Gilts short term strategy?

[1nvest]

Because institutes (pension funds) have to buy them, by law.

Simply not true.

I have worked in the fixed income industry for over 20 years and a common misapprehension often quoted as "fact". Find me that law and quote it!

Even if true that "have" would apply across the yield curve in proportion to that "law" and wouldn't create a micro arbitrage opportunity for retail investors.

Minimum funding requirement and subsequent changes/amendments (statutory funding 2005?) requires sufficient and appropriate assets to be held. Pension funds typically hold half their assets in Gilts as a part of liability matching liabilities decades into the future and as they're considered as being appropriate for such purposes.

[dealtn]

Simply not true.

I have worked in the fixed income industry for over 20 years and a common misapprehension often quoted as "fact". Find me that law and quote it!

Even if true that "have" would apply across the yield curve in proportion to that "law" and wouldn't create a micro arbitrage opportunity for retail investors.

Minimum funding requirement and subsequent changes/amendments (statutory funding 2005?) requires sufficient and appropriate assets to be held. Pension funds typically hold half their assets in Gilts as a part of liability matching liabilities decades into the future and as they're considered as being appropriate for such purposes.

Close. And a long way from a law that they "have to hold them", and certainly not exclusively.

[1nvest]

Minimum funding requirement and subsequent changes/amendments (statutory funding 2005?) requires sufficient and appropriate assets to be held. Pension funds typically hold half their assets in Gilts as a part of liability matching liabilities decades into the future and as they're considered as being appropriate for such purposes.

Close. And a long way from a law that they "have to hold them", and certainly not exclusively.

So pension funds can sell all of their Gilts then. Nice! What alternative 'appropriate' assets might they replace those with and still fall within remit/laws?

[dealtn]

Close. And a long way from a law that they "have to hold them", and certainly not exclusively.

So pension funds can sell all of their Gilts then. Nice! What alternative 'appropriate' assets might they replace those with and still fall within remit/laws?

Actually they can. Why they would choose to do so is beyond me though.

Regardless this is beyond the point I was making that institutional demand sets the yield curve, not the miniscule retail market.

[Jam2Day]

Just catching up with everything since my original post. Many thanks to all for their feedback. Much appreciated.

Jam

[Jam2Day]

I am considering a short term gilts strategy but have limited experience with bonds/gilts. I normally use an IT fund for bonds. I have a question on the best strategy for buying/selling in the short term.

My plan is to purchase gilts with @ 2 year to redemption. Some might consider this to be a 'cash strategy', assuming the UK government does not go bust or spin on a CBDC penny and devalue the return by one means or another . For the record, my view is that inflation will be deflated by recessionary forces in the UK economy which I consider to be a can of worms with the potential of a Pandora's Box.

Currently, the Gross Redemption Yield of suitable gilts is @ 5%. My question concerns the following examples with contrasting styles of return.

Gilt - TR25
Dirty Price - £101.11
Gross Redemption Yield - 5.22%
Years to redemption - 1.7

I see this as a 'front' loaded gain with a high yielding coupon but with a low redemption gain. A Jam today or bird in the hand cash flow strategy.

Gilt - TN25
Dirty Price - £92.37
Gross Redemption Yield - 5.32%
Years to Redemption - 1.6

I see this as a 'rear' loaded gain with low yielding coupon but with a high redemption gain. Can't think of any real reason to go for this.

The gilts will be held in an ISA so, for what it is worth, the tax free capital gain is irrelevant but the income is currently untaxed, assuming the government does not U turn on this.

Given the above, it seems too obvious. Have I identified the relevant moving parts or am I missing something?

Thanks.

Back in the 1980s when I was buying gilts for my mother-in-law, I only ever bought them at a discount to par. Yields were higher than the coupon, and her objective was income. Presumably you are looking at total return, and the example standing at a discount provides the better return. Perhaps you should look at the cash flow.

TJH

Yes, that is the ideal sweetspot strike on gilts if possible. Long time since it has made any real sense on yields though.

[Jam2Day]

You have a decent understanding of these already.

