Ishr � Ind-link Discussion Threads

[rob the slob] 11/10/2022 14:24

I put this frenzied selling mostly down to liability driven investment strategies at pension funds. They will continue to follow what will eventually be discredited as an outdated formula for too long because that poses less risk of them losing their job than using their brain. Surely this is one occasion when the little guy can benefit over the institutional investors. I am buying these. Positive inflation linked yield. That is all I want.

[riverman77] 11/10/2022 13:57

I think it's more a case of keeping exposure to cover a range of scenarios - linkers would do very well if they have to start QE again so I think worth having a few after their massive sell off this year, but certainly wouldn't bet the house on them (long dated linkers are about the most volatile asset class you can find when rates are moving around)

[spectoacc] 11/10/2022 13:23

That's certainly the big bet. But the difference this time is inflation. US inflation may be slowing, but look at the employment stats, look at wage growth, look at how far from target they are.

Saying that, it's hard to see interest rates ever returning to eg 15%, in the US or UK. But UK rates at 5% next year is odds-on.

[riverman77] 11/10/2022 12:43

I suspect central banks will have to restart QE before too long, once its becomes apparent that US inflation is slowing and in recession - probably too early to say that ZIRP has ended (more likely paused).

[spectoacc] 11/10/2022 12:30

@riverman77 - yes, but tell me what they were in the years before ZIRP? Negative yields are historically very, very unusual. The market's problem is that the ZIRP era seems to have ended with a bang, thanks mainly to Powell becoming the new Volcker.

(I'd not rule out the can being kicked hard enough to create a global depression that causes a huge return to negative yields, ZIRP, and QE. But if that happens, there's surely no more road after that, and we're odds-on to now be out of road IMO).

[riverman77] 11/10/2022 11:40

1.24% is the yield on the 10y index linked gilt, not to be confused with the nominal gilt which now yields 4.5%. Now 1.24% may not sound a lot but this is inflation linked to if you hold to maturity you are guaranteed a positive real yield. For many years real yields have been deeply negative so you could argue they currently look phenomenal value (I suspect before too long real yields will go negative again and this will translate to significant capital gains for linkers).

[kiwi2007] 11/10/2022 11:27

Excellent explanation but one which the journalist seems to have overlooked.

Anyway, looks like the BoE have decided to buy linkers this a.m.

[spectoacc] 11/10/2022 10:39

It's simple. 14 years of ZIRP is over. It's ending an awful lot quicker than ZIRP took. Ergo, a yield of 1.24% on the 10-year is still cr*p. Would you invest in it for that?

The market is setting the new price. The BoE is resisting, tho perhaps not very hard.

"Bonkers move" in price terms, sure - just look at the 2068 Gilt, that's been stupendous. But in yield terms, is anything out of the ordinary? Base rate was 0.1% less than a year ago, it's now 2.25%, will be 3% in less than a month, and heading to 5% next year. Gilts need to reprice, Linkers too.

[kiwi2007] 11/10/2022 10:34

UK 10-year inflation-linked gilt yields rose 64 basis points yesterday, hitting 1.24 per cent. This is an absolutely bonkers move. In price terms, the 10-year linker fell 5.5 per cent; developed world sovereign bonds are not supposed to move like that (the 30-year linker was down 16 per cent on the day).

At the same time, very strangely, nominal 10-year gilt yields rose by much less — 23bp. In a brief story, our friends at Bloomberg noted that the move in linkers was the largest since at least 1992, and said the move was driven by “concerns over market frailties ahead of the Bank of England ending its bond-buying operations”. That sweepy phrase seems to mean “we don’t really know what is going on here”. Unhedged sympathises; we don’t really know what is going on here, either. All we can offer are the following thoughts:

Economic fundamentals cannot explain this move. In a liquid and efficient market, index-linked bonds would be a proxy for the real rate of interest. The real rate of interest in the UK did not double yesterday. Also, in a liquid and efficient market, nominal bond yields minus inflation-linked bond yields is proxy for inflation expectations. Ten-year inflation expectations did not fall by 40bp yesterday.

This move is partly to do with liability driven investment strategies at pension funds. The very rapid rise in yields which followed the Liz Truss/Kwasi Kwarteng “mini” Budget announcement left LDI investors with big losses on their rate hedges, forcing them to sell gilts to raise cash. LDI investors own a lot of inflation-linked gilts, as well, and have been forced into selling them. But there is a crucial difference: the Bank of England is not buying inflation-linked gilts as part of its temporary market stabilisation programme. Given that the inflation-linked market is relatively thin to begin with, the presence of forced sellers in the absence of a buyer of last resort adds up to an ugly day.

While not as wild as the move in linkers, the move in vanilla gilts is a big deal, too. As the FT reported:

Monday’s fall in gilts came despite the BoE announcement earlier in the day of a new short-term funding facility to avoid a “cliff edge” when the central bank’s £65bn emergency bond-buying programme ends this week.

On a day when the UK government also sought to reassure markets by bringing forward the date of a debt-cutting plan, the 30-year gilt yield jumped 0.29 percentage points to 4.68 per cent. The gilt market has been unsettled since the government announced unfunded tax cuts last month.

The BoE announced yesterday that it was raising the upper limit of its daily purchases of long-dated bonds from £5bn to £10bn. It also announced a temporary repo facility “to enable banks to help ease liquidity pressures facing their client LDI funds”. The facility allows banks to borrow using a range of securities, including index-linked gilts, as collateral. The idea is that the banks will be able to act as intermediaries for LDI investors who need to raise cash. Neither move worked. As of Monday, the long end of the curve was clearly out of the BoE’s control.

