I've Bought Even More Ns&i Index-Linked Bonds

[the_duke_of_hazzard]

I've just put my lot in with the stagflation camp by buying more of these bonds, even though inflation is running at an annualised 12% (based on last month's figure).

The rising input costs, emergence of parts of the world from recession over the next couple of years (the ones that have let land values drop!), wage stagnation coupled with the BoE's and Chancellor's letters being sanguine about inflation dropping, and the probability of more QE in the pipeline make me think this is a relatively safe bet.

If there's depression and deflation and house prices fall, then at least I get at least 1% and my capital protected.

[Fully Detached]

I've just put my lot in with the stagflation camp by buying more of these bonds, even though inflation is running at an annualised 12% (based on last month's figure).

The rising input costs, emergence of parts of the world from recession over the next couple of years (the ones that have let land values drop!), wage stagnation coupled with the BoE's and Chancellor's letters being sanguine about inflation dropping, and the probability of more QE in the pipeline make me think this is a relatively safe bet.

If there's depression and deflation and house prices fall, then at least I get at least 1% and my capital protected.

I've got 50% in these, and have been wondering whether to increase that even further - for exactly the reason you've stated above (bold).

What I'm not so sure about is whether it's smart to buy them right now, when RPI is at a recent record high. If Merv and crew were right (for once in their lives), you'd risk buying at the peak and therefore ensuring you only get your 1% in year 1. That risk of course depends on RPI dropping, but I reckon they're going to have to massage this a little in order to keep the interest rates low - they're already talking about adding house prices back in.

Now why would they be thinking that, I wonder?

Caveat on the above because I'm still not completely clear on how they calculate what you get back on these things - sure someone smarter can clarify, but my understanding is that you get the difference between RPI on the date you invested and RPI 12 months later. I bought at 0.9% on this basis, so hope I'm correct on that

Edit just to add - as you say the above is irrelevant if you're genuinely happy with 1%, but I'd I'd prefer that 1% to come on the back of real deflation and not manipulation of the index.

Edited June 2, 2010 by Crash Gordon

[Selling up]

I've got about 75% of my wealth in these.

What's the worst case scenario? That they slightly underperform a savings account. Given their safety and the huge upside if inflation persists, that seems a risk worth taking.

[Dorkins]

What's the worst case scenario?

The UK government goes bankrupt, defaults on its debts and you take a big loss.

[Guest absolutezero]

The UK government goes bankrupt, defaults on its debts and you take a big loss.

And if that happens you have more to worry about that your NS&I certificates!

[Dorkins]

And if that happens you have more to worry about that your NS&I certificates!

Real life is not a Hollywood movie. Argentina did not descend into concentration camps and/or civil war, but people who trusted the government lost two thirds of their savings. The current 14% of GDP deficits are virtually unprecedented, and sovereign default is a genuine risk.

[the_duke_of_hazzard]

I reckon they're going to have to massage this a little in order to keep the interest rates low - they're already talking about adding house prices back in.

I did some research into how the RPI index is generated, and concluded that it was definitely not massaged, manipulated or fixed.

[Guest absolutezero]

Real life is not a Hollywood movie. Argentina did not descend into concentration camps and/or civil war, but people who trusted the government lost two thirds of their savings. The current 14% of GDP deficits are virtually unprecedented, and sovereign default is a genuine risk.

So is crossing the road and we all do it without losing any sleep at night.

[the_duke_of_hazzard]

Real life is not a Hollywood movie. Argentina did not descend into concentration camps and/or civil war, but people who trusted the government lost two thirds of their savings. The current 14% of GDP deficits are virtually unprecedented, and sovereign default is a genuine risk.

Which is why they'll inflate first.

[Guest absolutezero]

I did some research into how the RPI index is generated, and concluded that it was definitely not massaged, manipulated or fixed.

How did you come to that conclusion?

[the_duke_of_hazzard]

How did you come to that conclusion?

I read all the documents freely available on the BoE website about how the RPI index is constructed, and looked at the historical figures.

