked at the prices of them? With low interest rates most are standing at a considerable premium to the redemption price, and the redemption yield is minimal.

TJH

[AleisterCrowley]

Yep, Gilt yields are not good at the moment.

Downsides with fixed term savings 'bonds'
Your money is locked in for the duration (with withdrawal penalties) - unlike bonds with a secondary market
If provider goes bust you may have to wait to get your money back from FSCS

I have.. No. Gilts. At. All.
Some corporate bonds and prefs, the rest of my non-equity assets are splattered all over the place- NSANDI index linked, Investec High5, prem bonds, P2P (just a bit in Ratesetter)

[GoSeigen]

Hello,
A fair proportion of my portfolio is in stocks and want to offset that with some safe investment(s). Looking at short term (up to 5 years) UK government bonds the returns are stunning but I guess they tick the box as relatively safe investments. However if I look at the best buy tables in the UK for banks term or notice deposit accounts it would appear they offer a much better return. You could build a ladder of these and achieve a better return. However most of these organisation are not high street names (little banks etc.) but they are covered by the government protection up to £85K for each organisation so in theory they are as safe as say Gilts. So as far as retail investors (us) why would we want to purchase shortish term (up to 5 years) Gilts if we planned to hold until maturity? Am I missing something here?
Thanks for your help,
BillG

The gilts I purchased this time last year returned about 30% to date of sale. That is a stunning return as you say, but they were long-dated gilts which like shares carry considerable duration risk.

As you see from responses on this thread, amateur investors don't hold gilts. This can be interpreted as quite bullish. It's long been my opinion that the bull market in gilts will not end until posters in threads like this start boasting and saying what a sure deal gilts are. In spite of the efforts of this government to massively increase borrowing, issuance of UK gilts is still modest by historical standards so there is scope for a further bull phase IMO.

However nothing is a dead cert in investing and certainly you have no business making decisions based on the opinions of people like me. Decide for yourself, buy when assets are unloved if possible, start small and keep sensible allocation sizes.


GS

[AleisterCrowley]

Which Gilt(s) produced a 30℅ yield over the last year?
Genuine question - with yields so low I'm surprised there were any with that much headroom.
Anyway the reason most of us amateurs are advised to buy Gilts is to fulfil the minimal risk asset part of a balanced portfolio - e.g. 60/40 equities/bonds. Emphasis on 'minimal risk'

[dealtn]

Which Gilt(s) produced a 30℅ yield over the last year?
Genuine question - with yields so low I'm surprised there were any with that much headroom.
Anyway the reason most of us amateurs are advised to buy Gilts is to fulfil the minimal risk asset part of a balanced portfolio - e.g. 60/40 equities/bonds. Emphasis on 'minimal risk'

Who is doing the "advising"? Gilts are not low risk. An asset class with the ability to rise 30% in a year, or less, has the ability to fall by similar, or more, over the same kind of timeframe. Just because, even a long, history suggests they aren't risky doesn't make it the case. That's how "bubbles" look too, before the event of their popping.

No problem with anyone choosing to invest in Fixed Income, it's their money after all, but the only "advice" I would follow here is to properly understand what you are buying, and the price you are paying.

[GoSeigen]

Which Gilt(s) produced a 30℅ yield over the last year?

Bought 4.5% 2055 on 3 Dec 2018 @1.59, sold 2 Sep @2.04. Return: 29.7% flat or 41%CAGR. I posted the trades in real time here:
viewtopic.php?t=15037#p184513
viewtopic.php?t=15037#p248729

Some posters here are obsessed with "Income" and "Capital" and can't accept that they are two sides of the same coin -- as shown by pretty elementary bond maths. This makes the idea that gilts priced at 160% of par could return 30% in a year incomprehensible to them. I'm afraid I often rather neurotically feel the urge to advance an alternative viewpoint!

Genuine question - with yields so low I'm surprised there were any with that much headroom.'

With long-duration securities it works the opposite way to your expectation, i.e. the lower the yields, the larger the price movements. This is a feature of bonds known as convexity:

https://en.wikipedia.org/wiki/Bond_convexity


The concept of convexity underlies what I wrote earlier about long gilts and shares having considerable duration risk.


GS

[Gan020]

Hello,
A fair proportion of my portfolio is in stocks and want to offset that with some safe investment(s). Looking at short term (up to 5 years) UK government bonds the returns are stunning but I guess they tick the box as relatively safe investments. However if I look at the best buy tables in the UK for banks term or notice deposit accounts it would appear they offer a much better return. You could build a ladder of these and achieve a better return. However most of these organisation are not high street names (little banks etc.) but they are covered by the government protection up to £85K for each organisation so in theory they are as safe as say Gilts. So as far as retail investors (us) why would we want to purchase shortish term (up to 5 years) Gilts if we planned to hold until maturity? Am I missing something here?
Thanks for your help,
BillG

Hi Bill,
This table of gilt yields suggests that UK 5 year gilt gives a yield of 0.57% to maturity
https://www.bloomberg.com/markets/rates ... t-bonds/uk

This compares with a 5 year bond which will yield somewhere between 2.05% and 2.3% depending on how much you want to spread your money around and you attitude to platform risk.
https://savings-accounts.comparethemark ... FCLIE=CM01

Thus if it is your intention to hold to maturity and aren't bothered about movements in bond prices inbetween or ability to access your cash without penalty then stick to a regular savings bond with a bank or building society.


