Ishr � Ind-link Discussion Threads

[prokartace] 09/11/2023 09:32

Wow, we are getting a dividend lol

[bollers] 04/6/2023 14:50

Now that makes sense, thanks for the explanation. I should have done a bit more research 2 years ago!

Lesson learnt (until next time).

[llef] 04/6/2023 14:34

Hi Bollers,

Its a bit arcane, but my understanding is as follows: the issue is that the over the last 2 years, the "real rate" on index linkers has risen roughly from -2% to +1%.

What does this mean?

This means that 2 years ago, if you bought an index linker, the price was so high that you were guaranteeing you would be getting growth of (inflation -2%), whereas today, (with a much lower price), you would be getting growth of (inflation +1%).

ie 2 years ago, by buying that linker, you were guaranteeing that your money would fall in value in real terms by 2% per annum. So linkers were really, really expensive.

If I assume you bought a 20 year linker, and I assume inflation of 2% over the 20 years, then if you paid 100 for the linker 2 years ago, then you would get back 100 in 15 years time, (as it would have risen by 2%-2%=0% per annum). Ie you would have seen no nominal growth in your purchase cost despite inflation averaging over 2% over the whole 20 years.

Today if you buy that same linker, then you will get 2% inflation +1% real rate per annum for 18 years, so to get 100 pounds in 18 years time, you would need to discount the 100 pounds by 3% for 18 years.

(100/1.03^18) = 58.7 pounds (so roughly a 40% fall in value).

The longer the maturity of the linker, the bigger the fall.

Basically, linkers were really expensive 2 years ago, and are in my opinion reasonable value now.

[bollers] 04/6/2023 11:15

thanks for that. I understand 1/8% coupon is neither here nor there now - but the most I can get in a building soc for example is 5% ish.

If the underlying index linked gilt is growing 10% a year as that is the current rate of inflation - surely that should be attractive and the market price go up not down?

I would be quite happy getting a zero coupon if the market price had gone up by 10% to reflect the index linking - but I'm clearly missing something as the price has fallen by 50% over the last 2 years instead of rising by the 15% or so that CPI has risen since then.

[hindsight] 04/6/2023 10:45

bollers issue is the coupon, as you say 1/8%, means that the capital value has to be discounted for this

[bollers] 03/6/2023 18:35

Can anyone please help me? I hold some of these and also some 1/8% index linked gilts. I was under the impression these would pay out the inflation rate on top of the original coupon from when they were launched until maturity. So, for example at the beginning of this year they might have been (say)valued at £10, and as inflation is running at 10% would be worth £11 by the end of the year. No other savings approach that rate. I therefore assumed that my savings would be inflation proofed. Instead they have fallen by 50% over the last couple of years. Can anyone explain? Thanks

[hindsight] 24/5/2023 09:46

Thank you jellypbean from that i can work out what inflation rate they are presuming

[jellypbean] 23/5/2023 19:00

Google "Bank of England yield curves", download the data for the relevant time frame and look at 17 year spots for "real" and "inflation" and add them to each other. On 11 Jan these were 0.42 and 3.4

[hindsight] 11/1/2023 11:24

Been looking at these and wondered is anyone knew how the YTM of 3.8% is calculated.



Realise they use any coupon and present indexation added but how do they account for indexation to maturity and if so where do they get a number and what is that number

[prokartace] 06/1/2023 13:00

Is now the time to buy? Inflation peaking and interest rates soon to peak.

[catsick] 20/10/2022 07:30

The way linkers work is you pay price * index and get a coupon of coupon * index , at maturity you get notional * index , the index being the compounded inflation from the issue date of the bond . Most of the gilts issued have very low coupon like 0.125% so not much in coupon but these issues were trading down at .42 at the lowest point, to be honest for a lot of people buying the actual gilt is more efficient as there is no cgt on them but there is on the fund, low coupon high capital gain tax free very efficient

[belfry17] 19/10/2022 16:04

It has paid out historically, but only small percentage distribution, according to its history. I don't know the answer to your other questions and they are good ones. If all gilts were held to maturity and got their returns then it would work well - the challenge is how they are valued daily so the notional value of gilts fall when yields rise, and our Nav falls too.

[prokartace] 19/10/2022 13:16

How does a linker pay out. Is it added to the capital at maturity or does it pay out like gilts semi-annually and if so what is the delay to inflation? There has been no payment made over the period I have looked back in the past. Also does this fund pay out or reinvest?

