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Preparing a Bond Ladder (via Interactive Investor?)

Gilts, bonds, and interest-bearing shares
Newroad
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Preparing a Bond Ladder (via Interactive Investor?)

#373643

Postby Newroad » January 5th, 2021, 11:16 pm

Hi All.

Currently, the "passive" bond component of my family's holdings (about 16.7% of each of the four ISA's and SIPP's and about 12.5% of the two JISA's) is held in VWRL.

As we approach retirement in a year or two, for the former four, I was thinking it may make sense to create a bond ladder, e.g. from age 55 onwards, selling 1/10th (then 1/9th etc) of VWRL each year and investing in 10 year gilts, holding until redemption. With a presumed retirement age of 65, this would then roll into an oven-baked bond ladder.

I currently invest via II, where I have looked at the documentation which suggests that you should be able to do this. However, in the application, I can't see an obvious way to do so via the Primary Market and seemingly only limited options via the Secondary Market. As such, does anybody know

(1) If you can buy such gilts in the primary market via II, and if not
(2) If I can buy such gilts in the secondary* market via II (and would it make sense to do so, noting that I could keep it within the tax free wrappers), or
(3) Should I look to an additional account with another broker to buy such gilts in the primary market (and if so, could I keep the purchases within second ISA/SIPP wrappers with them - and how practical would it be to hive off part of VWRL each year to transfer across to them from II)

My apology if I haven't asked the question(s) clearly, but I hope you get the gist!

Regards, Newroad

* in which case, I was then wondering if a 6 rung ladder rather than a 10 rung one might make sense, e.g. Jan 31 then Feb 32, Mar 33, Apr 34, May 35, Jun 36 etc or similar (assuming such 10 year gilts will exist) which would then give fairly even coupon payments each month of the year - when "oven baked"

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373677

Postby Newroad » January 6th, 2021, 7:57 am

PS Sorry, typo above - I intended VAGP rather than VWRL where it's mentioned - VWRL is the passive holding for the equity, not bond, component.

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373723

Postby dealtn » January 6th, 2021, 9:55 am

Newroad wrote:Hi All.

Currently, the "passive" bond component of my family's holdings (about 16.7% of each of the four ISA's and SIPP's and about 12.5% of the two JISA's) is held in VWRL.

As we approach retirement in a year or two, for the former four, I was thinking it may make sense to create a bond ladder, e.g. from age 55 onwards, selling 1/10th (then 1/9th etc) of VWRL each year and investing in 10 year gilts, holding until redemption. With a presumed retirement age of 65, this would then roll into an oven-baked bond ladder.

I currently invest via II, where I have looked at the documentation which suggests that you should be able to do this. However, in the application, I can't see an obvious way to do so via the Primary Market and seemingly only limited options via the Secondary Market. As such, does anybody know

(1) If you can buy such gilts in the primary market via II, and if not
(2) If I can buy such gilts in the secondary* market via II (and would it make sense to do so, noting that I could keep it within the tax free wrappers), or
(3) Should I look to an additional account with another broker to buy such gilts in the primary market (and if so, could I keep the purchases within second ISA/SIPP wrappers with them - and how practical would it be to hive off part of VWRL each year to transfer across to them from II)

My apology if I haven't asked the question(s) clearly, but I hope you get the gist!

Regards, Newroad

* in which case, I was then wondering if a 6 rung ladder rather than a 10 rung one might make sense, e.g. Jan 31 then Feb 32, Mar 33, Apr 34, May 35, Jun 36 etc or similar (assuming such 10 year gilts will exist) which would then give fairly even coupon payments each month of the year - when "oven baked"


As a retail investor you won't be able to buy in the Primary market (I assume you mean buy directly auction issuance by the DMO).

You can buy in the secondary market, but I have no knowledge of II.

Out of interest as you are holding to maturity, are you aware you (might be) locking in negative yields? Would it not make more sense to be simply using a bank savings account?

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373732

Postby Newroad » January 6th, 2021, 10:12 am

Hi Dealtn.

