The Lemon Fool

Throughout '21 we could see that inflation was beginning to climb and threatened to reach a higher level,so to protect hard earned savings I bought several tranches,during that year, of Index Linked Government Bonds (INXG.L) for protection.However they seem to have done the opposite and are heading South.I'm down about 20%. I just don't get it. Anybody have an explanation?

indicator wrote:Throughout '21 we could see that inflation was beginning to climb and threatened to reach a higher level,so to protect hard earned savings I bought several tranches,during that year, of Index Linked Government Bonds (INXG.L) for protection.However they seem to have done the opposite and are heading South.I'm down about 20%. I just don't get it. Anybody have an explanation?

Gilt yields have risen. As would be expected in a rising-inflation scenario. And INXG has an 18y effective duration, so 18% loss for every 100bp rise in yield.


GS

What is INXG?

CliffEdge wrote:What is INXG?

What is Google?

GS

GoSeigen wrote:

CliffEdge wrote:What is INXG?

What is Google?

GS

Google among other things is a search engine. Next time I see something incongruous I'll make a point of sending you a postcard, unstamped. Subtle you ain't.

It's an ETF from BlackRock ie iShares. It aims to track an index of UK index linked gilts. I looked it up on Google as I had no idea.

indicator wrote:Throughout '21 we could see that inflation was beginning to climb and threatened to reach a higher level,so to protect hard earned savings I bought several tranches,during that year, of Index Linked Government Bonds (INXG.L) for protection.However they seem to have done the opposite and are heading South.I'm down about 20%. I just don't get it. Anybody have an explanation?

IL gilt prices are a function of various factors including nominal yields (which have risen) and market expectations of inflation (which have also risen but less than the rise in nominal rates). For a more comprehensive but accessible explanation see the Personal Assets Trust April 2022 report (page 2).

https://www.patplc.co.uk/Portals/0/Lite ... 202022.pdf

Top of my head here, but I can see where the OP is coming from.,. One might think that if the yield/coupon was “indexed-linked” (1:1), then the capital should be relatively inflation proofed.

daveh wrote:It's an ETF from BlackRock ie iShares. It aims to track an index of UK index linked gilts. I looked it up on Google as I had no idea.

So it's not a bond then is it? To the OP, I'm not sure if an ETF is what you thought you were buying.

I think that's it, CliffEdge.

I feel for the OP - who appears to have simply been trying to be cautious - but I suspect it's one of those cases where a little knowledge may be a dangerous thing

The OP mentions buying "... several tranches ... of Indexed Linked Government Bonds ...". Whilst what that means exactly might be a matter of debate, I would argue, that by buying INXG that's NOT what the OP did. Rather, they purchased something that replicates the performance of a basket of linkers, on multiple occasions.

As GoSeigen notes, rising yields cause bond prices to fall all things being equal - linkers or otherwise. Increased coupons linked to rising (RPI) inflation may partially or wholly counteract the effect of this, but based on the performance quoted, it would seem not wholly.

Expressed a more crude way, bond yields and RPI inflation, though at some level correlated, are not the same thing.

Regards, Newroad

I don't think there's anything mysterious here. The OP bought a few tranches of an index-linker ETF (he/she omitted the word ETF but helpfully included the EPIC (INXG.L), which, this being an investment site I assume most regulars know how to look those up!). He/she has found that the price of the EFT has fallen, obviously because the price of the underlying has fallen.

Index linked bonds protect you from the effects of inflation, that is not in dispute. However you have no protection from rising yields (either real or nominal), why would you? As was widely discussed on these boards, gilts have been ridiculously priced for some years, real yields of many shorter dated linkers were negative(!!) and even longer-dated linkers had yields never seen in the history of UK debt.

So it's no surprise prices have fallen sharply as people realise that 0% is not an acceptable yield for a long-term fixed interest product.


GS

GoSeigen wrote:I don't think there's anything mysterious here. The OP bought a few tranches of an index-linker ETF (he/she omitted the word ETF but helpfully included the EPIC (INXG.L), which, this being an investment site I assume most regulars know how to look those up!). He/she has found that the price of the EFT has fallen, obviously because the price of the underlying has fallen.

Index linked bonds protect you from the effects of inflation, that is not in dispute. However you have no protection from rising yields (either real or nominal), why would you? As was widely discussed on these boards, gilts have been ridiculously priced for some years, real yields of many shorter dated linkers were negative(!!) and even longer-dated linkers had yields never seen in the history of UK debt.

So it's no surprise prices have fallen sharply as people realise that 0% is not an acceptable yield for a long-term fixed interest product.


GS

Good explanation but I am still not convinced the OP understood what she was buying, which is an important point, it being one thing to buy a bond but another thing to buy a fund of bonds - though the outcomes might be correlated, possibly.

Maybe a comment I made on another topic, regarding US TIPS (admittedly not UK IL Gilts) might clarify why the OP has lost money:

viewtopic.php?f=88&t=32177#p459304

At the time, I said:
'.....The current yield on US TIPS is negative and varies from -0.5% to -2% which isn't appealing.....'

Further down the topic I also added:
'.....With negative current yields, the holders are guaranteed to lose 0.5% to 2% p.a. in real terms, whatever the inflation rate, unless they can sell the bonds to someone else who is prepared to pay an even higher price for an even more negative real return.
I don't see the logic in holding a negative real yielding asset in the hope that someone else might buy it off me for a higher price......'