[belfry17] 15/10/2022 22:29

I have found it now, albeit 1.19% on there now. That is interesting as they refer to it as the real yield (I.e. expected return inflation adjusted).

[belfry17] 12/10/2022 19:42

Thanks. I had a look on there earlier but couldn't see it. Maybe me being silly

[mozy123] 12/10/2022 18:31

hxxps://www.ishares.com/uk/individual/en/products/251717/ishares-indexlinked-gilts-ucits-etf

Is the up to date factsheet so to speak

I don't really understand bonds too well.

[belfry17] 12/10/2022 18:20

Hi Mozy. Thanks for that but where did you get the information from please? Are we therefore due a distribution again in November? I have been in her for a while and been adding on the way down, just don't know where it will stop!A

[spectoacc] 12/10/2022 15:44

Thanks @Mozy123. Haven't pulled the trigger yet, but have been buying conventional gilts. Not all at once - surely next week has the potential for fireworks. Ollie Bailey seems to have flip-flopped 3x already.

Hope to pick up direct Linkers next week.

[mozy123] 12/10/2022 12:32

Real yield now 1.39%
Weighted YTM 4.66%

[spectoacc] 11/10/2022 16:58

Gold - long-term inflation protection, $'s, no negative yield (albeit no yield at all).

Physical assets - commodities, commodity producers, even property, if you believe in sustained 10% inflation.

Moat shares - tho I accept they're as overpriced as Linkers got. But compounders with pricing power can't be dismissed.

Shares denominated in other currencies - if you believe the sustained high inflation is UK only (since it would absolutely destroy the £ - am guessing 10% inflation is paired with low interest rates).

I just don't think a negative yield is giving you wealth preservation, except in very narrow circumstances. It's giving you a guarantee of real-terms loss, albeit a smaller loss if the historically unlikely scenario of sustained high inflation plays out.

If we're going to be Venezuela, or Zimbabwe, or Turkey, getting out of Sterling ought to be priority no.1. US TIPS, not Linkers.

[riverman77] 11/10/2022 16:42

It depends on your priorities but if you want wealth preservation above everything else, and are concerned about persistently high inflation, then accepting a 1% negative real yield makes perfect sense. In an extmreme scenario of say 10% inflation you'd get 9% (if held to maturity) - this would be pretty good result (especially since in this scenario most other asset classes would absolutely crater).

Why not buy something with a better yield (such as a corporate bond or equity)? Because this would involve more risk - in the event of serious market crash these assets could see massive losses, while the linker would guarantee you inflation minus 1%. This might look attractive to some and why I suspect negative real yields will be back before too long.

[spectoacc] 11/10/2022 16:34

No, I really think a negative yield is illogical - yes, you get some inflation protection, but if you're taking say a 1% negative yield, and believe that long-term inflation will hit the 2% target, then you're accepting a 1% yield. Why not buy something with a better return?

And there's no deflation protection I think? So if things go badly awry, you'll be underperforming even cash under the mattress, which would "gain" 1% pa on 1% deflation, whilst you're losing 1% pa.

(NS&I Index-Linked savings certs - when they're available - offer a teeny tiny positive yield, but don't lose money on deflation).

Saying all that - if I can get my head around Linkers a bit more, quite fancy pairing together a c.1%-earning, positive yield, inflation-protected Linker with a 4.6% standard Gilt of similar duration (say the TR38). That feels more of an opportunity.

[riverman77] 11/10/2022 15:08

Lending to the government at a negative real yield is not as illogical as it sounds - if your main priority is preservation of capital then linkers guarantee inflation linked returns if held to maturity. For instance, if you buy at a 1% negative yield, then you are effectively being charged a 1% fee in exchange for guaranteed inflation linked returns. If you excpect very high inflation and an equity bear market then accepting a 1% negative real return might look attractive compared to the massive losses you'd get elsewhere. That's why negative yields make sense and why they will probably return before too long.

[spectoacc] 11/10/2022 14:25

I look at long-dated and think "Why on earth did anyone ever think lending the govnt money on a negative yield was a good idea?". And wonder at what point they're good value.

But I also think ZIRP is over, after so long, and that far too many people have had 20 year careers knowing nothing else. Go back to the 1998 bailout of LTCM - 24 years - and no one in the City or money management under the age of 45 has any experience of a "real" market, one with inflation, realistic interest rates, rising bond yields.

(OK that's harsh, but if you don't remember the horrors of the early 90's or mid-70's, you're unlikely to be prepared for now).

And I might be wrong - on everything - but if so, so is the market, looking at interest rate expectations and inflation forecasts