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Preparing a Bond Ladder (via Interactive Investor?)

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

#398108

Postby Newroad » March 22nd, 2021, 9:57 pm

Hi All.

I thought I'd circle back on this one, as new information (for me at least) has come to light.

It does appear that retail investors can participate in Primary DMO auctions. One has to register to become one of the "Approved Group Of Investors" (AGIP), after which you can bid at scheduled DMO auctions, for amounts between £1K and £500K. The bids are non-competitive - for conventional gilts you pay the average price at the auction, for index-linked gilts you pay the lowest accepted price. The registration is done via Computershare on behalf of the DMO. Further details below from p16 of the link.

https://dmo.gov.uk/media/14702/pig201204.pdf

This brings a bond ladder back into the frame for me in due course. To give an example as to what one would have had to pay at such an auction, the 15 May 2014 auction, Treasury Gilt 4.5% 2034, the average price at the auction (and hence the one you'd have paid) was £118.591, which, according to the source, is a yield of 3.243%. If anyone knows what one would have had to pay on the secondary market for that on the day or shortly thereafter, I would be interested.

The question then becomes can this be done in a tax efficient way (so that the coupons are not taxable)? For example, is it possible to Bed'n'ISA bonds in this way, e.g. each year, take the maturing cash out, buy the gilts in the primary market then Bed'n'ISA the value back in? Do SIPP's have any similar facility? Is there a different way for either ISA's or SIPP's that might work?

In any case, I don't believe anyone mentioned the AGIP before for this purpose - so that alone appeared to be of interest - and made a lot of sense (I struggled to believe retail investors were completely excluded from the primary market). There was a topic which did mention a similar service for the secondary market (and indeed, it's noted at the end of p18 of the previous link) topic repeated below for convenience

https://lemonfool.co.uk/viewtopic.php?f=55&t=28165&start=20

but given the spreads and alleged extra costs etc, this didn't seem a flyer at the time. Sorry if I missed an earlier reference to the AGIP being used for primary market purposes.

It may still all be for naught, but who knows?

Regards, Newroad

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

#398149

Postby GoSeigen » March 23rd, 2021, 7:12 am

Newroad wrote:but given the spreads and alleged extra costs etc, this didn't seem a flyer at the time. Sorry if I missed an earlier reference to the AGIP being used for primary market purposes.

It may still all be for naught, but who knows?


I've always found quoted gilt spreads pretty tight, except the old undated gilts, and wanted to purchase in an ISA so have used my brokers for all my gilts trades. If you want to shave a few pounds off your costs I suppose the AGIP might be worth trying.

Personally I'd put more energy into thinking about the current pricing of gilts and where the gains will come from in the first place. The yield curve has steepened but not enough to tempt me yet and I would want to sell well before maturity anyway so no traditional ladder for me...

GS

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

#398168

Postby Newroad » March 23rd, 2021, 8:39 am

Understood, GoSeigen.

If and when the time comes, I suppose both paths are an option, e.g. buy a 20 year old 30 year to replace the rung on the bond ladder, if the quote is tight enough, else if not, buy a new 10 year old on the primary market.

Not that they share exactly the same characteristics, but you get the general idea.

Regards, Newroad

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

#398502

Postby 1nvest » March 23rd, 2021, 11:40 pm

As a alternative to rolling a maturing 10 year gilt into another 10 year gilt, applying some relative valuations can be interesting.

Compare the stock earnings yield (inverse of PE) with the 10 year Gilt yield and roll that rung into whichever is the higher for the next 10 years. With a override of if the Dow/Gold ratio is above 20 then instead roll the rung into gold for the 10 years.

Somewhat like 10 separate portfolios, 10% initial weightings each, each invested for 10 years at a time. With one 'maturing' each year.

US data for 1979 to 2010 inclusive had that reward slightly more than all-stock, whilst doing so with a average of 16% stock, 28% gold, 56% 10 year treasury.

Rungs above 2011 are incomplete (10 year runs), but that's been indicating stocks since then, so average stock would have increased to closer to 35% levels, and total returns would have continued to pace all-stock (i.e. achieved the 14% annualised stock gains since 2011).

With stock earnings yields continuing to be ahead of 10 year treasury yields treasuries would have treasury yields needing to rise at least two/few percent before coming back into vogue and assuming stock earnings yields remained relatively low (high PE). More likely is gold coming back into vogue, with recent years having Dow/Gold up at 18 and 19 type levels (near the 20 trigger level).

