Ishr � Ind-link Discussion Threads

[jonwig] 28/5/2021 08:14

aspringo - haven't checked, but I expect zero.
Coincidentally, a good article in the Telegraph (Questor) answers your question:

Before we name the next asset to be added to our Wealth Preserver Portfolio, which aims to counter the rising threat of a return to high inflation, we’ll take a brief look at how the investments we have already made, in gold and Bitcoin, have fared.

Our investment in the latter was, at least from the perspective of just six weeks later, very poorly timed: we bought at almost the very top, paying $63,260 (£45,881 at the time) compared with a current price of $39,069 (£27,557).

We have done better with gold, whose price was $1,764 (£1,280) at purchase but has now climbed to $1,892 (£1,335). Fortunately we put four times more money into gold (10pc of the portfolio against 2.5pc for Bitcoin), so our overall loss so far is only 4.6pc.

Now to our new holding. We will invest 12.5pc of the portfolio in index-linked bonds issued by the Government (gilts).

These assets sound relatively simple – the income they pay rises in line with inflation, as does the maturity value – but the way they behave in practice is not so easy to understand. So Questor asked an investor who has long believed in their value as an inflation shield, Hamish Baillie of Ruffer, the fund manager, to explain.

“What drives the price of these ‘linkers’; is the ‘real’ interest rate,” he said. “Real” interest rates are interest rates relative to inflation – if, for example, Bank Rate is 3pc but inflation is 1pc, the real interest rate is 2pc. Now of course we are in the opposite position: inflation (the CPI was 1.5pc in April) is higher than interest rates (Bank Rate is 0.1pc). Currently therefore the real interest rate is minus 1.4pc.

But it’s not a negative real interest rate alone that constitutes a favourable environment for index-linked gilts. Instead, said Baillie, “you want real interest rates to be falling”.

This is another way to say you want inflation to rise faster than interest rates. This is precisely what we can expect if inflation does take off: the Bank of England will be reluctant to do what it normally does to counter inflation – raise interest rates – because indebted consumers, businesses and the Government itself can bear the burden of their borrowings only if interest rates stay low.

When we say interest rates we should really talk of the yield on conventional (non-index-linked) gilts – the interest rate the Government pays when it borrows – rather than Bank Rate, although both are now extremely low.

So another way to look at it would be to say that the price of linkers is influenced by two things: inflation and the price of conventional gilts. A fall in the value of the latter, which means a rise in their yield, can offset the gains you get from the inflation-linking component of linkers.

“It’s very common for investors not to understand that conventional bond yields matter too,” Baillie added. “You can’t judge linkers by looking at inflation prospects alone – you need to bring interest rates or gilt yields into the picture too.”

He said linkers were second to none as assets that could be certain to produce the returns promised in the event of high inflation. “There’s a range of investments that say they will link returns to inflation but there is room for doubt over whether they would really be willing or able to do so if inflation reached, say, 20pc,” he said.

“In an inflation panic the ‘covenantsR17; on lesser inflation-linked assets could be broken. But gilts represent a contract with the British Government – a sovereign guarantee. This is their real appeal. We like to own assets that other people panic into.”

He said the Government had introduced linkers in 1981 in an attempt to restore trust after its conventional bonds were rendered vastly less valuable in the great inflation of the 1970s and would be loath to give up the credibility it has now established by failing to honour their terms.

There remains the question of exactly which linkers to buy. “Short-dated” ones close to maturity offer little by way of returns because inflation cannot affect their value much either way in just a year or two. Longer-dated gilts offer the greatest sensitivity to inflation but the very longest dated are more volatile so we will plump for the middle ground: a linker that matures in 2036.

Linkers are available from brokers such as Hargreaves Lansdown or directly from the Government’s Debt Management Office. Even outside an Isa or Sipp, capital gains are tax free, although income is taxable.

[aspringo] 28/5/2021 08:08

Sorry jonwig, I seem to be in almost all the stocks you are. I guess we're of an age where income and steady as she goes count.What dividend did you receive in the end. 26th may. As you have owned this for over a year, how do you rate it's performance.Yield and price, and do you believe it's meeting what you were after in your portfolio?Apologies for picking your brain's but been mulling over these for some time.Appreciate any views you may care to share.All the best. Cheers

[jonwig] 13/5/2021 19:16

Interesting, INXG is ex-div today. Amount £0.0000, payable 26 May.

[mctmct] 25/2/2021 16:19

hxxps://finpricing.com/lib/FiInflationBond.pdf

[mctmct] 25/2/2021 16:14

hxxps://www.lazardassetmanagement.com/de/de_de/research-insights/investment-research/an-introduction-to-inflation-linked-bonds

[sweep stock] 25/2/2021 15:44

I'm in here as an inflation hedge but I must confess I haven't a clue why this might work. The chart looked good for a bounce. Anyone got any time to point me in the right area how I can understand how this might be good? Sorry. A bit thick.