I'm guessing your backstory is that like many PI's looking for a return on your money the interest rates are so low from the banks/building societies you are trying to broaden your search to find a better return. Regrettably if you are 100% risk adverse and do not want to risk losing your capital and intend to hold until maturity there are no other options which will beat the bank/building society rates.

Also regrettably even if you shift your risk profile to some form of "I can live with a risk of default of once in 100 years" or "I can put up with losing 5% of my capital", the options remain extremely limited.

[hiriskpaul]

Which Gilt(s) produced a 30℅ yield over the last year?
Genuine question - with yields so low I'm surprised there were any with that much headroom.
Anyway the reason most of us amateurs are advised to buy Gilts is to fulfil the minimal risk asset part of a balanced portfolio - e.g. 60/40 equities/bonds. Emphasis on 'minimal risk'

I have noticed a drift by advisers into holding short dated gilts or even Treasury bills (money market securities with less than 1 year maturity) for the 40% bond/minimal risk assets. One reason for this is that duration and interest rate risk has increased as bond yields have dropped. There is also concern over the correlation between bond and share price movements if/when long bond yields rise.

The idea now is that the minimal risk or bond asset should have low volatility/low return, whereas at one time the thinking was to accept higher volatility/higher return bonds, as price movements were negatively correlated with share price movements. Combining high volatility, but negatively correlated assets resulted in an overall reduction in portfolio risk.

The concern now is that as longer dated bonds yields have dropped, there is a lot more interest rate risk in share prices, so if the trend in long bond yields goes into reverse, we may see a drop in share prices as well as bond prices. ie the expectation is that movements in share prices and bond prices may not be negatively correlated if/when long bond prices start to rise. Nobody knows for sure, but it is not an unreasonable supposition.

This is just about changes in long bond yields though. I strongly suspect that in some other financial shock, which crashes stock markets, long bond prices are very likely to rise, just as they did in the GFC.

For DIY UK investors wanting to hold minimal risk assets, you may as well hold short dated FSCS protected cash deposits (and/or NS&I accounts) for the minimal risk asset component. However, that can be tricky to manage with tax sheltered money, in which case a short dated gilt and/or a GBP hedged global bond ETF would suffice.

[hiriskpaul]

Hello,
A fair proportion of my portfolio is in stocks and want to offset that with some safe investment(s). Looking at short term (up to 5 years) UK government bonds the returns are stunning but I guess they tick the box as relatively safe investments. However if I look at the best buy tables in the UK for banks term or notice deposit accounts it would appear they offer a much better return. You could build a ladder of these and achieve a better return. However most of these organisation are not high street names (little banks etc.) but they are covered by the government protection up to £85K for each organisation so in theory they are as safe as say Gilts. So as far as retail investors (us) why would we want to purchase shortish term (up to 5 years) Gilts if we planned to hold until maturity? Am I missing something here?
Thanks for your help,
BillG

If you are choosing between short dated gilts, which you hold to maturity and equivalent maturity deposit accounts, then no you are not missing anything. In fact due to the fact that most gilts trade above par you are actually being stung quite hard by the income tax on gilt interest payments. The comparison is slightly more subtle if you do not hold gilts to maturity and roll them over each year instead. In that case you can expect a higher return than the yield to maturity might indicate due to the upward slope of the yield curve. At the moment though, that is not likely to add a great deal to your returns.

Unsheltered money is definitely better off in FSCS protected deposit accounts than short dated gilts at present. As I mentioned in another thread though, decent returns on cash held in say a SIPP is difficult to obtain. In which case short dated gilt or GBP hedged bond funds are the better choice. When it comes to ISAs, it is now possible to transfer between cash and S&S ISAs, so you may get better returns that way.

I don't have all my investments in tax shelters, so I hold cash deposits outside tax shelters and use tax shelters solely for risk assets (shares and higher risk bonds) so I don't currently have an issue with what to do for low risk in tax shelters.

[AleisterCrowley]

Which Gilt(s) produced a 30℅ yield over the last year?

Bought 4.5% 2055 on 3 Dec 2018 @1.59, sold 2 Sep @2.04. Return: 29.7% flat or 41%CAGR. I posted the trades in real time here:
viewtopic.php?t=15037#p184513
viewtopic.php?t=15037#p248729

Some posters here are obsessed with "Income" and "Capital" and can't accept that they are two sides of the same coin -- as shown by pretty elementary bond maths. This makes the idea that gilts priced at 160% of par could return 30% in a year incomprehensible to them. I'm afraid I often rather neurotically feel the urge to advance an alternative viewpoint!