Most complaints about RPI seen on here are based on very naive complaints like "milk's just gone up by 5p!".

[Dorkins]

So is crossing the road and we all do it without losing any sleep at night.

I assume you look before you cross the road, right? Look right - 14% deficits. Look left - rising inflation. Safe to cross?

[Namaste]

I've got about 75% of my wealth in these.

What's the worst case scenario? That they slightly underperform a savings account. Given their safety and the huge upside if inflation persists, that seems a risk worth taking.

That's what I thought. If inflation rises, you win. If it doesn't, you at least don't lose. If savings rates elsewhere do rise significantly, you can pull the money instantly as well. You lose your 1%, but big deal. I plan to max out on the 3 and 5 year issues over the next 2 months.

[Dorkins]

Which is why they'll inflate first.

So what's to stop them creating inflation to devalue the non-index-linked bonds, and then defaulting on the index-linking and paying you back in nominal terms? It's not necessarily an either-or situation. Ultimately you are trusting the UK government to pay you back in real terms. It may not be able to do that.

[Guest absolutezero]

I read all the documents freely available on the BoE website about how the RPI index is constructed, and looked at the historical figures.

Most complaints about RPI seen on here are based on very naive complaints like "milk's just gone up by 5p!".

Fair enough.

How about the "conspiracy" that they want to inflate away index linked debt?

[Pants]

Caveat on the above because I'm still not completely clear on how they calculate what you get back on these things - sure someone smarter can clarify, but my understanding is that you get the difference between RPI on the date you invested and RPI 12 months later. I bought at 0.9% on this basis, so hope I'm correct on that

Spookily, yesterday I just bought a bunch more too.

There does seem to be significant confusion about how they calculate what you get back each year. As I understand it (having just spoke to them) you simply get the annual RPI as published on the anniversary of your purchase (plus of course any bonus; currently 1%). i.e. simply the total inflation experienced during that year. It is not the difference in inflation figures. However if inflation is high today because of a temporary, monthly, big blip in last month's figures then as that blip works out of the figures (just in time for your rate to be calculated in a year's time) then you will see a negative hit to the figure you get (this is why some people invest over several months, rather than one big hit to smooth these effects). Otherwise, just because annual inflation is high today, this does not mean that annual inflation will not be high next year too - unless, of course, something is actively done to manage things (figure manipulation or higher interest rates) or the economy genuinely goes into some deflationary phase. This is just my understanding and I could of course be totally wrong.

[the_duke_of_hazzard]

So what's to stop them creating inflation to devalue the non-index-linked bonds, and then defaulting on the index-linking and paying you back in nominal terms? It's not necessarily an either-or situation. Ultimately you are trusting the UK government to pay you back in real terms. It may not be able to do that.

I'll trust the government not to default over the banks.

I have money in standard bank accounts as well (up to 50K per bank), at fixed IRs.

[jonb]

I've got 50% in these, and have been wondering whether to increase that even further - for exactly the reason you've stated above (bold).

What I'm not so sure about is whether it's smart to buy them right now, when RPI is at a recent record high. If Merv and crew were right (for once in their lives), you'd risk buying at the peak and therefore ensuring you only get your 1% in year 1. That risk of course depends on RPI dropping, but I reckon they're going to have to massage this a little in order to keep the interest rates low - they're already talking about adding house prices back in.

Now why would they be thinking that, I wonder?

Caveat on the above because I'm still not completely clear on how they calculate what you get back on these things - sure someone smarter can clarify, but my understanding is that you get the difference between RPI on the date you invested and RPI 12 months later. I bought at 0.9% on this basis, so hope I'm correct on that

Edit just to add - as you say the above is irrelevant if you're genuinely happy with 1%, but I'd I'd prefer that 1% to come on the back of real deflation and not manipulation of the index.

They are going to incorporate house prices into the Bank of England's inflation target, but they currently use CPI rather than RPI for their target. I don't think house prices will be added to the RPI because they are not a retail price.

