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Alternatives to index-linked gilts: more rooting around in the rubble of the bond crash

Logo of a galaxy with the writing ‘alternate universe’ as a pun on these alternatives to index-linked gilts

Assets do not exist in a vacuum. The late great Harry Markowitz won the Nobel prize for economics for showing that a diversified portfolio is superior to putting all your eggs in one basket.

More modestly, I’d counter that the same thing that crashed the price of index-linked gilts over the past 18 months also walloped a bunch of other assets.

The villain is, of course, the inflation surge, and the rapid ascent of interest rates in response.

Rising rates did for index-linked gilts, drowning out gains made from higher than expected inflation.

That reset was predictable (the timing and speed wasn’t) but it’s still been shocking to watch.

Every asset class whacked by rates

In fact nearly all assets took a beating in 2022 for much the same reasons.

And the pain has continued in 2023 for the most rate-sensitive assets.

The past week alone has been tough, as the City took peak rate expectations to 6.5%:

Financial markets bet on Thursday that the Bank of England will raise interest rates to a 25-year high of 6.5% early next year, up from a previous expected peak of 6.25%, pushing the yield on short-dated government bonds to their highest since mid 2008.

Rate futures showed a roughly two in three chance that the BoE will have raised rates to 6.5% or higher by its February 2024 meeting, up from 5% now.

Warren Buffett likens interest rates to gravity. That’s on account of how rates affect every aspect of finance.

Hence all assets were repriced as Bank Rate rose 20-fold from 0.25% to 5% in a year and a half.

Shares fell, naturally. Especially growth stocks.

Risk-averse investors might usually enjoy a snicker on seeing thrill-seeking equity investors getting their just deserts, but not in this crash. Safety-first investors were roughhoused just the same.

Besides index-linked gilts (aka ‘linkers’), conventional bonds – government and corporate – have been thumped. So too the supposedly boring ‘bond proxies’ invested in by those who chased higher yields, who feared a bond crash, or who preferred the hope of some growth in their paltry income and so bought dividend stalwarts like Diageo or trusts like Finsbury Growth & Income.

All down, down, down.

Normally some asset class does well in a rout. But very little has prospered for long in the declines of 2022 onwards, except for a few niches like energy stocks and UK large caps. Investors of all stripes have been carried out on their shields.

Yet for those with the appetite – and the dry powder – to sally forth once more, all this carnage also makes for opportunities.

I just wrote 6,000 words for Mogul members about index-linked gilts, for example.

And that too-vast word count was even after I removed a section about alternatives, out of mercy for my readers. Instead I’ll run through a few below.

Again, if this week in the markets is anything to go by then the pain is not yet over for these usually less volatile assets.

But I have to think we’re closer to the end than the beginning for the big falls.

Vanilla gilts and other bonds

Like linkers, conventional gilts crashed in 2022. Anything beyond toddler-level duration plunged in price as yields rose on higher rates.

Horrible for standard 60/40 portfolios. But it was even worse if you were a cautious type and so invested in an extra-conservative portfolio that was more overweight in gilts.

This is strikingly illustrated by charting the performance of Vanguard’s LifeStrategy funds over the past 18 months.

  • The LifeStrategy fund with 80% in higher-risk equities did best.
  • The version with only 20% in equities and 80% in bonds fared worst.

Source: Trustnet

Whenever I update this chart, I’m honestly staggered.

I fretted about a bond market crash a decade ago. By 2015 I thought – wrongly – it might be upon us. The Accumulator ran the numbers in 2020, and again in 2021. Over and over we warned that while government bonds were generally a less risky asset that could cushion your portfolio when equities fell, they were not risk-free. Especially not in real terms, and when sporting low-to-negative yields after years of barely-there interest rates.

Yet despite all that, I still gasp when I see this chart.

Goodness knows what the average LifeStrategy investor has made of this experience. Whatever we want to tell ourselves after this bond crash for the ages, I doubt anyone buying into the LifeStrategy 20% Equity fund before 2022 saw the potential for the Bizarro World chart above.

So much for our dark yesterdays. The good news is the crash has taken yields back to saner levels.

You can now get a 5.5% yield on a one-year gilt, for example. That’s compares – ahem – very well to 0% in 2020. It’s competitive with all but the very best buy savings accounts in July 2023.

