94% Of 2040 Gilt Issue Bought By Domestic Investors

[Guest tbatst2000]

http://www.automatedtrader.net/real-time-news/46495/uk-dmo-says-domestic-investors-took-94-of-new-2040-gilt

The article doesn't mention it but the total sale was a bit over 8B GBP. The interesting thing is how much was bought by domestic investors. Again, this isn't mentioned in the article, but most went to pension funds and insurance companies rather thank banks as you might expect. Are we about to turn Japanese I wonder? This somewhat undermines my sterling rising on the back of foreign demand for gilts after the end of QE theory also.

[Frank Hovis]

Interesting, 4.24% looks like cheap borrowing to me with 5% RPI!

[Executive Sadman]

Presumably the British investor(s) being the BoE?!

[Guest tbatst2000]

Presumably the British investor(s) being the BoE?!

No, that's the point. QE is finished for now, pretty much all of this stuff was bought by private UK companies.

[Mega]

......................& those companices would be.....Banks...owned by?

Mike

[Guest tbatst2000]

......................& those companices would be.....Banks...owned by?

Mike

I refer you to my original post:

Again, this isn't mentioned in the article, but most went to pension funds and insurance companies rather than banks as you might expect.

[efdemin]

I refer you to my original post:

Ooops, I guess this includes myself as I pay a percentage of my stakeholder pension into a UK gilts passive fund (the rest is split between global equities and company bonds & sterling cash passive funds).

Is this a bad thing for me? At least my company is matching my contributions up to 10%.

[Guest_ringledman_*]

World's biggest Ponzi scheme.

Lending money to the government for 30 years at 4.25%, WTF!!!!!!!!!!!!!!!!!!!!!

These will be trading at 40-50% of their value within 20 years.

Bonds are a dumb investment. The worlds most risky investment.

There has been a bull market in bonds since the early 80s. Yields have fallen from 15% to 4% over this period. They bottomed at just over 2% in the height of the crises.

As Marc Faber says, that is likely to be the bottom for yields and with it top for bonds.

Its all downhill from here.

Long term investment in bonds is a mugs game.

Real wealth can only be stored in equities over the longer term (10-30) years.

Government bonds are not low risk. They have inflation risk and price risk. Most people dont appreciate these risks with bonds.

Edited July 3, 2010 by ringledman

[indirectapproach]

So why does the pension industry buy them then?

[Guest_ringledman_*]

So why does the pension industry buy them then?

Because everyone loves to bail into an asset class towards the end of its bull market.

These pension funds are making a huge mistake. They are often run by trustees who aren't that clued up.

They moved from equities after the 2000 crash, hoping that bonds would be their saviour. Fine for a small part of their funds but some are so overly indebted in bonds that they will suffer. The returns off bonds over the long term aren't high enough to cover their liabilites. One of the reasons for the huge pension deficits.

If inflation hits its game over for these funds. They should move into Emerging Market debt as this will be safer than bakrupt UK/USA/Euro debt. They wont do this though as they think it is too risky.

Play it safe and invest in countries with 80-120% official debt/GDP and 350-600% debt/GDP including all liabilites.

Muppet investment over the longer term.

I don't own a bond to my name as you may have guessed

[Guest_ringledman_*]

Interesting, 4.24% looks like cheap borrowing to me with 5% RPI!

Gap will only get bigger.

Marc Faber says expect 'negative interest rates for at least a decade in the West'

People only look at the nominal return on cash and bonds and say 'wow they are paying me 4.24% oer annum, great'.

They fail to look at the REAL return adjusted for inflation.

Why pay the government to hold your money in this way?

Inflation is government theft of your wealth.

Long term investors need to protect their wealth in equities and precious metals.

Also property when it is selling at a good price (i.e. not now!).

[ralphmalph]

So why does the pension industry buy them then?

A certain financial wrecking ball called Gordon Brown changed the rules on what assets pension funds had to hold to meet their liabilities I think it was FRS17. No surprise that it said that stocks were risky and so pension funds had to hold a higher percentage of safe assets, basically UK government bonds. (Great scam eh!)

This worked so well that Brown did it again to the banks when he knew that he had to fund a massive deficit and changed the rules on what would be considered as safe assets a bank could hold that in the event of the bank needing cash and could be sold quickly, again the rules were changed meaning that the UK banks had to hold a much higher percentage of UK govt debt (because it is safe). It was estimated that when these rules were changed the UK finance industry had to exchange 200 billion of other assets to UK govt bonds to meet the new conditions. No surprise that the budget forecast at the time was that Brown needed to borrow 170billion the year after QE was stopped.

