Should I sell gilts?

[Alaric]

The higher the rate of interest the lower the bond price. Correct.

But that isn't what you are arguing.

That is what I'm arguing. The simple premise that a change in the announced rate by the BoE directly affects the yields at the shortest end and indirectly affect those at the longer end.


In a simple minded way, surely if the BoE rate is 1%, a bond due to mature in three months time is going to have a yield of around 1%. Anything else encourages arbitrage between cash and bonds. Whichever way the BoE moves the rates, why won't the yields on the closest Gilts to cash move in sympathy, regardless of whether the change was expected?

[dealtn]

The higher the rate of interest the lower the bond price. Correct.

But that isn't what you are arguing.

That is what I'm arguing. The simple premise that a change in the announced rate by the BoE directly affects the yields at the shortest end and indirectly affect those at the longer end.


In a simple minded way, surely if the BoE rate is 1%, a bond due to mature in three months time is going to have a yield of around 1%. Anything else encourages arbitrage between cash and bonds. Whichever way the BoE moves the rates, why won't the yields on the closest Gilts to cash move in sympathy, regardless of whether the change was expected?

But at no point in your first post, to which I responded, did you contain your argument to such Gilts with maturities of one month (or less). Nor did the OP when asking his question to which you responded. 99% of outstanding Gilt issuance will be for periods beyond one month, so when someone talks about the Gilt market it isn't unreasonable to assume they are not talking about only Gilts maturing approximately at the next meeting of the interest setting MPC.

The wider Gilt market is influenced all the time by various news items that change the markets perception of the likely future path of interest rates. If a general question is posed on what is thought likely to happen to the Gilt market, the likliest outcome of the next meeting, isn't going to be of much use in either that prediction, or the investment return beyond that.

[GoSeigen]

Alaric habitually conflates interest rates and gilt yields. They are not the same thing and any sensible non-neophyte discussing gilts or bonds recognises the distinction. There is also such a thing as a yield curve which is bond 101.

Anyone similarly confused about interest rates and yields would be advised to read a basic bond primer and note the difference.


OP: You have invested in a gilt fund with duration just under 12 years and current yield of 1%. It's TER is 0.32% so you lose this amount in charges every year.

You asked for views on the gilts outlook. You have had useful replies from JohnW, dealtn, Bubblesofearth in their initial posts.

The relevant part of the gilt curve for your investment is about the 10-15-year mark. What I'd note is that the yield curve in historical terms is very flat (and low). That is not a particularly good sign for ten-year bonds. The golden age or the 10-year gilt was 2008-16 or so. This period had multiple years with 25% annual gains. Looking at the yield curve now, that performance is unlikely to be achieved and you certainly should not hope for it! With the yield curve flat I'd want to start moving to cash or short gilts in anticipation of a steepening (where short gilts fall more than long gilts or rise less meaning they gain relative to longer gilts). Last year was an ideal time to do this with fantastically low yields and a flat yield curve but you might take the view that it's not too late now.

If you stay in your fund then that is IMO an expression of one of two beliefs: either 1. you don't care to much about your gilts' performance and hold them as diversification, planning for example to rebalance if their weighting in your portfolio gets too small, or 2. you strongly believe that this inflation is transient and the yield curve will revert to its range of the past few years (it's a speculation).

My own (worthless) view is that inflation is transitory and you will get an opportunity to offload your gilts at a higher price. However many will disagree and if high levels of inflation persist I fear your fund is sure to show further losses. I cannot tell you which view is correct. JohnW's early post is most relevant: it is important for you to understand your strategy and stick to it for the worst thing in investing is to react to your emotions (fear, greed) and trade in and out.

Good luck.

GS

[Alaric]

OP: You have invested in a gilt fund with duration just under 12 years and current yield of 1%.

If the BoE moves its base rate anywhere near recent price index changes, that yield is going to seem as much history as rates of under 3.5% seemed in the 1970s.

[dealtn]

OP: You have invested in a gilt fund with duration just under 12 years and current yield of 1%.

If the BoE moves its base rate anywhere near recent price index changes, that yield is going to seem as much history as rates of under 3.5% seemed in the 1970s.

So where do you think 12 year gilts would yield if base rate was raised to 11% tomorrow?

[1nvest]

Consider a Gilt holding of a 10 year ladder, equal amounts initially loaded into each of 1, 2, 3, ... 10 year Gilts and as each Gilt matures you roll the proceeds into another 10 year Gilt.

Now modify that to be 50/50 with stocks and where instead you roll 5% of the total portfolio value into a new 10 year Gilt as each Gilt matures.

Volatility tends to cluster, large/fast gains also often have large/fast declines around them. 10 years of great portfolio gains might be accompanied by another 10 years of low/flat rewards.

After a great decade, relatively high portfolio value, relatively more capital is rolled into a 10 year gilt. If the next 10 years are flat, then at the end of that you have a 'above average' maturing Gilt to in part compensate. From there, whilst relatively less is rolled into the next 10 year Gilt at that time, so also are portfolio gains likely to be higher over that subsequent 10 years following the relatively poor 10 years portfolio outcome. In effect a sort of time-shift diversification that helps smooth down overall portfolio value volatility.

To the end of 2021 portfolio gains have been 'above average', so in effect you have more capital being rolled into a 10 year Gilt paying a lower yield compared to if prior gains had been lower and having had less to roll into a 10 year Gilt paying a higher yield.

You could alternatively on the assumption that a 10 year Gilt purchase being a bad choice look to redirect that rungs capital elsewhere, but that then becomes predictive, a deviation away from 'staying the course', that might work out better, could be worse. Should you sell (not roll) and speculate elsewhere? Well you'll only know if you should or shouldn't have done so in later years. It' a 50/50 guess. Whatever alternative you might opt to invest in instead could do better, could do worse. The common mantra is not to bother and to instead just stay the course.

Yet others might assume that you can easily do better than the equivalent of a guaranteed (nominal) return of capital and 2.5%/year (recent 10 year yields) cash deposit. Perhaps suggesting a stock paying 4% dividends instead - however if you swap out some/all of that fixed/assured return of capital over the next decade for 5% in xyz stock shares then that could end up with all of that capital having been lost. Buying a index of stocks is less risky, but could still see a decade of deflation resulting in both share prices and dividends collapsing below levels where fixed income worked out better.