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Gilts versus Gilt Funds

Investment discussion for beginners. Why you should invest your money, get help getting started
AWOL
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Gilts versus Gilt Funds

#435999

Postby AWOL » August 19th, 2021, 4:38 pm

Hi,

I am not in a rush to buy any bonds but part of me is considering having them as a glidepath as their downside risk is probably still less than equities. To that end I have to confront the fact that what little I once knew about bonds I have largely forgotten through lack of use.

In order to be prepared for a potential opportunity for buying some gilts, linkers, and TIPS I'd like to ask a question... Given that for private investors bonds appear to be less accessible than equities and that private investors want to trade low volumes.... are bonds still better than bond funds?

My order of interest is gilts, linkers, then TIPS. I am not interested in corporate bonds especially not junk, or to be polite, high yield bonds.

I see bonds as a diversifier and a store of value. If I want risky yield then I'd rather buy equities.

Please educate me. I'm probably not the only citrus fool needing enlightening.

Thanks,
AWOL

1nvest
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Re: Gilts versus Gilt Funds

#436051

Postby 1nvest » August 19th, 2021, 6:56 pm

If you're buying enough, perhaps £50K+ at a time, then gilt spreads will tend to be much tighter (via telephone trades) than if you're buying relatively little online £££ trade amounts. So for instance if £150K total in gilts via a 3 year ladder so around £50K/year maturing/rolled, then maybe go with direct gilts, otherwise IGLS or whatever (fund). Or even just £50K and a 1 year gilt rolled yearly, and rebalance your portfolio as the gilt matures (cash in hand). Or picking the gilt near the peak of the steepest part of the yield curve and selling/rolling that yearly, which might even yield closer to 0% real even in the present era negative real yields world (gilt capital gains are capital gains tax exempt).

Buffett prefers to shift bond risk over to the stock side, so prefers 90/10 stock/T-Bills rather than 80/20 stock/bonds. All broadly washes ('Cash' in that link is T-Bills)

Gilts are better than high street fixed income as they're just T+3 days away from liquidation and fully protected no matter how much you 'deposit'. Gilt funds also directly hold the Gilts so near as good, but some additional likely very small additional 'counter party' risk. Also some management cost i.e. 0.07% expense ratio for IGLS.

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Re: Gilts versus Gilt Funds

#436052

Postby scrumpyjack » August 19th, 2021, 7:05 pm

AWOL wrote:Hi,

I am not in a rush to buy any bonds but part of me is considering having them as a glidepath as their downside risk is probably still less than equities. To that end I have to confront the fact that what little I once knew about bonds I have largely forgotten through lack of use.

In order to be prepared for a potential opportunity for buying some gilts, linkers, and TIPS I'd like to ask a question... Given that for private investors bonds appear to be less accessible than equities and that private investors want to trade low volumes.... are bonds still better than bond funds?

My order of interest is gilts, linkers, then TIPS. I am not interested in corporate bonds especially not junk, or to be polite, high yield bonds.

I see bonds as a diversifier and a store of value. If I want risky yield then I'd rather buy equities.

Please educate me. I'm probably not the only citrus fool needing enlightening.

Thanks,
AWOL


I just hold cash, rather than Gilts. The yield difference is so tiny that I can't see it's worth the bother of buying and selling gilts, incurring dealing costs, fees and charges, plus the risk of interest rates rising. Much less hassle at the moment to just have large bank deposits. I get 0.55% at present. Don't know what you can get on a short dated gilt, but is it worth it?

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Re: Gilts versus Gilt Funds

#436070

Postby 1nvest » August 19th, 2021, 8:43 pm

scrumpyjack wrote:I just hold cash, rather than Gilts. The yield difference is so tiny that I can't see it's worth the bother of buying and selling gilts, incurring dealing costs, fees and charges, plus the risk of interest rates rising. Much less hassle at the moment to just have large bank deposits. I get 0.55% at present. Don't know what you can get on a short dated gilt, but is it worth it?

Other than the bank queues can sometimes get quite long
https://www.trustnodes.com/wp-content/u ... 75x500.jpg
and you may not get out what you deposited.

Used to be fine when banks were custodial, they kept your money safe in their vaults. Nowadays a bank deposit is a IOU, they can do whatever they like as your deposit then becomes their money, with a promise to maybe return it, perhaps with some interest. Incentive to bet like mad, heads they win, tails they default and taxpayers partially bail deposits out, up to limits. And with increased incentives since 2008 that bank fixed income bonds should bear more of the costs/risks.

With Gilts they're backed by the Treasury, who can raise taxes and/or print money rather than default.

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Re: Gilts versus Gilt Funds

#436073

Postby scrumpyjack » August 19th, 2021, 8:55 pm

What touching faith in the Treasury :D

Still we can all make our own assessments of what the risks are. Bank deposits are guaranteed up to £80k, I think, and if you can't spread it around enough, I take the view that the chances of the likes of Goldman Sachs (Marcus) or the major UK banks going bust is utterly trivial.

Whereas the chances of high inflation, rising interest rates and falls in gilt prices is certainly not trivial, IMO

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Re: Gilts versus Gilt Funds

#436088

Postby AWOL » August 19th, 2021, 9:58 pm

I am toying with the idea of moving from 90/10 to 80/20 although my current 90/10 is 5% PBs and 5% Gold and then run down in 2% chunks the 10% of additional ballast. Just a thought at this stage. Bonds aren't attractive but ballast still has it's uses. More cash is a good suggestion although like bonds inflation will hurt that. Thanks.

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Re: Gilts versus Gilt Funds

#436116

Postby JohnW » August 20th, 2021, 1:12 am

If you have a particular target date for needing spending money, or a series of target dates such as yearly for 10 years running, then individual bonds make lots of sense in that they can be highly predictable when held to maturity. But individual bonds are a bit fiddly. If you want something to save your bacon in a meltdown a bond fund is a great choice. It's then a matter of finding one with a suitable duration, cost, and how much nominals vs linkers.

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Re: Gilts versus Gilt Funds

#436119

Postby 1nvest » August 20th, 2021, 1:23 am

scrumpyjack wrote:Whereas the chances of high inflation, rising interest rates and falls in gilt prices is certainly not trivial, IMO

The closer a gilt is to its maturity the closer it will be to par price (low price volatility) and if interest rates rise so the maturing gilts proceed can be rolled into a replacement higher yielding gilt.

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Re: Gilts versus Gilt Funds

#436133

Postby dealtn » August 20th, 2021, 7:05 am

JohnW wrote: If you want something to save your bacon in a meltdown a bond fund is a great choice. It's then a matter of finding one with a suitable duration, cost, and how much nominals vs linkers.


Well that depends on the "meltdown", of course.


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