We don’t yet know why the bank’s interventions have not worked (we’re trying to talk to more of the people involved). But there is something odd about the fact that, before yesterday, the bank had a cumulative purchase ceiling of £40bn, and had purchased only £5bn in bonds. Yesterday, it set a daily limit of £10bn and bought just £853mn — while bond prices were crashing. We don’t know the details yet, but from the outside, this sure looks like a halfhearted intervention, not so much yield curve control as politely asking the yield curve, if it wouldn’t mind terribly, to behave itself, just for a few days? Please?

Unhedged is still a little puzzled about how all of this got started and why it is all so bad. There was a simple narrative when the “mini” Budget was announced and the market recoiled. Fiscal deficits were going to rise. That meant the supply of gilts would increase, pushing their prices down. What’s more, the budget implied an odd combination of tight monetary and loose fiscal policy. This, along with some general clowning around with the budget process, meant that the extreme market moves could be explained by the loss of credibility, or, if you prefer, a widening risk premium on UK gilts. But the fact that much of the fiscal programme has now been rowed back, and the market is still not pacified, suggests there is more to this story. Part of this is the LDI funds puking bonds into the market. Part of it is the simple fact that the global policy tightening cycle impairs liquidity and risk appetites. But Unhedged suspects there is something more going on.

That something more may be international. Bund yields moved 15bp yesterday, too.

This story ain’t nearly over.

FT

[skyracer] 30/9/2022 11:32

Well, depending on what threats or actions Putin makes after he has incorporated the 4 regions into Russia there could be an almighty rush into gilts. It seems to me that this is probably the most perilous time the world has ever known. Something momentous must happen to resolve the situation.

[badtime] 28/9/2022 19:58

Look at the finish lol

[brwo349] 28/9/2022 10:39

and again

scary times

[spectoacc] 26/9/2022 16:31

You'd need steel balls to buy with the way Gilt yields are going - Kamikwasi has further tricks up his sleeve too.

Very, very important to know how INXG is valued, and why it's gone down the toilet. And then take a view on where yields are heading, which is having so much more effect than inflation expectations.

[prokartace] 26/9/2022 16:17

As everyone has given up on this as an investment tells me that it's the right time to buy

[jellypbean] 12/9/2022 19:44

The ishares website for inxg gives the effective duration and the market implied real yield to maturity over that duration (relative to RPI). If real yields continue to increase, prices will not go up as much as inflation does.

[mctmct] 09/9/2022 11:05

INXG has a very large % holding in long-dated gilts (~50 years) which are very sensitive to interest rates. An expert, writing on Stockopedia, says that IL bonds are a very poor hedge against inflation, for that reason. I haven't found a site that gives up to date redemption yields or up to date capital values and coupons, inflation adjusted - if anyone here knows one, please share.

[spectoacc] 09/9/2022 06:50

No view, but something I've seen absolutely no commentary on is whether the govnt choosing to use taxpayer's money to lower energy bills to lower inflation, also has the effect of lowering govnt debt repayments, c.25% being index-linked?

Don't currently own here, but do have a wad of NS&I index-linked bonds - which will now earn considerably less (if inflation peak say 12% instead of 16% due to the energy cap, that's a quarter less interest for that year).

[brwo349] 08/9/2022 20:52

Well I dodged a bullet here. Anyone have any views at this price?

[spectoacc] 22/6/2022 16:44

Wow, not looked at these in a while, had no idea they'd been tonked.

Rates going to 3% IMO, but peaking sooner than expected - we're pushing recession already.

Not sure I dare go back in here tho.

[prokartace] 22/6/2022 16:02

Obviously, in spite of the fact that these are index linked they also move in line with long dated gilts. This means that it isnt just inflation that matters if you want to buy these ILGs but also how fast and high interest rates ate going to rise. I have just bought for 2 reasons, 1 because they have had a huge fall and 2 because I don't think the B of E can continue to raise rates with recession on the horizon. This is, I have to say, only my opinion.

[mctmct] 23/3/2022 15:32

Inflation is certainly rising faster that interest rates at present. CPI is 6.2% and RPI is 8.2% - way above interest rates and far higher than HMG could tolerate as the interest rate on ordinary Gilts,

I'm thinking that Treasury Gilt T30I looks good.

Views?

[jonwig] 22/3/2022 19:33

MrM - the same holds true today. But today's inflation is not demand-led, it's a supply crunch. If interest rates rise too quickly, stagflation will follow. That would be good for ILGs.

The currnt fall is on fears that the Fed will tighten more sharply that was thought earlier.

But the arguments are finely balanced. Your view could well prove the right one.

[mrmuggins] 22/3/2022 18:47

I've been thinking about buying a holding in INXG ever since John Baron added some to his portfolios, but whenever I read about indexed linked Gilts the term 'Very Expensive' is also used.At 19.29 INXG has fallen about 10.5% from its recent high making it look attractive, but before jumping in I decided to re-read an article from Investors Chronicle dated 20/09/2018.It put me off.The main takeaways from the article were:Indexed linked Gilts work best when inflation is rising and interest rates are not . This is not the case today.As a rule for every 1% rise in interest rates the capital value of a bond (indexed linked or not) falls 1% for every year of duration. The bond holdings in INXG should behave the same.From the Ishares website the duration of INXG is about 20 years. This implies that a 2% rise in interest rates could cause a fall of 40% in the share price of INXG. You would get an inflation updated dividend but it would not compensate for the loss of capital.Note. INXG has paid a dividend of 0.00 ( I.e. Zilch) for the last two distributions.Not for me at the moment thank you.