[spectoacc] 21/2/2021 07:59

Surely weakness due to the rise in bond yields generally - ie Linkers priced off "bond yield plus (sometimes minus!) inflation expectations".

But must admit I regularly fail to fully understand them.

But if eg the 3 year was at 5%, all things being equal you'd expect the linker to yield more, ie bond price down. Granted, the yield on bonds very much related to inflation expectations, but then Linkers have been pricey for a good while.

[mctmct] 20/2/2021 20:36

I used it as an opportunity to double my holding. Short term movements are sentiment, longer term are reality.

[jonwig] 20/2/2021 20:08

Strange:

Signs that inflation is making a comeback are unsettling big investors.

Inflation forecasts are now rising following massive increases in government spending and the torrent of liquidity unleashed by central banks in response to the coronavirus pandemic.

Asset managers are now facing a barrage of questions from clients over the risks of inflation and are rushing to shore up portfolios from inflationary risks, fearing that a resurgence threatens to spoil the party again for investors.

“Inflation is an escalating concern among institutional investors,” said Michael John Lytle, chief executive of Tabula, a London-based ETF provider.


Also notes rise in commodity prices.

So why is INXG weak???

[jonwig] 19/2/2021 16:47

True. I mentioned GBP before reading the issue quote.
But they had to price it lower, which chimes with the INXG price.

[mctmct] 19/2/2021 16:00

Jonwig

Another interpretation of this could be that the market thinks that inflation is likely and 30 years protection is worth having. The buyers could well be UK institutions with long-term liabilities in Sterling, such as life insurers and pension providers who need to match their commitments with interest-bearing securities. 2.5% plus CPI protection is a good and safe backing for long term pension liabilities.

On this reading, the strength of the pound is not significant, as the liabilities and bonds are in the same currency.

[spectoacc] 19/2/2021 14:54

Not the best timing, seems to fall 1% a day :)

[spectoacc] 17/2/2021 08:54

No Ponzi Bitcoin for me either, but kudos to those who bought it at cents. I see Ruffer has sold enough to cover cost, and still holds 2/3rds of the position. Was $15k when they bought in. But still rather them than me!

Got plenty of short Tesla for the eventual bubble-burst.

[jonwig] 17/2/2021 08:52

A good entry point I think, Spec. (No Bitcoins for me.)

[spectoacc] 17/2/2021 08:38

Joined you all - gold yesterday, this today, let's hope timing better than the gold :)

[andyj] 17/2/2021 08:32

And the ideal conditions for this, low interest rates and rising inflation look the most likely scenario.

[jonwig] 17/2/2021 08:24

A lot of higher UK inflation talk along with recovery, so surprised to see this sold down. Added at 1906.

[andyj] 17/2/2021 05:11

Could not resist adding these to my portfolio. I note JB bought in at 20.46

[jonwig] 19/8/2020 08:08

FT:

UK consumer inflation climbed more than forecast last month, led by an increase in prices in the culture and recreation industry.

Consumer prices rose 1 per cent in July from the previous year from a rate of 0.6 per cent in June, according to data from the Office for National Statistics. The rate of inflation was significantly higher than 0.6 per cent forecast by economists polled by Bloomberg.

The biggest contributor to the rise in inflation was culture and recreation, a category that includes computer games and that has been boosted by shifts in consumer habits caused by the pandemic.

Clothing, petrol, and furniture and household goods also contributed significantly to the rise in consumer prices, the ONS said.

Sterling climbed 0.2 per cent against the dollar to $1.326, hitting its highs of the day after the report that could come as a relief for Bank of England policymakers who have cut interest rates to historic lows in a bid to bolster the economy. The central bank targets an inflation rate of 2 per cent.

[jonwig] 29/6/2020 08:07

FT's morning email:

... prices could be rising more quickly than official data suggest. Research from the National Institute of Economic and Social Research has claimed the Office for National Statistics’ measures of annual price increases were too low in May because they put too much weight on goods and services that were unavailable because of Covid-19, dragging the inflation rate down.

[jonwig] 18/6/2020 12:20

"the latest official figures showed the annual inflation rate dropped to a near four-year low of 0.5% in May.
Cheaper petrol and the falling cost of toys and games had a downward effect on the cost of living, more than compensating for higher food and drink prices."

You've recently grown out of toys, and the lockdown has driven you to drink?

[kiwi2007] 18/6/2020 12:07

Zero sign of deflation in my day to day living (except in the interest paid by banks and stock market dividends).

[jonwig] 17/6/2020 15:27

The spectre of DEflation seems to be haunting the BoE, with the promise of further £100bn QE. The consensus appears to be that deflation is the major fear for this year and next.

So why is INXG up 9% since the beginning of April (6.5% since beginning of March)?
Not that I'm complaining.