[ralphmalph]

Because everyone loves to bail into an asset class towards the end of its bull market.

These pension funds are making a huge mistake. They are often run by trustees who aren't that clued up.

They moved from equities after the 2000 crash, hoping that bonds would be their saviour. Fine for a small part of their funds but some are so overly indebted in bonds that they will suffer. The returns off bonds over the long term aren't high enough to cover their liabilites. One of the reasons for the huge pension deficits.

If inflation hits its game over for these funds. They should move into Emerging Market debt as this will be safer than bakrupt UK/USA/Euro debt. They wont do this though as they think it is too risky.

Play it safe and invest in countries with 80-120% official debt/GDP and 350-600% debt/GDP including all liabilites.

Muppet investment over the longer term.

I don't own a bond to my name as you may have guessed

I assume your pension fund is stuffed full of high yielding low risk BP shares?

[efdemin]

Gap will only get bigger.

Marc Faber says expect 'negative interest rates for at least a decade in the West'

People only look at the nominal return on cash and bonds and say 'wow they are paying me 4.24% oer annum, great'.

They fail to look at the REAL return adjusted for inflation.

Why pay the government to hold your money in this way?

...

Ok, Mr. Guru, how should I invest my stakeholder pension given that I am restricted to either a) managed funds (from a small selection of providers) or passive funds, i.e. trackers, from an equally limited number of funds? Each of which sticks to a very broad profile - e.g 'UK gilts'/'Global gilts', 'UK equities/World equities' (no industry specific choice possible), 'Sterling cash', 'Company bonds'. If I choose to go it alone I miss out on my employer's 10% matching.

Maybe people are just trying to make the best of a bad system, and gilts are not so bad at the moment? At least they're not tanking 10% over a month!

[ralphmalph]

Ok, Mr. Guru, how should I invest my stakeholder pension given that I am restricted to either a) managed funds (from a small selection of providers) or passive funds, i.e. trackers, from an equally limited number of funds? Each of which sticks to a very broad profile - e.g 'UK gilts'/'Global gilts', 'UK equities/World equities' (no industry specific choice possible), 'Sterling cash', 'Company bonds'. If I choose to go it alone I miss out on my employer's 10% matching.

Maybe people are just trying to make the best of a bad system, and gilts are not so bad at the moment? At least they're not tanking 10% over a month!

The reason pension funds buy bonds at these levels is because they think long term. They want the money back after 20years of the bond investment. They do not trade these bonds they buy them at issue and hold them to maturity when they get 100p in the pound back.

The general rule for a private pension fund is to have your age in cash and bonds. i.e if you are 50 then 50% of the fund in bonds cash and 50% equities. The percentage of the equity portion should be high in UK equities as this will mitigate the currency risk of non domestic equities.

Edited July 3, 2010 by ralphmalph

[Guest_ringledman_*]

I assume your pension fund is stuffed full of high yielding low risk BP shares?

That is a rather naive response.

The reason equities perform better than bonds over the long term is to compensate the holder for the percentage of companies that go bankrupt along the way. Diversify and expect a few to go along the way whilst the majority perform. That reality.

50% of my pension is in emerging markets. I was purchasing throughout the downturn. Now they are rather expensive and I believe there is better value to invest new money into the UK market (defensives over trash cyclicals).

And yes I bought a small percentage of BP recently with my speculative/punt cash.

It depends on your time frame. For me (31) its 90% equities and 10% commodities.

Western bonds are a bubble set to explode (Faber/Schiff/Rogers) even Bond King Bill Gross is getting out.

Edited July 3, 2010 by ringledman

[Guest_ringledman_*]

The reason pension funds buy bonds at these levels is because they think long term. They want the money back after 20years of the bond investment. They do not trade these bonds they buy them at issue and hold them to maturity when they get 100p in the pound back.

So in 2040 if inflation has been over 4.25% per annum I assume the government will pay the bond holder an additional sum on the 100p bond price?

Or perhaps the bond holder takes the risk on inflation being over 4.25% pa the next 30 years???

Think about the risks in government bonds. They are not the risk free investment that governments spin out.

- Default risk

- Currency debasement risk

- Price Risk - If you dont hold to maturity

- Inflation Risk

Risk free investment?!

Edited July 3, 2010 by ringledman

[ralphmalph]

So in 2040 if inflation has been over 4.25% per annum I assume the government will pay the bond holder an additional sum on the 100p bond price?