Yes, as per the above, my apology for any linguistic/terminology inaccuracy. When I say from the primary market, what I'm trying to say is at point of issue (rather than resale). That is, are II themselves, or do they have direct access to, a Primary Dealer.

Yes, I could be holding bonds with a negative yield in theory - but at present, the UK 10 year is yielding c0.25% (though if I'm mistaken in that, by all means, please advise)?

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373737

Postby dealtn » January 6th, 2021, 10:18 am

Newroad wrote:Hi Dealtn.

Yes, as per the above, my apology for any linguistic/terminology inaccuracy. When I say from the primary market, what I'm trying to say is at point of issue (rather than resale). That is, are II themselves, or do they have direct access to, a Primary Dealer.

Yes, I could be holding bonds with a negative yield in theory - but at present, the UK 10 year is yielding c0.25% (though if I'm mistaken in that, by all means, please advise)?

Regards, Newroad


II aren't a GEMM. They might have access to a GEMMs retail offering for Gilts for retail clients, but that would only be secondary market anyway.

I misread your intentions, I assumed you were about to construct a ladder, hence buying 1 year, 2 year, 3 year ... Gilts, not the buying new 10 year Gilts each year.

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373782

Postby 88V8 » January 6th, 2021, 11:42 am

Newroad wrote: I was thinking it may make sense to create a bond ladder....

Why?

When one can buy Income ITs with a reliable dividend yield of c5%.

Or if you want a hobby, HYP shares at 4-5% divi.

Or if not bothered about inflation/longevity, some Prefs and FI at similar yields?

OK, one's capital is vaguely at risk, but......

Is there some tax quirk here?

V8

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373796

Postby Newroad » January 6th, 2021, 12:06 pm

Understood, Dealtn.

Yes, to give a more thorough example, imagine I was 55 next year - though I wouldn't be (yet) :)

    In Oct 22 sell 1/10th of VAGP and buy Oct 32 10 Year Gilt
    In Sep 23 sell 1/9th of (remaining) VAGP and buy Sep 32 10 Year Gilt
    In Aug 24 sell 1/8th of (remaining) VAGP and buy Aug 33 10 Year Gilt
    ...
    In Jan 31 sell all remaining VAGP and buy Jan 41 10 Year Gilt

Then, come Oct 32, when I'd be 65, take the proceeds of the redeeming Oct 32 10 Year Gilt and then in Nov 32 use it to buy Nov 42 10 Year Gilt and do similar each year rolling it into the next missing month (to even out the coupons).

Re II having access to a GEMM, it depends on what terms. When coupons on the 10 year are around 0.25%, one can't afford much margin - too many basis points in cost might force me into keeping VAGP, current yield approximately 1.21% (minus some currency switching costs) or switch it into VGOV* on retirement - matching assets closer to liabilities - current yield approximately 1.17%.

Maybe the latter makes more sense than a ladder anyway, at least in terms of practicality, but equally, a ladder makes sense to me! Maybe the ladder should have 11 rungs, further evening out coupon payments (leaving only one month free to reinvest in upon maturity.

[88V8] Hi 88V8. To answer your question, because, rightly or wrongly, I want to hold a portion of investment grade bonds. I'm not interested in HYP, income based funds/trusts, preference shares or zeroes etc. A bond ladder of gilts seems the sensible way for me to do this - timed to be complete and ready to rollover for retirement.

No tax quirk - see earlier comments on SIPP's and ISA's.

Regards, Newroad

* but ave maturity at c18 years and ave duration at c14 years give it a different profile

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373850

Postby dspp » January 6th, 2021, 2:15 pm

Newroad wrote:Understood, Dealtn.

Yes, to give a more thorough example, imagine I was 55 next year - though I wouldn't be (yet) :)

    In Oct 22 sell 1/10th of VAGP and buy Oct 32 10 Year Gilt
    In Sep 23 sell 1/9th of (remaining) VAGP and buy Sep 32 10 Year Gilt
    In Aug 24 sell 1/8th of (remaining) VAGP and buy Aug 33 10 Year Gilt
    ...
    In Jan 31 sell all remaining VAGP and buy Jan 41 10 Year Gilt

Then, come Oct 32, when I'd be 65, take the proceeds of the redeeming Oct 32 10 Year Gilt and then in Nov 32 use it to buy Nov 42 10 Year Gilt and do similar each year rolling it into the next missing month (to even out the coupons).