[...

GS

Thanks GS, interesting detail. So you are talking about *very* long bonds, with maturity dates well outside most of our lifetimes I suspect.
As you say that's a risky trade, more akin to equity investments

In my simple world of shorter bonds;

(a) you know all the future cash-flows (true of any vanilla bond)
(b) if the price of the bond is greater than the sum of the above, you are guaranteed a loss if held to maturity - and that's ignoring inflation
(c) the zero return price is a ceiling, unless returns go negative - I know this has happened in the Eurozone)

The only way you could make money on a bond with a baked-in loss is to hope someone will pay more for the bond and make an even bigger loss - and so on. Doesn't seem like a solid basis for an investment - cash in a biscuit tin under the bed would perform better. I am of the opinion (strictly amateurish, and could be wrong) that fixed term retail bonds from banks etc are a better option at the moment if you can accept the liquidity risk.

Obviously a person's tax situation will affect the choice but there are plenty of fixed term cash ISAs around .

[AleisterCrowley]

Which Gilt(s) produced a 30℅ yield over the last year?
Genuine question - with yields so low I'm surprised there were any with that much headroom.
Anyway the reason most of us amateurs are advised to buy Gilts is to fulfil the minimal risk asset part of a balanced portfolio - e.g. 60/40 equities/bonds. Emphasis on 'minimal risk'

Who is doing the "advising"? Gilts are not low risk. An asset class with the ability to rise 30% in a year, or less, has the ability to fall by similar, or more, over the same kind of timeframe. Just because, even a long, history suggests they aren't risky doesn't make it the case. That's how "bubbles" look too, before the event of their popping.

No problem with anyone choosing to invest in Fixed Income, it's their money after all, but the only "advice" I would follow here is to properly understand what you are buying, and the price you are paying.

The 'advice' ,which I haven't followed, seems to be very common when passive balanced portfolios are discussed.
https://monevator.com/simplest-possible-isa-portfolio/
"If you want minimum risk, buy UK government bonds with a time to maturity that suits your time horizon"
https://monevator.com/what-is-the-minimal-risk-asset/
What is the minimal risk asset?
For a sterling-denominated investor, short-term UK government bonds are a good choice for your minimal risk-asset.

Obviously this is Gilts held to maturity so the risk of a capital loss isn't relevant (unless you accept a loss when you buy the flippin' things)
This is not a Monevator/Kroijer thing, I just happened to have the articles bookmarked. Plenty of similar advice elsewhere

[Alaric]

Obviously this is Gilts held to maturity so the risk of a capital loss isn't relevant (unless you accept a loss when you buy the flippin' things)

Unless they have an exceedingly low coupon, don't almost all Gilts now stand above par?

[AleisterCrowley]

yes, but the total return is positive including coupon payments

[dealtn]

yes, but the total return is positive including coupon payments

In money terms, not in real. Negative real yields along the linker curve. But similar accusations can of course be made about "cash" deposits at banks too.

[AleisterCrowley]

Well yes, nominal value. Who knows where inflation is going ?

[GoSeigen]

Thanks GS, interesting detail. So you are talking about *very* long bonds, with maturity dates well outside most of our lifetimes I suspect.

I discussed long gilts because that answered your earlier question.

GS

[AleisterCrowley]

The OP's question was '-so as far as retail investors (us) why would we want to purchase shortish term (up to 5 years) Gilts if we planned to hold until maturity?'
I haven't seen anything to convince me that a short Gilt is a better option than a 5 year fixed term savings account.
OK if interest rates go up you are 'stuck' but bond prices will fall as yields rise ,and selling before maturity to hop onto a better rate will involve a capital loss

PS I would hope to live beyond another 35 years but I suspect the average age on this site is above 50....

[AleisterCrowley]

Thanks GS, interesting detail. So you are talking about *very* long bonds, with maturity dates well outside most of our lifetimes I suspect.

I discussed long gilts because that answered your earlier question.

GS

yes noted, I didn't realise quite how long

[Lootman]

A fair proportion of my portfolio is in stocks and want to offset that with some safe investment(s). Looking at short term (up to 5 years) UK government bonds

The gilts I purchased this time last year returned about 30% to date of sale. That is a stunning return as you say, but they were long-dated gilts which like shares carry considerable duration risk.

Since the OP wants a "safe" investment I don't think that speculating that rates will go down via long-dated bonds is likely to meet his needs. As you note you are carrying a lot of interest rate risk there. You could just as easily lose 30% in a year as make it, and interest rates are subject to unpredictable movements in either direction. And you are hardly being paid to wait either.

I have dabbled in US Treasuries which bear a higher yield and, at least in recent years, there has been a currency kicker as well. When the world goes to hell in a handbasket, US Treasuries are the safe haven. Gilts are a much more esoteric bet in my view.