How does one buy gilts?

[fivemack]

Suppose, lunatic that I am, that I wish to leave the comfortable safety of FCSC-insured cash ISAs and head, rather than to the flaming whirlpool that is the UK equity market, to the choppy waters of index-linked UK gilts, where my money is at least wrapped in Her Majesty's third-best ermine mantle against the unknown possibilities of inflation.



My share-dealing service, if I enter 'IL TREASURY', says

'2 1/2% IL 11 2 1/2% IL TREASURY 11 TR2H 247.85 08:24 20/10 -0.20% 290,158,120 '

I presume this is a bond which will mature in 2011, and which pays 2.5%+RPI annually. 08:24 20/10 is the time and date of the last update, which seems a bit peculiar since the 290,158,120 last figure is apparently the volume of those bonds traded today ...

Googling for "2 1/2% index linked treasury 2011" gets me

http://www.bankofengland.co.uk/publications/news/2001/081.htm

which I think means that this was a thirty-year bond issued on 22 January 1982, and indeed, using the data from

http://www.statistics.gov.uk/downloads/theme_economy/RP02.pdf

247.85 is broadly consonant with the RPI figure from 1982 to date.

So: if I buy a hundred units of this bond for £247.85, then

http://www.bankofengland.co.uk/publications/news/2009/003.htm

tells me that HMG will give me £3.56 on 23 August 2009. My assumption is that I get some similar sum on 23 August 2010, some similar sum on 23 August 2011, and then, on 22 January 2012, some sum equal to 100 times the ratio of the RPI on 22 January 2012 and on 22 January 1982; or at any time I can sell the bond to somebody else for whatever the market has determined the price should be. Is this correct?

Whether correct or not, it seems unlikely to be terribly useful because the share-dealing service doesn't give me the 'trade this instrument' button. I suppose the sane thing to do is to buy an investment trust or unit trust which wraps the bonds, and the even saner thing to do is to buy an index-linked savings certificate from National Savings, which ( http://www.nsandi.com/products/ilsc/rates.jsp ) pays RPI+1% over three years. Any recommendations?

NB my bed-frame is slatted so money stored under the mattress will just fall out

Comments

[hsenag.livejournal.com]

I had some index-linked gilts in an ISA for a few years and I had to deal them over the phone (with Barclays Stockbrokers).

[dd-b.livejournal.com]

I'm not going to be your answers, of course; I don't think I even know the American equivalent answers. Nope, more questions -- what's "RPI"?

And, if the money falls through the slats, well, it's *still* under the mattress, after all; just a little FURTHER under.

[fivemack.livejournal.com]

RPI is the Retail Prices Index, it's one of two official UK government measures of inflation, the other being the CPI, Consumer Prices Index. The RPI includes housing costs, so has gone down a lot in the last few months as the interest paid on tracker mortgages has decreased; the CPI doesn't.

For the last few years the RPI has reliably been above the CPI, and so the fact that gilts were RPI-indexed seemed generous, but this is no longer the case.

http://www.marketoracle.co.uk/images/Nadeem_12_6_07a.gif has a graph of RPI and CPI for Jan 2000 to May 2007; http://www.statistics.gov.uk/images/charts/19.gif has the graph for February 2007 to today.

[naath.livejournal.com]

Retail Prices Index. It is one of the available measures of Inflation (the other common one is CPI - Consumer Prices Index). http://en.wikipedia.org/wiki/Retail_Prices_Index_(United_Kingdom)

[emperor]

Your nearest pig farmer should be able to help.

[fivemack.livejournal.com]

That was really quite confusing until I'd googled a bit. Whilst I suppose the pig is the best method yet invented of converting vegetable offcuts into a) exceedingly pungent manure and b) BACON, I am not convinced that my garden would be improved by a pig, even if a gilt is probably the sort of sow that one should sensibly buy for the garden.

[jiggery-pokery.livejournal.com]

I would note, further to your note that the National Savings is the sane way to get what you want, that the index-linked savings certificate's income is tax-free. Looks dang-diddly good, if as unspectacular as a bucket of cement, to me.

[papersky.livejournal.com]

this would be my suggestion. Gilts are just too complicated to do individually. That fund's been around and doing pretty well since the eighties.

But bear in mind you're not the only person going to be having this idea right now. But you know gilts are a long term investment, right?

Shares can go up as well as down! I'm not giving financial advice on the internet, that would be wrong! Never sell at the bottom, wait it out!

[dd-b.livejournal.com]

Selling at the bottom is described as "converting paper losses into REAL losses". Of course, selling half-way down might be an excellent deal, especially if it was GM which was probably badly over-valued most of the last decade (i.e. little chance of really recovering in terms of stock price).

[crazyscot.livejournal.com]

If I were looking to put money into gilts or bonds right now - which isn't a million miles away as I do need to properly restart paying into a pension - I'd be looking for a fairly broad low-charges bonds fund which the SIPP-I-don't-yet-have could access.

[(Anonymous)]

My understanding is that the coupon is 2.5% (of the nominal amount, adjusted for RPI inflation). The nominal amount increases by RPI inflation and at maturity you receive the nominal amount, adjusted for RPI inflation.

So even if the bond were trading at par it's not quite precise to say "pays 2.5% + RPI annually". Your income would be around 2.5%, and the capital appreciation (and annual increase of the coupons) would be RPI.

Then there's the issue that the bond could be trading below or above par which would mean:

(a) The annual income as a percentage of the market value could be more or less than 2.5%.
(b) The capital appreciation (and annual increase of the coupon) could be more or less than RPI.

You need to find out what the real yield of the bond is. That, plus RPI inflation, will (broadly speaking) be your expected return.

I'm not sure it's sane to buy a unit trust or investment trust that invests in gilts. Why pay the charges for a straightforward investment when you can buy the asset yourself?

The National Savings index-linked certificate is good value as it is tax free and has an option value (the values don't go down if there's deflation).

You are wise not to touch the stockmarket at the moment. Very wise. But soon it will be time to enter with a short spread bet, methinks.

[monkeyhands.livejournal.com]

I misread your subject heading as "How does one buy gifts?" I would have been able to offer lots of advice if you had been asking that.