Re II having access to a GEMM, it depends on what terms. When coupons on the 10 year are around 0.25%, one can't afford much margin - too many basis points in cost might force me into keeping VAGP, current yield approximately 1.21% (minus some currency switching costs) or switch it into VGOV* on retirement - matching assets closer to liabilities - current yield approximately 1.17%.

Maybe the latter makes more sense than a ladder anyway, at least in terms of practicality, but equally, a ladder makes sense to me! Maybe the ladder should have 11 rungs, further evening out coupon payments (leaving only one month free to reinvest in upon maturity.

[88V8] Hi 88V8. To answer your question, because, rightly or wrongly, I want to hold a portion of investment grade bonds. I'm not interested in HYP, income based funds/trusts, preference shares or zeroes etc. A bond ladder of gilts seems the sensible way for me to do this - timed to be complete and ready to rollover for retirement.

No tax quirk - see earlier comments on SIPP's and ISA's.

Regards, Newroad

* but ave maturity at c18 years and ave duration at c14 years give it a different profile


What is wrong with VAGP as a substitute for an eternally refreshed bond ladder ?

(or something similar)

I am asking as a genuine question, bonds not being my thing. I am asking for the same reason as you inasmuch as I am thinking where best to place everdry rainy-day funds equivalent to 2-3 years of bread & water. All I would be seeking is inflation protection year-on-year, and stability during times of equity market downturn when I would not want to touch my equity portfolio (figuring on 30-year life expectancy I would expect to see 3-4 such events).

regards, dspp

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373885

Postby dealtn » January 6th, 2021, 3:12 pm

Newroad wrote:Understood, Dealtn.

Yes, to give a more thorough example, imagine I was 55 next year - though I wouldn't be (yet) :)

    In Oct 22 sell 1/10th of VAGP and buy Oct 32 10 Year Gilt
    In Sep 23 sell 1/9th of (remaining) VAGP and buy Sep 32 10 Year Gilt
    In Aug 24 sell 1/8th of (remaining) VAGP and buy Aug 33 10 Year Gilt
    ...
    In Jan 31 sell all remaining VAGP and buy Jan 41 10 Year Gilt

Then, come Oct 32, when I'd be 65, take the proceeds of the redeeming Oct 32 10 Year Gilt and then in Nov 32 use it to buy Nov 42 10 Year Gilt and do similar each year rolling it into the next missing month (to even out the coupons).

Re II having access to a GEMM, it depends on what terms. When coupons on the 10 year are around 0.25%, one can't afford much margin - too many basis points in cost might force me into keeping VAGP, current yield approximately 1.21% (minus some currency switching costs) or switch it into VGOV* on retirement - matching assets closer to liabilities - current yield approximately 1.17%.

Maybe the latter makes more sense than a ladder anyway, at least in terms of practicality, but equally, a ladder makes sense to me! Maybe the ladder should have 11 rungs, further evening out coupon payments (leaving only one month free to reinvest in upon maturity.

[88V8] Hi 88V8. To answer your question, because, rightly or wrongly, I want to hold a portion of investment grade bonds. I'm not interested in HYP, income based funds/trusts, preference shares or zeroes etc. A bond ladder of gilts seems the sensible way for me to do this - timed to be complete and ready to rollover for retirement.

No tax quirk - see earlier comments on SIPP's and ISA's.

Regards, Newroad

* but ave maturity at c18 years and ave duration at c14 years give it a different profile


I assume you mean Sep33 and Aug 34?

In practice 10 year Gilts won't necessarily be as "neat" as that, and your income, such as it is, will likely not be spread equally over the calendar year (if that's important).

I think you also need to differentiate your understanding on Coupon, and Yield, although for freshly issued on the run Gilts they will likely be similar anyway (unless market rates go negative).