[Fully Detached]

Spookily, yesterday I just bought a bunch more too.

There does seem to be significant confusion about how they calculate what you get back each year. As I understand it (having just spoke to them) you simply get the annual RPI as published on the anniversary of your purchase (plus of course any bonus; currently 1%). i.e. simply the total inflation experienced during that year. It is not the difference in inflation figures. However if inflation is high today because of a temporary, monthly, big blip in last month's figures then as that blip works out of the figures (just in time for your rate to be calculated in a year's time) then you will see a negative hit to the figure you get (this is why some people invest over several months, rather than one big hit to smooth these effects). Otherwise, just because annual inflation is high today, this does not mean that annual inflation will not be high next year too - unless, of course, something is actively done to manage things (figure manipulation or higher interest rates) or the economy genuinely goes into some deflationary phase. This is just my understanding and I could of course be totally wrong.

I guess that makes sense - for anyone who wants to use the search function I remember some threads about a year ago which did clarify it completely. I've just forgotten...

Out of interest, I recently had a review with a very good (IMO) IFA, and she reckoned that 50% cash, 50% index linked was a reasonable split for the next few months while we wait to see what happens. In order to provide me with another potential bolt hole, I asked her to recommend a couple of decent funds as well, which I invested a small sum in each, so as to open the channels. So in theory I'm ready for whatever comes.

In reality, I suspect that by the time it becomes clear what is going to happen, it'll be too late to prevent losing at least some of our wealth. My only hope is that I can minimise the loss.

[Fully Detached]

They are going to incorporate house prices into the Bank of England's inflation target, but they currently use CPI rather than RPI for their target. I don't think house prices will be added to the RPI because they are not a retail price.

You're quite right, and I'm quite wrong - I'll wake up in a minute

[davidcameron]

Given the number of people who whinge on these forums about those who don't know the difference between annual deficit and total debt it's somewhat surprising how many don't seem to know the difference between the Retail Price Index and the annual change in the Retail Price Index (AKA the inflation rate).

[the_duke_of_hazzard]

Given the number of people who whinge on these forums about those who don't know the difference between annual deficit and total debt it's somewhat surprising how many don't seem to know the difference between the Retail Price Index and the annual change in the Retail Price Index (AKA the inflation rate).

I believe the market doesn't know the difference either, so has underestimated the speed with which the index is rising.

[Sparkey]

There does seem to be significant confusion about how they calculate what you get back each year. As I understand it (having just spoke to them) you simply get the annual RPI as published on the anniversary of your purchase (plus of course any bonus; currently 1%). i.e. simply the total inflation experienced during that year. It is not the difference in inflation figures. However if inflation is high today because of a temporary, monthly, big blip in last month's figures then as that blip works out of the figures (just in time for your rate to be calculated in a year's time) then you will see a negative hit to the figure you get (this is why some people invest over several months, rather than one big hit to smooth these effects). Otherwise, just because annual inflation is high today, this does not mean that annual inflation will not be high next year too - unless, of course, something is actively done to manage things (figure manipulation or higher interest rates) or the economy genuinely goes into some deflationary phase. This is just my understanding and I could of course be totally wrong.

Agreed. This is pretty much my understanding of it too. Not sure where people keep getting the "change in RPI" thing from.

Seems pretty clear to me.

[Selling up]

The UK government goes bankrupt, defaults on its debts and you take a big loss.

Agreed, it's possible. But there aren't many better ways of preserving wealth in that scenario. All I can think of is gold (which is 15% of my portfolio along with 10% cash and 75% index-linked certs) and forex, but those investments risk being legally restricted in an emergency scenario.

[MinceBalls]

Agreed. This is pretty much my understanding of it too. Not sure where people keep getting the "change in RPI" thing from.

Seems pretty clear to me.

Yes, the previous poster on page one is incorrect (and many people also think the same). The bonds do not pay zero (or just the bonus) if you take them out when RPI is higher that what it is when they mature! They are designed to track RPI so that any effect of inflation during the period you hold them is taken into account.