Much of investment rewards are a function of start and end date valuations. Start at a high valuation, end at a low valuation and that's when the likes of historic low SWR's are seen. Such timing/rotation is one means to reduce the risk of buying at too high valuations, is more inclined to buy in at relatively low valuations. Can however lead to concentration risk, such as ending up all-in stocks, or treasury/gilts or gold ... or near-as. But historically such concentrations have occurred at appropriate times to be concentrated (good/great gains followed).

Why 20 for the Dow/Gold? Why not! Historically its varied from just over one ounce of gold to buy the Dow, to 40 ounces being required to buy the Dow. 20 is just a 'by eye' choice - unscientific. Revise as you may see fit.

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

#398730

Postby Newroad » March 24th, 2021, 8:13 pm

Interesting idea, 1nvest.

Might lead to an unbalanced (risky) portfolio if trends run for too long, but I get the idea. Any of course, you have to decide (and rely on) your relative metrics - I know you've postulated two below.

How far could you back-test without too much effort?

Regards, Newroad

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

#398921

Postby 1nvest » March 25th, 2021, 2:44 pm


1nvest
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Re: Preparing a Bond Ladder (via Interactive Investor?)

#425209

Postby 1nvest » July 6th, 2021, 12:06 pm

dealtn wrote:How is the UK different? You can buy both conventional and indexed linked government bonds. The NS&I products are different to US treasuries and TIPS as equivalents..

I specifically had US i-Bonds in mind. Guaranteed your money back even if deflation occurs after you've invested £10K/whatever you'd get the £10K back. Or inflation pacing if there's inflation ... and a fixed amount on top. Inflation hedge. In contrast there's no UK equivalent, and where at present rates all offerings held to maturity will lose in inflation adjusted terms (broadly at a present rate of around -2%/year)

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

#425214

Postby 1nvest » July 6th, 2021, 12:20 pm

Earlier examples are marking gilts to market. In practice for a ladder where each bond is held to maturity there's no need to do that, the reward is simply the weighted average of the yield to maturities at the time of purchasing each gilt.

For a simple 2 rung/2 year ladder you initially buy a 1 and a 2 year gilt, then when each bond matures you buy another 2 year gilt. After a year the effective reward is the rolling average of the two year maturity gilt yields, approximately - as that assumes equal amounts invested in each rung whereas in practice one rung will likely have more (or less) than the other.

Marking to market, accounting for the ongoing changes in prices/yields is only relevant if you sell bonds before maturity.

Extended up to 10 year and that yields the average of the 10 year yields, but where the average period before a bond matures is 5 years. 5 year duration, 10 year yield. Given recent low yields however the tendency is to shorten down i.e. perhaps to a 5 year ladder instead of a 10 year, or 3 instead of 5 (whatever).

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

#538051

Postby 1nvest » October 17th, 2022, 6:34 am

One alternative to a straight ladder, buying each of 1 to 10 year Gilts and as each matures roll that into another 10 year, is to roll-down-the-yield curve, buy at/near the peak of the steepest part of the yield curve and periodically roll that as the yield curve moves around. However that involves trading costs/spreads to repeatedly buy/sell.

A reasonably effective alternative is to be more dynamic with a conventional ladder where each bond is held to maturity so avoids sell trade costs/spreads, and roll maturing bonds into the peak of steepest yield curve point, such as around the point indicated by arrows in the following image/examples (the last chart in that image is the 'live' (recent) actual yield curve)

Image

With ii you get a free trade/month, so 120 rungs/bonds spread out over perhaps 10 years is like a conventional ladder with one bond maturing each month, but where instead when you pick off variable date/maturity bonds to roll into the maturities are less regular - but that collectively tends to yield a higher overall reward than a standard ladder. You may for instance end up with one maturity/bond having had several months of maturing bonds proceeds loaded into that, so a larger £££ amount dropping into your account as that bond matures, but maybe 3 months instead of 1 month before your next bond matures.

If you average a 2% higher yield from having repeatedly picked off the peaks and bonds are 50% of the portfolio then that 'value-adds' 1% to the total portfolio return compared to a standard ladder. Rolling down the yield curve, that involves selling trades/spreads, may have been more productive in gross terms, but perhaps less so after costs/spreads.