Or perhaps the bond holder takes the risk on inflation being over 4.25% pa the next 30 years???

Think about the risks in government bonds. They are not the risk free investment that governments spin out.

- Default risk

- Currency debasement risk

- Price Risk - If you dont hold to maturity

- Inflation Risk

Risk free investment?!

You do not understand why pension funds and insurance companies buy bonds. You are looking at it from the view of a 30 year old with 35 years to go till retirement.

The pension funds have people that are 1, 2 ,3 4, 5, years from retirement and want an income and potentially want to remove 100% of their money from the fund to somebody else and they have to be able to stump up the cash, you may like to take the risk that 6 months from retirement the stock market crashes 50%, pension companies are not.

I have never said that bonds are a risk free investment.

When was the last time that the UK defaulted?

When was the last time that sterling fell against sterling?

They hold to maturity it is their model.

Buy inflation linked bonds just like the BoE pension fund is 100% in.

Also if the UK govt defaulted on its debt what do you think the stockmarket would do the next day, 80% down would be my guess.

Edited July 3, 2010 by ralphmalph

[Guest tbatst2000]

So in 2040 if inflation has been over 4.25% per annum I assume the government will pay the bond holder an additional sum on the 100p bond price?

Or perhaps the bond holder takes the risk on inflation being over 4.25% pa the next 30 years???

Think about the risks in government bonds. They are not the risk free investment that governments spin out.

- Default risk

- Currency debasement risk

- Price Risk - If you dont hold to maturity

- Inflation Risk

Risk free investment?!

Pension funds hold all sorts of assets, fixed interest gilts are just one of them and, generally, not the biggest chunk either. Other asset classes include index linked gilts (there's a lot of 50 year linkers in that mix), equities, corporate bonds, real estate, commodities, hedge funds etc. They have to invest in something and, relative to all other asset classes, government bonds are very low, albeit not zero, risk.

[indirectapproach]

So if the pensions industry is just run by such muppets how come everyone's pension tends to get paid?

I would accept that people probably don't get as much pension as perhaps they should because the people working in it are probably overpaid and make a lot of mistakes but .... and it is a big but ..... peoples pensions generally get paid pretty much on time.

Wasn't the converse to investing in these bond products equities backed annuities (was that what they were called?) to pay off your mortgage and didn't a load f those fail to deliver?

[Guest sillybear2]

That's pretty meaningless, they could be sold on to some foreign sovereign wealth fund the next day.

So if the pensions industry is just run by such muppets how come everyone's pension tends to get paid?

They used to say the same thing about Madoff, "if this guy is a fraud why is he able to pay redemptions?"

Edited July 3, 2010 by sillybear2

[indirectapproach]

That's not so persuasive.

What about Equitable Life?

[Guest sillybear2]

That's not so persuasive.

What about Equitable Life?

What about them? The government has generously decided that we'll soon be paying to bail them out. They were a glorified Madoff, I believe they built their models around continuous 7% P.A. returns, Madoff promised around 10%. The public pension funds in the US still assume >8% investment returns.

"At the Massachusetts pension board, the target was 8.25 percent. “That was the starting point for all of our investment decisions,” Michael Travaglini, until recently its executive director, says. “There is no way a conservative strategy is going to meet that.”

Edited July 3, 2010 by sillybear2

[stormymonday_2011]

So why does the pension industry buy them then?

Because they have to match their receipts to the payouts required to retirees.

Unless a pension fund has payments linked to RPI it does not really need to worry about inflation. It sole concern is finding sufficient money to pay its current and its short term liabilities.Most of those 2040 gilts are being bought to fund the boomers generation retirement (which contrary to popular opinion on this board will not start until about 2020). Whether it proves to be a good buy remains to be seen.

[stormymonday_2011]

What about them? The government has generously decided that we'll soon be paying to bail them out. They were a glorified Madoff, I believe they built their models around continuous 7% P.A. returns, Madoff promised around 10%. The public pension funds in the US still assume >8% investment returns.

"At the Massachusetts pension board, the target was 8.25 percent. “That was the starting point for all of our investment decisions,” Michael Travaglini, until recently its executive director, says. “There is no way a conservative strategy is going to meet that.”

For benefit and tax credits the DWP and HMRC in the UK assume all savings receive a 10% return.

This figure has not been adjusted since the 1980s.

Edited July 3, 2010 by realcrookswearsuits