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373888

Postby Newroad » January 6th, 2021, 3:18 pm

Hi DSPP.

The main reason is that VAGP is a global bond ETF, not a UK (Gilt) one - so an asset vs liabilty (once retired) question. I'm happy - indeed prefer to be - global, whilst in the accumulating phase. However, once retired, I may prefer to be in sterling.

In terms of maturity, duration etc, they are somewhat similar - both "intermediate" I would say (whereas VGOV, the probable gilt equivalent, is somewhere between intermediate and long).

However, VAGP would be OK - I would have no issue using it (or perhaps VGOV) for the purpose if my ladder proves impractical.

[Dealtn] Hi - yes, correct on the typos. Agreed on "neatness" - I think I mentioned something earlier about if they exist, catering to this. On coupons vs yield, as you know, I was hoping to buy as close to the primary market as practical, hence this wasn't an initial consideration.

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373948

Postby tjh290633 » January 6th, 2021, 4:46 pm

I have been running a theoretical 5 year gilt ladder, buying gilts with 5 years to maturity and then reinvesting with the accumulated interest in another gilt with 5 years to maturity each year.

It started with a gilt bought each year from 2008 with maturity 5 years hence, with the first maturity in 2013.

The results to each anniversary are:

Year   XIRR  
2013 0.21%
2014 -1.23%
2015 -1.64%
2016 -1.45%
2017 -0.47%
2018 -2.30%
2019 -0.98%
2020 0.39%

It perked up a bit last year, but not enough to inspire me to invest real money.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#373999

Postby Newroad » January 6th, 2021, 6:05 pm

Hi TJH290633.

I'm no expert on various rate of return calculations, including XIRR. However, your results are nowhere near what I would have expected, so perhaps I don't understand what you tried to model.

Did you hypothetically by a 5 year gilt, at issue, each for the years (or a different kind of gilt with five years to maturity in the prevailing secondary market) - and if so, would you mind advising the original maturity (if not a 5 year gilt), the month (within in the year) and coupon in each case?

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374010

Postby dspp » January 6th, 2021, 6:30 pm

Newroad wrote:Hi DSPP.

The main reason is that VAGP is a global bond ETF, not a UK (Gilt) one - so an asset vs liabilty (once retired) question. I'm happy - indeed prefer to be - global, whilst in the accumulating phase. However, once retired, I may prefer to be in sterling.

In terms of maturity, duration etc, they are somewhat similar - both "intermediate" I would say (whereas VGOV, the probable gilt equivalent, is somewhere between intermediate and long).

However, VAGP would be OK - I would have no issue using it (or perhaps VGOV) for the purpose if my ladder proves impractical.

[Dealtn] Hi - yes, correct on the typos. Agreed on "neatness" - I think I mentioned something earlier about if they exist, catering to this. On coupons vs yield, as you know, I was hoping to buy as close to the primary market as practical, hence this wasn't an initial consideration.

Regards, Newroad


Thank you Newroad, that is much appreciated. My preference is to be global rather than UK, but you've perfectly answered my question. regards, dspp

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374084

Postby Newroad » January 6th, 2021, 9:31 pm

Hi All.

For anyone interested, please see below a pseudo-contrived (I'll explain how later) set of bond coupons in a generally rising interest rate environment. I'm going to see what it looks like in a ladder (assuming purchasing 10 Year Gilts at issue) - please feel free to use your own mock calculations to determine XIRR or anything else of interest.

    Oct Year 1: 0.526%
    Sep Year 2: 1.303%
    Aug Year 3: 1.350%
    Jul Year 4: 1.087%
    Jun Year 5: 1.431%
    May Year 6: 2.030%
    Apr Year 7: 2.616%
    Mar Year 8: 2.777%
    Feb Year 9: 1.715%
    Jan Year 10: 2.442%

Similarly, here is a "real" set of data for such a ladder in a generally falling interest rate environment.