Also when you hold many bonds, maybe over 100, then some might be dropped into corporate bonds instead of Gilts for a bit more interest with modest/low additional risk.

Your own bond-fund, with a typical yearly cost of around 0.1% (i.e. 1% Gilt price bid/ask spreads and where you utilise the monthly 'free' ii trades).

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

#538185

Postby JohnW » October 17th, 2022, 11:51 am

Can you confirm that your hand drawn yield curves and the BoE curve with the x-axis ‘years ahead’ are really comparable?
I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now. On the other hand, I thought the hand drawn curves mean the interest rate at 10 years is the interest a loan pays if you lend for 10 years.

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

#538219

Postby 1nvest » October 17th, 2022, 1:21 pm

JohnW wrote:Can you confirm that your hand drawn yield curves and the BoE curve with the x-axis ‘years ahead’ are really comparable?
I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now. On the other hand, I thought the hand drawn curves mean the interest rate at 10 years is the interest a loan pays if you lend for 10 years.

Thanks for the reply, resulting in my stumbling across this web site http://www.worldgovernmentbonds.com/cou ... d-kingdom/

:)

Image

Image

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

#538226

Postby 1nvest » October 17th, 2022, 1:42 pm

Here's a chart I created using BoE spot yield data for 13th October 2022 data

Image

21.5 years 4.7626% peak (down from 5.05% the day prior to that).

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

#538516

Postby dealtn » October 18th, 2022, 11:31 am

JohnW wrote:I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now.


No (although you are correct to distinguish between "spot" and "forward" yields). You have not interpreted what "instantaneous" means, which is essentially a single moment in time of no length. Whilst in theory this can be "instantaneous" in practice a minimum time period might be a day, but this is somewhat irrelevant since it is a mathematical construct derivied from the shape (and absolute level) of the spot yield curve at any point along its length.

The spot curve, comprised of all the individual bonds along its length, is "boot strapped" to join the maturity dates to turn a series of "dots" into a "curve" (this isn't a linear joining of the dots), from which any forward date can be derived, which also assumes no individual bond has any peculiar circumstances that might distort the underlying curve (often not true). Gilt yields aren't also the appropriate curve to derive what the overnight policy rate, or even the expected implied TBill rate is (they are different instruments and you also need to adjust for the credit curve - small though its impact is - or at least was - given the UK governments credit standing).

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

#538597

Postby 1nvest » October 18th, 2022, 2:42 pm

dealtn wrote:
JohnW wrote:I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now.


No (although you are correct to distinguish between "spot" and "forward" yields). You have not interpreted what "instantaneous" means, which is essentially a single moment in time of no length. Whilst in theory this can be "instantaneous" in practice a minimum time period might be a day, but this is somewhat irrelevant since it is a mathematical construct derivied from the shape (and absolute level) of the spot yield curve at any point along its length.

The spot curve, comprised of all the individual bonds along its length, is "boot strapped" to join the maturity dates to turn a series of "dots" into a "curve" (this isn't a linear joining of the dots), from which any forward date can be derived, which also assumes no individual bond has any peculiar circumstances that might distort the underlying curve (often not true). Gilt yields aren't also the appropriate curve to derive what the overnight policy rate, or even the expected implied TBill rate is (they are different instruments and you also need to adjust for the credit curve - small though its impact is - or at least was - given the UK governments credit standing).

Dealtn, given your familiarity with the bond markets, may I ask why did the UK cease more general access to Gilts? Used to be able to buy them via a simple Post Office counter form. Whilst we have NS&I that's significantly different to the US's Treasury Direct where American's can buy government bonds/notes/bills relatively easily. As far as I know retail Brits can't even access/buy the likes of UK T-Bills, where you're fully protected no matter how much is deposited, unlike banks/retail where you're only covered up to FSCS protection levels (£85K).

There must be a reason why the UK government/treasury don't want Brits buying Gilts. One reason might be to not detract business away from banks/others, similar to how gold from the Royal Mint is priced to a premium so as not to detract from others, but from a consumer angle many might prefer to deal with the state rather than through third parties. There's also a benefit when government debt is internal to the UK rather than being held by foreign investors.

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

#538871

Postby dealtn » October 19th, 2022, 9:25 am

1nvest wrote:
dealtn wrote:
JohnW wrote:I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now.


