Index-link gilts 2024: sell or hold to maturity?

[yorkshirelad1]

I have a holding of index-linked gilts
UK TREAS 2.5% IDX LKD 17/07/2024
£55k nominal at a cost £181k, current price is £359 so total £197k, so (CGT free) gain of £16k.

It has been suggested I should consider selling them, I would get approx £197k.
If I retain them till maturity, I will get the maturity value of the capital, and another six bi-annual dividends of approx £2k (£12k)

From what I read, if I sell now, I would make more than if I hold to redemption.
Can anyone help, explain, point me in the direction of something to read to understand how to work the figures out for myself.
I suppose there have to be assumptions about inflation (let’s allow for 2% RPI), and tax just to add to the complexity.

I read that index-linked gilts are overpriced and shouldn’t be bought. But there must be buyers out there at these levels to support the price, but why would they buy at what are reportedly high prices if the eventual outcome can be calculated and any buying now would clearly be at a loss if held to redemption.

TIA

[scrumpyjack]

The reason I suppose is that the interest they pay is higher than current market rates so that is taken into account by the market in setting the capital value now as compared with the estimated maturity value. If the interest is taxable you may be better off selling now for a higher (non taxable) capital value.

If you are certain what inflation will be from now until the date used for calculating the redemption value you must have an excellent crystal ball!

[tjh290633]

I'm not sure how they work it out, but the last time I looked at gilt prices, all the index linked gilts had negative redemption yields. That is why the suggestion to sell now is made.

TJH

[JohnW]

From what I read, if I sell now, I would make more than if I hold to redemption.
Can anyone help, explain, point me in the direction of something to read to understand how to work the figures out for myself.
I suppose there have to be assumptions about inflation (let’s allow for 2% RPI), and tax just to add to the complexity.
TIA

You can calculate how much each coupon payment will be worth easily, I think, and there's only ?12 coupons left to pay, so it's not like you'll be drowning in numbers. But what assumption will you use for the money's return for the next 3 years if you redeem them now? And then there's the assumption about inflation for the next 3 years.
If they were yielding more when you bought them than buying them now would yield, you'd imagine it's better to keep them unless of course you'll replace them with equities! There are too many moving parts, surely, to even bother.

[dealtn]

I read that index-linked gilts are overpriced and shouldn’t be bought. But there must be buyers out there at these levels to support the price, but why would they buy at what are reportedly high prices if the eventual outcome can be calculated and any buying now would clearly be at a loss if held to redemption.

TIA

For some a "known" loss of "real" capital is preferable to an "unknown" and uncertain value in the future. In that position it isn't illogical to purchase with negative real redemption yields.

Your decision on selling, or not, would need to take into account your place on that spectrum of uncertainty, and what alternative homes for your capital are available to you.