And under current legislation and the fact you hold these in an ISA, the tax differences between the two are irrelevant.

I too have been loading up on short term gilts.

I view the risk of these as investments as virtually non existent.

And I agree that a direct holding for short term gilts is a better idea than a bond fund as you will save on charges and will know exactly your rate of return to redemption, which does not happen with bond/gilt funds as they are continually buying and selling constituent elements.

I have a mixture of low and higher yielding directly held gilts in my SiPP and am not bothered about the yield, just the total return as the differences between the total returns for gilts maturing in the same year (specific month of redemption aside) are minuscule.

Thanks for the reassurance. Glad I am not too far off the beaten track on this one. Interesting to see how yields pan out over the next year. I guess we are about 6-8 months behind the US of A on the rate escalation/tightening. For me, it's about cash management, opportunity cost and little steps .

[Jam2Day]

I am considering a short term gilts strategy but have limited experience with bonds/gilts. I normally use an IT fund for bonds. I have a question on the best strategy for buying/selling in the short term.

My plan is to purchase gilts with @ 2 year to redemption. Some might consider this to be a 'cash strategy', assuming the UK government does not go bust or spin on a CBDC penny and devalue the return by one means or another . For the record, my view is that inflation will be deflated by recessionary forces in the UK economy which I consider to be a can of worms with the potential of a Pandora's Box.

Currently, the Gross Redemption Yield of suitable gilts is @ 5%. My question concerns the following examples with contrasting styles of return.

Gilt - TR25
Dirty Price - £101.11
Gross Redemption Yield - 5.22%
Years to redemption - 1.7

I see this as a 'front' loaded gain with a high yielding coupon but with a low redemption gain. A Jam today or bird in the hand cash flow strategy.

Gilt - TN25
Dirty Price - £92.37
Gross Redemption Yield - 5.32%
Years to Redemption - 1.6

I see this as a 'rear' loaded gain with low yielding coupon but with a high redemption gain. Can't think of any real reason to go for this.

The gilts will be held in an ISA so, for what it is worth, the tax free capital gain is irrelevant but the income is currently untaxed, assuming the government does not U turn on this.

Given the above, it seems too obvious. Have I identified the relevant moving parts or am I missing something?

Thanks.

Holding gilts in an ISA is a bit of a waste of the ISA capacity TBH. Of course it depends how much you have saved but holding low coupon gilts unsheltered makes more sense all else equal.

I take a macro approach. Ideally, we would all like to shove our funds into equity growth but the broad picture looks a bit spotty to me, hence the defensive stance on cash.

[Jam2Day]

My vote goes with those who say it really makes no difference assuming 1. you don't have a use for higher cash flows and 2. tax is not a consideration.

As always the problem with gilts is inflation, but that should be obvious at the current juncture. If inflation doesn't drop enough you have a negative real yield. I think short-dated is right though given the shape and movement of the yield curve. I dumped my 5-year gilts a few weeks back and saved several % of losses.

GS

Yes, I am happy to stick to my guns and bide my time for now. You will see from my original post that I believe 'high street' inflation could well be deflated away by recessionary forces. Asset/commodity inflation is another matter but nevertheless, I think we might see some price correction which could be interesting.

[Jam2Day]

Holding gilts in an ISA is a bit of a waste of the ISA capacity TBH. Of course it depends how much you have saved but holding low coupon gilts unsheltered makes more sense all else equal.

I have to agree with Spet0789, both sentences.

Of course it depends on where you have available funds but I've recently switched some of my unsheltered previously bank/building society savings pots into TN24 and TN25 (also unsheltered), giving me greater post tax returns (I'm a BRT). I first grabbed some of each during the Truss/Kwarteng debacle period and some more a couple of weeks ago.

BTW, not sure where you're getting your prices from but the clean offer price (which is what's relevant to you) for TN25 is currently 92.47. https://www.londonstockexchange.com/stock/TN25/united-kingdom/company-page

Excel's =YIELD(TODAY(),"31/01/2025",0.25/100,92.47,100,2,3) gives a redemption yield of 5.21%, which is equivalent to sticking it into a savings a/c at 6.51% for a basic rate taxpayer who has already used up their PSA (ignoring the small amount of tax on the tiny coupon, which I can't be bothered to figure!)

