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

[(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.