    Oct Year 1: 2.317%
    Sep Year 2: 1.846%
    Aug Year 3: 2.719%
    Jul Year 4: 2.369%
    Jun Year 5: 1.882%
    May Year 6: 0.871%
    Apr Year 7: 1.049%
    Mar Year 8: 1.418%
    Feb Year 9: 0.996%
    Jan Year 10: 0.440%

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374108

Postby Newroad » January 6th, 2021, 11:15 pm

Hi again all.

Assuming I've made no mistakes (always a questionable assumption!) and that one £100 gilt was purchased at each of the 10 purchase dates (11 months apart) ... then at the point when the first gilt purchased gets redeemed (i.e. exactly 10 years later) the average monthly cash-flow over the period would have been

    Rising Yields scenario: 66.6p, i.e. £79.91 over the 120 months
    Falling Yields scenario: 88.3p, i.e. £105.94 over the 120 months

At this point, the capital of the first gilt would be redeemed (with negligible risk - as sound as the UK Government) then reinvested in a new 10 Year gilt at the prevailing rate. The average capital invested over the 120 months was £587.50, meaning

    Rising Yields scenario: average yield 1.36%
    Falling Yields scenario: average yield 1.80%

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374122

Postby tjh290633 » January 6th, 2021, 11:38 pm

Newroad wrote:Hi TJH290633.

I'm no expert on various rate of return calculations, including XIRR. However, your results are nowhere near what I would have expected, so perhaps I don't understand what you tried to model.

Did you hypothetically by a 5 year gilt, at issue, each for the years (or a different kind of gilt with five years to maturity in the prevailing secondary market) - and if so, would you mind advising the original maturity (if not a 5 year gilt), the month (within in the year) and coupon in each case?

Regards, Newroad

No, I bought a gilt with a 5 year period to maturity each year.

Here is a list of the gilts and the dates bought.

Date         Stock        Amount      Coupon   Matures      Price  
26/02/2008 4.5% 2013 999.30 4.50% 07/03/2013 100.07
26/02/2009 5% 2014 891.82 5.00% 07/09/2014 112.13
25/02/2010 4.75% 2015 913.41 4.75% 07/09/2015 109.48
25/02/2011 4.0% 2016 941.44 4.00% 27/09/2016 106.22
28/02/2012 8.75% 2017 704.87 8.75% 25/08/2017 141.87
15/02/2013 5% 2018 1,016.28 5.00% 07/03/2018 121.54
17/02/2014 4.5% 2019 998.86 4.50% 07/03/2019 114.78
07/03/2015 4.75% 2020 990.89 4.75% 07/03/2020 116.12
26/02/2016 8% 2021 823.92 8.00% 09/03/2021 139.18
27/02/2017 4% 2022 1,066.14 4.00% 07/03/2022 118.03
26/02/2018 2.25% 2023 1,193.82 2.25% 07/09/2023 106.41
07/03/2019 2.75% 2024 1,109.76 2.75% 07/09/2024 110.26
06/03/2020 5% 2025 984.18 5.00% 07/03/2025 124.58


TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374126

Postby Newroad » January 6th, 2021, 11:44 pm

Thanks, TJH.

Not quite an apples'n'apples comparison in that case, with what I am trying to figure out how to do.

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374157

Postby GoSeigen » January 7th, 2021, 7:06 am

tjh290633 wrote:
Newroad wrote:Hi TJH290633.

I'm no expert on various rate of return calculations, including XIRR. However, your results are nowhere near what I would have expected, so perhaps I don't understand what you tried to model.

Did you hypothetically by a 5 year gilt, at issue, each for the years (or a different kind of gilt with five years to maturity in the prevailing secondary market) - and if so, would you mind advising the original maturity (if not a 5 year gilt), the month (within in the year) and coupon in each case?

Regards, Newroad

No, I bought a gilt with a 5 year period to maturity each year.

Here is a list of the gilts and the dates bought.

