Gilts short term strategy?

[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.

[tjh290633]

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

[thebarns]

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.

[Spet0789]

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.

[GoSeigen]

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

[mc2fool]

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 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!)

[Alaric]

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.

[GoSeigen]

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

[dealtn]

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.

[Spet0789]

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

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.

[thebarns]

Dealtn,

As you point out your view of “risk”and virtually “non existent” or the interpretation of the words are indeed different, as I suppose others will also be different to both of ours.

I take it as read that all of my particular investment options have loss of purchasing power implicit in the background as I can’t control general macro inflation but I can control what I decide to invest in and my own expenditures.

Also, in my own circumstances, the loss of purchasing power is not at the forefront of my mind, given I have reached a certain level of invested wealth at a certain age. Clearing a mortgage and reducing expenditure on childrens’ school fees and university costs have had a far more significant impact on my assessment of non existent risk on investments, such as short dated gilts, than loss of purchasing power on other far smaller items.

[air04]

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?

[dealtn]

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.

The percentage demand for gilts by retail investors with CGT concerns is de minimis. Nearly all the demand for gilts is institutional. Tax is irrelevant to the price mechanism of gilt yields.

[GoSeigen]

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

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

[GoSeigen]

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.

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

[air04]

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.

The percentage demand for gilts by retail investors with CGT concerns is de minimis. Nearly all the demand for gilts is institutional. Tax is irrelevant to the price mechanism of gilt yields.

dealtn, I really appreciate your views. But, may be the discrepancy is in retail pricing and not institutional pricing. The MMs can get away with asking for more, as it is higher in demand by retail investors? The difference is small.
You can see that the yield curve is not smooth (takes a dip) when the coupon is suddenly lower.
https://docs.google.com/spreadsheets/d/ ... 9&range=A1
https://ibb.co/JvzMgGR

I can see it in https://www.yieldgimp.com/gilt-yields too that the GRY is slightly higher for higher coupon gilts.

[GoSeigen]

I can see it in https://www.yieldgimp.com/gilt-yields too that the GRY is slightly higher for higher coupon gilts.

It's a good idea to plot for modified duration, not time to maturity. Probably doesn't affect the point you're trying to make.


GS

[1nvest]

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.

The percentage demand for gilts by retail investors with CGT concerns is de minimis. Nearly all the demand for gilts is institutional. Tax is irrelevant to the price mechanism of gilt yields.

Because institutes (pension funds) have to buy them, by law. As that opens up the potential for the state to raid those pots. Buying Gilts is lending to someone who has a money printing press, and who sets the terms/conditions of that loan !!! Some opt not to lend to such a entity and instead shift the risk over to the stock side, third stocks, two thirds hard currencies for instance (perhaps Pound notes and Sovereign coins stuffed under a mattress). There are times however when Gilts can become attractive, such as after/during high inflation periods when relatively high long dated Gilt yields can be locked into, early 1980's 14% 10 year gilt yield price levels for instance. At present rates (yields) that are below inflation .. not so good.

PV example (selected a period when cash returned 0% i.e. the same as hard-cash).

[dealtn]

The percentage demand for gilts by retail investors with CGT concerns is de minimis. Nearly all the demand for gilts is institutional. Tax is irrelevant to the price mechanism of gilt yields.

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.

[dealtn]

The percentage demand for gilts by retail investors with CGT concerns is de minimis. Nearly all the demand for gilts is institutional. Tax is irrelevant to the price mechanism of gilt yields.

dealtn, I really appreciate your views. But, may be the discrepancy is in retail pricing and not institutional pricing. The MMs can get away with asking for more, as it is higher in demand by retail investors? The difference is small.
You can see that the yield curve is not smooth (takes a dip) when the coupon is suddenly lower.
https://docs.google.com/spreadsheets/d/ ... 9&range=A1
https://ibb.co/JvzMgGR

I can see it in https://www.yieldgimp.com/gilt-yields too that the GRY is slightly higher for higher coupon gilts.

Firstly year to maturity isn't an accurate measure. You need to use a "time" axis that is modified duration, or a cashflow weighted measure. I'm hoping this isn't too patronizing but consider the differences between 2 bonds that both mature in exactly 50 years time. One is zero (or low) coupon, and one is a high coupon. They are different as one gives you running income that can be reinvested at the applicable reinvestment (or market predicted forward) rates.

Secondly you will also get micro supply/demand issues regarding individual bonds due to liquidity, on/off the run, known future issuance calendars, as well as factors such as demand/supply in the repo market such that funding of positions is different.

The point though is that the small micro factors that influence the relative attractiveness of individual bonds in the retail space are very small compared to the supply/demand in the institutional market in setting the yield curve to be de minimis. No doubt there will be some additional factors in quoted pricing in the retail space but most market making in gilts doesn't actually exist in the retail space. MMs don't care, it makes no money, and most quotes through retail platforms are simple algorithmic RFQs that trade (or not) automatically. You might get some influence at the retail provider or broker level as they will always know what you are trying to do, but even then retail brokers aren't hugely sophisticated and unlikely to get involved in price quoting (or adjusting a MM quote - even where allowable under a "best quote" protocol).