Pricing from Sharepad which I understand streams FTSE data.I quoted the dirty price as I wanted to reflect the accrued income and therefore total consideration. Don't forget, this is cash management in my ISA so deposit accounts are off the menu. There are better yields but greater risk of downside so I am happy to partially protect funds against benchmark inflation for now. Cash is still key for me, however unfashionable.

[Jam2Day]

Given the above, it seems too obvious. Have I identified the relevant moving parts or am I missing something?

As you observe, the gross redemption yields are almost identical. What you didn't record was the coupon. The one standing above par would be high coupon and the one below par, low coupon, very low to give such a discount.

Given you propose to hold them in an ISA and preumably intend to hold them to maturity, there's little diffrerence other than that you will get a decent income return from the high coupon. Held in a taxable account, one would probably go with the low coupon, as capital gains on GIlts are not taxed, but Coupon payments, being classified as interest are.

Sorry, did not list the coupon. I suppose assumed everyone commenting would be gilt hounds with finely tuned noses on every minutiae etc . Fundamental to the whole excercise so I can appreciate resulting potential for confusion. No necessarily held to maturity but happy to do so if nothing changes radically on the current underlying slant in the markets. I am ignoring the current AI fad rally for now.

[Jam2Day]

Holding gilts in an ISA is a bit of a waste of the ISA capacity TBH.

Okay, I'm going to disagree. It really depends on the circumstances and there are many where it is not a waste of time. Including the multiple occasions where gilts gave me between 30% (sometimes in a year) and 100% gains in my ISAs. Not to be sniffed at. Okay, that won't happen with a 2-year gilt, but what if the OP has plenty of cash sitting idle in her ISAs?


GS

Yep. Good points.

[Jam2Day]

I view the risk of these as investments as virtually non existent.

We have different definitions then of either "risk" or "non-existent".

I see a risk you will have a real loss of purchasing power. Not an ideal outcome for a "riskless" investment.

Maybe, maybe not. If the equity markets fall further into value territory, all things 'measured', I would rather have some semi protected dry powder ready for discounted prices.

[Jam2Day]

My experience is that there is more demand for low interest gilts[TN25](and so lower GRY). This is because, the gilts are CGT free.

And, if you buy 5% TR25, GRY(I think) is based on the interest being reinvested. If the interest will just sit in the ISA account(and not earn any interest), then the real final amount could change.

Have you considered ILGs. https://www.yieldgimp.com/index-linked-gilt-yields . TR26 has breakeven RPI of 3.27%, RPI is now at 11.3% https://www.ons.gov.uk/economy/inflatio ... /czbh/mm23

If you think, average RPI will be higher than 3.27%, then TR26 may be a better bet?

I don't like Linkers for several reasons. I think they are overpriced and I also believe there are better places for your cash if long term inflation persists. I am certainly mindful of the different ways in which inflation is measured. I conform to the belief that governments are the real culprits when it comes to money printing debt driven inflation. Let's face it, inflating away debt is ultimate game for governments. Commodity/services inflation is really more a part of the pricing mechanism of markets through supply and demand. I think we all know and recognise that certain equities/investments generally ride the inflationary wave better than paper which, ironically, is the very source of monetary inflation itself . For me, this is about cash management.

[Jam2Day]

But those gains are tax free in or outside an ISA. Hence the comment. Not to be sniffed as you said at but still a waste of ISA capacity. As I said (you truncated my post) it depends what else you hold, but right now low coupon gilts are about the best thing to hold outside a pension or ISA there is.

I guess when the annual limit is £20,000 it doesn't make too much difference. Most people aren't maxing out their allowance. Granted. In my case I my ISA contributions were already fully used, and today all my cash is in ISAs so that's where gilts will be bought.

GS

Yep.

[Jam2Day]

We have different definitions then of either "risk" or "non-existent".

I see a risk you will have a real loss of purchasing power. Not an ideal outcome for a "riskless" investment.