Date         Stock        Amount      Coupon   Matures      Price  
26/02/2008 4.5% 2013 999.30 4.50% 07/03/2013 100.07
26/02/2009 5% 2014 891.82 5.00% 07/09/2014 112.13
25/02/2010 4.75% 2015 913.41 4.75% 07/09/2015 109.48
25/02/2011 4.0% 2016 941.44 4.00% 27/09/2016 106.22
28/02/2012 8.75% 2017 704.87 8.75% 25/08/2017 141.87
15/02/2013 5% 2018 1,016.28 5.00% 07/03/2018 121.54
17/02/2014 4.5% 2019 998.86 4.50% 07/03/2019 114.78
07/03/2015 4.75% 2020 990.89 4.75% 07/03/2020 116.12
26/02/2016 8% 2021 823.92 8.00% 09/03/2021 139.18
27/02/2017 4% 2022 1,066.14 4.00% 07/03/2022 118.03
26/02/2018 2.25% 2023 1,193.82 2.25% 07/09/2023 106.41
07/03/2019 2.75% 2024 1,109.76 2.75% 07/09/2024 110.26
06/03/2020 5% 2025 984.18 5.00% 07/03/2025 124.58


TJH


Why make it so complicated? And risk mistakes with the calculation. The returns are very simple: they are exactly the yield (TYM) of the bond on purchase date.

Purchasing a 5-year gilt and holding to maturity was mostly not a very clever thing to do as was discussed ad nauseam on various boards at the time. Given the yield curve most of your capital predictably spent long periods earning nothing. Far more sensible would have been to buy ten year gilts and sell at five year maturity, or some analagous strategy.

If you buy pseudo-cash you're going to get cash returns! But most gilts sceptics were terrified of rising yields so the impulse is understandable... Also some are consumed with the idea that gilts should be held to maturity -- why, I have no idea.


GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374158

Postby GoSeigen » January 7th, 2021, 7:12 am

tjh290633 wrote:I have been running a theoretical 5 year gilt ladder, buying gilts with 5 years to maturity and then reinvesting with the accumulated interest in another gilt with 5 years to maturity each year.

It started with a gilt bought each year from 2008 with maturity 5 years hence, with the first maturity in 2013.

The results to each anniversary are:

Year   XIRR  
2013 0.21%
2014 -1.23%
2015 -1.64%
2016 -1.45%
2017 -0.47%
2018 -2.30%
2019 -0.98%
2020 0.39%

It perked up a bit last year, but not enough to inspire me to invest real money.

TJH


The 2013 gilt returned 4.5% CAGR. If you are calculating a real return you need to make that explicit.


GS
P.S. Stupid question: What exactly is the difference between IRR and XIRR? The latter seems to be used commonly round here for some reason. Is IRR somehow inferior?

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374185

Postby Newroad » January 7th, 2021, 9:08 am

Hi All,

Just to explain the mock, but semi-real data I used in my example ... the DMO figures weren't easy to access, so I went to Investing.com and got the monthly 10 year yield from 2011 through 2020.

For the rising rate, I started in 2020 and went backwards in time, so

    Jan 2020: 0.526%
    Feb 2019: 1.303%
    ...
    Oct 2011: 2.442%

Of course, things might not move up in the pattern they move down, but it was the best I could do quickly/easily for the purposes of the exercise.

For the falling rate, so as not to use the exact same months, I bumped a month up, so

    Nov 2011: 2.317%
    Oct 2012: 1.846%
    ...
    Feb 2020: 0.440%

As to why hold to maturity, my simplistic understanding is so that it becomes a consideration of the coupon(s) and taking capital loss (or gain) out of the equation. If one didn't do that, then why not say 3 or 7 years, rather than 5?

If a link could be posted to a germane discussion on the above, I'd be happy to read it. If it proved to have merit, selling at 6 years (4 years to go) might work well (as you could, subject to DMO issuance, keep the number of coupon payments per month even, at 1).

As an aside, does anyone know what the ETF's who hold the underlying (as opposed to synthesise it) e.g. VAGP, do? For example, do they buy at issuance (they should have enough clout to operate like a GEMM, via a GEMM, even if they aren't one) and whenever they buy, do they hold to maturity or typically sell at some point in advance?

Regards, Newroad


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