No (although you are correct to distinguish between "spot" and "forward" yields). You have not interpreted what "instantaneous" means, which is essentially a single moment in time of no length. Whilst in theory this can be "instantaneous" in practice a minimum time period might be a day, but this is somewhat irrelevant since it is a mathematical construct derivied from the shape (and absolute level) of the spot yield curve at any point along its length.

The spot curve, comprised of all the individual bonds along its length, is "boot strapped" to join the maturity dates to turn a series of "dots" into a "curve" (this isn't a linear joining of the dots), from which any forward date can be derived, which also assumes no individual bond has any peculiar circumstances that might distort the underlying curve (often not true). Gilt yields aren't also the appropriate curve to derive what the overnight policy rate, or even the expected implied TBill rate is (they are different instruments and you also need to adjust for the credit curve - small though its impact is - or at least was - given the UK governments credit standing).

Dealtn, given your familiarity with the bond markets, may I ask why did the UK cease more general access to Gilts? Used to be able to buy them via a simple Post Office counter form. Whilst we have NS&I that's significantly different to the US's Treasury Direct where American's can buy government bonds/notes/bills relatively easily. As far as I know retail Brits can't even access/buy the likes of UK T-Bills, where you're fully protected no matter how much is deposited, unlike banks/retail where you're only covered up to FSCS protection levels (£85K).

There must be a reason why the UK government/treasury don't want Brits buying Gilts. One reason might be to not detract business away from banks/others, similar to how gold from the Royal Mint is priced to a premium so as not to detract from others, but from a consumer angle many might prefer to deal with the state rather than through third parties. There's also a benefit when government debt is internal to the UK rather than being held by foreign investors.


I genuinely don't know. Retail interaction with bond markets is minimal in the UK. Whether that's demand driven, supply constrained, or regulated I can't say. Oddly in places like Italy its at the other end of the spectrum.

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

#539030

Postby stevensfo » October 19th, 2022, 4:32 pm

dealtn wrote:
1nvest wrote:
dealtn wrote:
JohnW wrote:I thought the ‘instantaneous forward yield curve’ showed interest rates for those years ahead eg 10 years ahead means the interest on a loan made 9 years from now and maturing in 10 years for now.


No (although you are correct to distinguish between "spot" and "forward" yields). You have not interpreted what "instantaneous" means, which is essentially a single moment in time of no length. Whilst in theory this can be "instantaneous" in practice a minimum time period might be a day, but this is somewhat irrelevant since it is a mathematical construct derivied from the shape (and absolute level) of the spot yield curve at any point along its length.

The spot curve, comprised of all the individual bonds along its length, is "boot strapped" to join the maturity dates to turn a series of "dots" into a "curve" (this isn't a linear joining of the dots), from which any forward date can be derived, which also assumes no individual bond has any peculiar circumstances that might distort the underlying curve (often not true). Gilt yields aren't also the appropriate curve to derive what the overnight policy rate, or even the expected implied TBill rate is (they are different instruments and you also need to adjust for the credit curve - small though its impact is - or at least was - given the UK governments credit standing).

Dealtn, given your familiarity with the bond markets, may I ask why did the UK cease more general access to Gilts? Used to be able to buy them via a simple Post Office counter form. Whilst we have NS&I that's significantly different to the US's Treasury Direct where American's can buy government bonds/notes/bills relatively easily. As far as I know retail Brits can't even access/buy the likes of UK T-Bills, where you're fully protected no matter how much is deposited, unlike banks/retail where you're only covered up to FSCS protection levels (£85K).

There must be a reason why the UK government/treasury don't want Brits buying Gilts. One reason might be to not detract business away from banks/others, similar to how gold from the Royal Mint is priced to a premium so as not to detract from others, but from a consumer angle many might prefer to deal with the state rather than through third parties. There's also a benefit when government debt is internal to the UK rather than being held by foreign investors.


I genuinely don't know. Retail interaction with bond markets is minimal in the UK. Whether that's demand driven, supply constrained, or regulated I can't say. Oddly in places like Italy its at the other end of the spectrum.


Yes, in Italy, it's easy to buy state gilts 'obbligazioni'.

However, you have to remember that not only do the equivalent of ISAs not exist, but the charges and taxes levied by the P.O., banks and state are eye-watering.

Italy was the only place where I lost money in having a savings account!! 8-)

Steve

PS I was perhaps too young or inexperienced to know about buying gilts at the Post Office, but I do miss the old P.O. savings accounts and those books that you filled up with 10p savings stamps. Great way for kids to save!


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