Monday, June 9, 2008
Gilt yields soar
Market data - Gilts
Short dated gilts are usually very boring, shifting in price by only a few pence each day - suddenly we have a seismic shift, with prices tumbling and yields jumping around a quarter per cent in one day. Much more of this and the BOE will be forced to raise rates
Posted by uncle tom @ 02:50 PM (1057 views)
9 thoughts on “Gilt yields soar”
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mark wadsworth says:
Sweet! That might be a good place to park one’s spare cash until the alarm clock goes in 2011 and it’s time to buy a house again.
mark wadsworth says:
Sure, the rate is fixed, the price goes up or down.
If you buy now and interest rates rise, then for sure, the market price will go down even further, but if you intend to hold until maturity, at which stage they are redeemed at 100% of face value, that is not a problem. And in practice, if you buy for less than 100%, the small capital gain is tax free.
So don’t necessarily buy now, today, I just meant in general, no sleepless nights worrying about the £35,000 limit and so on.
cornishman says:
Now I’m confused. I was going to ask a dumb question and then looked it up on Google and then thought I’d got this sussed. But now Mark, you’ve thrown me.
I thought that the price of gilts was going down – and that made the yield therefore go up. I worked out that Mr Market must think that interest rates are going to go up and that is why they are dumping gilts and that is why the price is going down.
So why would it be a good idea to buy them now then, if the price is going down? Isn’t that the same argument as buying a house now because rental yield is going up?
Help me out – I’m at the edge of knowing what I’m talking about here and know I may well have got the wrong end of the stick somewhere!
letthemfall says:
Very interesting. And pretty much across all dates. No doubt a reaction to the latest producer inflation figures. More people beginning to believe inflation is back.
cornishman:
Buying short-dated gilts might be worthwhile if you want to put away some cash in a safe investment for, say, 4 years. On redemption you will get back the face value, plus the coupon (interest rate at issue) in the meantime. At redemption yields of 5% odd, not a bad bet perhaps. Buying long gilts might not be such a good investment at present if yields continue to rise.
techieman says:
I’ve not heard anyone mention index linked gilts on here. Anybody any thoughts?
jonb says:
If you want to put aside money to buy a house in three years time, you should buy gilts with a maturity of no later than three years time. If you buy 25 year gilts for example, your income will be guaranteed for the next 25 years, but the capital is not. You are taking a gamble on interest rates going down over that time.
jack c says:
@5. techieman said…”I’ve not heard anyone mention index linked gilts on here. Anybody any thoughts?” – I know one or two people who were uncomfortable with their exposure to equities and switched a significant part of their portfolio to UK index linked gilts as an alternative. This looks like a better bet than money market rates – the portfolio is wrapped under an Insurance Co Investment Bond. I can elaborate if it’s of further interest?
uncle tom says:
Techie,
Index-linked gilts have the attraction of being ultra safe if you buy short dated ones, or keep them to redemption. However the yield (over and above inflation) is currently pathetically low – in the case of the ’55 ILG the yield was just 0.37% last time I looked, compared to an historical norm of around 2.5%. It follows that long dated ILG’s will almost certainly fall in value over the next few years, as normality returns to the markets, so personally, I wouldn’t touch them.
jack c says:
@8. uncle tom – some of the investment company run funds are worth looking at eg Newton Index linked gilt fund has returned 30.9% over past 3 years.