As of yesterday, US TIPS offered yields of +0.5% to +1.1% compared to -0.5% to -2% last autumn; TIPS paid negative yields last year (if held to maturity) and TIPS prices have declined since.

And the TIPS ETF, ITPG, is down 7.4% on the year

GrahamPlatt wrote:Top of my head here, but I can see where the OP is coming from.,. One might think that if the yield/coupon was “indexed-linked” (1:1), then the capital should be relatively inflation proofed.

The problem with such "thinking" is you really shouldn't think that. It simply isn't true!

You need to either understand what the underlying investment is, or not invest in it. That might sound brutally harsh but buying index linked bonds is not a way to inflation proof your capital. Not even when held to maturity, and especially not over the period before that.

In its simplest sense Index Linked Gilts are a combined investment that is influenced by the direction of (market) interest rates, and also (market) inflation rates. If you want to have an exposure solely to inflation then you need to be both "long" linkers, and "short" conventionals. If this is too "difficult" to do as a private investor then buy a fund, or synthetic, or similar, designed to do this. Buying linkers on their own does not achieve what you are looking for, as the OP has discovered. When the "interest rate" element moves more than the "inflation rate" element (crudely speaking) linkers will fall in price.

(Having said all that, and not relevant to the case brought by the OP, care needs to taken that by convention linkers are quoted by price outside of the indexation with inflation. So it is always possible that your capital has risen, though perhaps by less than inflation, even where the visual price has fallen. For example if quoted prices have fallen from 100 to 90, but the RPI index has moved from 300 to 360, the value of your investment has (again crudely) moved from 300 to 324. So care is required when understanding what exactly price means with respect to the "worth" of an investment).

CliffEdge wrote:

GoSeigen wrote:I don't think there's anything mysterious here. The OP bought a few tranches of an index-linker ETF (he/she omitted the word ETF but helpfully included the EPIC (INXG.L), which, this being an investment site I assume most regulars know how to look those up!). He/she has found that the price of the EFT has fallen, obviously because the price of the underlying has fallen.

Index linked bonds protect you from the effects of inflation, that is not in dispute. However you have no protection from rising yields (either real or nominal), why would you? As was widely discussed on these boards, gilts have been ridiculously priced for some years, real yields of many shorter dated linkers were negative(!!) and even longer-dated linkers had yields never seen in the history of UK debt.

So it's no surprise prices have fallen sharply as people realise that 0% is not an acceptable yield for a long-term fixed interest product.


GS

Good explanation but I am still not convinced the OP understood what she was buying, which is an important point, it being one thing to buy a bond but another thing to buy a fund of bonds - though the outcomes might be correlated, possibly.

I don't think there's a material distinction in this case. The EFT will perform in line with the underlying.

GS

CliffEdge wrote:And the TIPS ETF, ITPG, is down 7.4% on the year

And ITPG has a much smaller 8-year duration which (partly) explains the smaller loss.

GS

GoSeigen wrote:

CliffEdge wrote:

GoSeigen wrote:I don't think there's anything mysterious here. The OP bought a few tranches of an index-linker ETF (he/she omitted the word ETF but helpfully included the EPIC (INXG.L), which, this being an investment site I assume most regulars know how to look those up!). He/she has found that the price of the EFT has fallen, obviously because the price of the underlying has fallen.

Index linked bonds protect you from the effects of inflation, that is not in dispute. However you have no protection from rising yields (either real or nominal), why would you? As was widely discussed on these boards, gilts have been ridiculously priced for some years, real yields of many shorter dated linkers were negative(!!) and even longer-dated linkers had yields never seen in the history of UK debt.

So it's no surprise prices have fallen sharply as people realise that 0% is not an acceptable yield for a long-term fixed interest product.


GS

Good explanation but I am still not convinced the OP understood what she was buying, which is an important point, it being one thing to buy a bond but another thing to buy a fund of bonds - though the outcomes might be correlated, possibly.

I don't think there's a material distinction in this case. The EFT will perform in line with the underlying.

GS

But the ETF will not have a maturity date so the return is not locked in, whereas it is for a bond held to maturity, or maybe a bond ladder. Anyway the OP has not responded so still not really sure what her question meant.

CliffEdge wrote:

GoSeigen wrote:

CliffEdge wrote:Good explanation but I am still not convinced the OP understood what she was buying, which is an important point, it being one thing to buy a bond but another thing to buy a fund of bonds - though the outcomes might be correlated, possibly.

I don't think there's a material distinction in this case. The EFT will perform in line with the underlying.

GS

But the ETF will not have a maturity date so the return is not locked in, whereas it is for a bond held to maturity, or maybe a bond ladder. Anyway the OP has not responded so still not really sure what her question meant.

I don't understand what you mean by the return being "locked in" for an investment of almost 20 years duration whose value we are discussing one year after having purchased it?

GS

GrahamPlatt wrote:Top of my head here, but I can see where the OP is coming from.,. One might think that if the yield/coupon was “indexed-linked” (1:1), then the capital should be relatively inflation proofed.

Apologies if I didn't explain myself properly but thanks Graham you have translated accurately.