Loss of purchasing power applies to any investment at the mercy of the passing of time. So gilts have no risk of this relative to other assets.

GS

Yes. At least we can factor in our potential downside.

[mc2fool]

I have to agree with Spet0789, both sentences.

Of course it depends on where you have available funds but I've recently switched some of my unsheltered previously bank/building society savings pots into TN24 and TN25 (also unsheltered), giving me greater post tax returns (I'm a BRT). I first grabbed some of each during the Truss/Kwarteng debacle period and some more a couple of weeks ago.

BTW, not sure where you're getting your prices from but the clean offer price (which is what's relevant to you) for TN25 is currently 92.47. https://www.londonstockexchange.com/stock/TN25/united-kingdom/company-page

Excel's =YIELD(TODAY(),"31/01/2025",0.25/100,92.47,100,2,3) gives a redemption yield of 5.21%, which is equivalent to sticking it into a savings a/c at 6.51% for a basic rate taxpayer who has already used up their PSA (ignoring the small amount of tax on the tiny coupon, which I can't be bothered to figure!)

Pricing from Sharepad which I understand streams FTSE data.I quoted the dirty price as I wanted to reflect the accrued income and therefore total consideration. Don't forget, this is cash management in my ISA so deposit accounts are off the menu. There are better yields but greater risk of downside so I am happy to partially protect funds against benchmark inflation for now. Cash is still key for me, however unfashionable.

FTSE is an index provider, I think you mean the LSE (London Stock Exchange) data. End-of-day reference prices are produced by FTSE-Tradeweb and published on the Tradeweb site at noon the next day, but not streamed.

In any case, you get back the accrued income in the dirty price so while it appears to be the total consideration it actually isn't. The Excel YIELD function above using the clean price you actually buy at will give you the correct redemption yield (knock a tad off for dealing costs, if you must. )

[Jam2Day]

Pricing from Sharepad which I understand streams FTSE data.I quoted the dirty price as I wanted to reflect the accrued income and therefore total consideration. Don't forget, this is cash management in my ISA so deposit accounts are off the menu. There are better yields but greater risk of downside so I am happy to partially protect funds against benchmark inflation for now. Cash is still key for me, however unfashionable.

FTSE is an index provider, I think you mean the LSE (London Stock Exchange) data. End-of-day reference prices are produced by FTSE-Tradeweb and published on the Tradeweb site at noon the next day, but not streamed.

In any case, you get back the accrued income in the dirty price so while it appears to be the total consideration it actually isn't. The Excel YIELD function above using the clean price you actually buy at will give you the correct redemption yield (knock a tad off for dealing costs, if you must. )

Yes, I meant LSE data. Sorry. Been a long day. Also, quite right on accrued income. The dirty price includes income purchased or 'cum div' to use a term more fashionable in the previous century . Either way, I think we can agree that it is really just a 'contra' amount.

[GeoffF100]

I don't like Linkers for several reasons. I think they are overpriced and I also believe there are better places for your cash if long term inflation persists.

Can you suggest one that you can buy now that guarantees, after 40% (or 45%) tax, an inflation adjusted gain at maturity?

[GoSeigen]

I don't like Linkers for several reasons. I think they are overpriced and I also believe there are better places for your cash if long term inflation persists.

Can you suggest one that you can buy now that guarantees, after 40% (or 45%) tax, an inflation adjusted gain at maturity?

Guarantees. That little word makes the question impossible to answer; investing is mostly about potential not guarantees. Linkers are one of the few exceptions but even there you gloss a vital point: if you commit to hold to maturity you expose yourself to re-investment risk. It's small consolation having a slim return if you have missed out on significant potential gains in the meantime because you cannot reinvest.

So guarantees are nice, but they come with a cost.

I think the OP has investments in mind that have great potential but lack the guarantee. The lack of guarantee adds to the potential upside of course. If the OP (per his post above) thinks linkers are overpriced then he is anticipating a time when they will be cheaper. If he already holds them he forgoes the opportunity to purchase at the better price.


GS