What’s more, gilts are free of capital gains tax. The coupon on most short-duration gilts is very low – from 0.25% to 2.75% – so the yield-to-redemption largely comprises a capital gain. As I said you don’t pay tax on the capital gain, just income tax on the coupon. This makes gilts particularly attractive right now for those with cash outside of tax shelters who pay high income tax rates.

Gilts are government backed so there are no credit risk or FSCS limit issues. (You might still worry about your platform…)

Of course these are nominal yields – far below CPI of 8.7%. So a negative real return, currently.

However if you think inflation will fall sooner than expected, you might buy ahead of a re-rating.

More importantly for investors socking away money for the long-term, there have been worse times to top-up to your government bond fund in a balanced portfolio. (The past decade, for a start!)

Bolder or more active investors might also look at corporate and high-yield bonds. Just remember that these will usually fare worse if all these rate rises ultimately send us into recession, and so make it harder for companies to meet their obligations.

Whatever you do don’t write off bonds completely on the back of a bad crash.

Bonds are governed by maths and – at least in nominal terms – I’d say the sums are now much more attractive.

As with all the assets in this article, we might well have to suffer more pain until the interest rate cycle finally turns though.

Perhaps one answer is to slowly build up towards your desired position over time – the way we more typically talk about pound-cost averaging into equities?


Arguably the big one, and for a typical retiree probably better than mucking about with gilt ladders. Especially if you plan to live a long time and you buy an annuity with inflation protection.

Annuity providers use government bonds to back their guarantees. So there’s a direct relationship between annuity payouts and gilt yields:

Annuity income – Ages 65 and 60, £100,000 purchase, joint life 2/3rds and level payments

Source: William Burrows

Unlike with a retirement bond ladder, with an annuity you won’t run out of money if you overstay your innings. The company pays out until you shuffle off.

Also, by pooling many holders together the annuity provider spreads longevity risk. This improves the attractiveness of annuities for the average policy holder. (A few unlucky souls lose out).

On the other hand, once you buy an annuity your capital is more or less sunk. With an index-linked ladder you can sell up for cash if required.

Annuity providers are (understandably) taking a slice of our pie too. That’s why they’re in business.

Obviously a lot to think about. Consult professional advice if you need it.

For much more on index-linked gilts and linker ladders, please see my huge article for Moguls.

Infrastructure investment trusts, renewables, and other alternatives

These were a long favourite of yield-seeking private investors. But veteran readers may recall I was wary, not least due to how they invariably traded on high premiums.

That was my loss for many years, perhaps. Trusts could and did issue more shares at premiums, and they did so to grow. This funded new asset exposure, and by extension their dividend growth.

Whether shareholders understood this was going on is another matter!

Either way, the wheels came off in 2022. Higher rates tanked infrastructure trust share prices. They have continued to fall in 2023 and most are now on big discounts.

For instance, the popular HICL Infrastructure (Ticker: HICL) went from a 20% premium in summer 2020 to a 20%+ discount today:

Source: AIC

Pretty breathtaking – especially as the NAV reportedly rose nicely over that time. But the market clearly has its doubts.

In theory infrastructure trusts offer some inflation-protection – either explicitly in their contracts or implicitly due to the nature of their assets. (For example, a toll road can raise prices).

But higher interest rates also means higher discount rates applied to asset valuations / future cashflows. (Ironically, pretty much the same thing that hammered racier growth stocks.)

It’s all pretty complicated and the picture varies from trust to trust. Some seem set to be more responsive to inflation than others; with pretty much all the least we can say is there appears to be a lag!

Are infrastructure trusts now bargains? Maybe. HICL yields over 6%, and the big discount would seem to price in a lot of pain.

But the recent debacle with Thames Water – an infrastructure asset, you’ll note – has opened up a new front for the forces of fretfulness.

Thames Water is carrying many billions in debt. Bad enough from a confidence perspective. But there is an extra wrinkle in that its income is linked to CPI inflation, whereas the debt is based on the (higher) RPI measure.

The Financial Times notes that:

Surging inflation might at first glance appear beneficial for a regulated water company that is able to pass on costs to its consumers. But a mismatch between the measures of inflation Thames Water uses to hedge its debt and to price its customers’ bills has caused a growing strain on its balance sheet.

More than half the group’s debt is linked to inflation, meaning interest payments increase as inflation steps up, which the company has justified by noting that customer bills are also linked to it.

However, the debt is linked to one measure, the retail prices index (RPI), which is at a historically wide premium to the other, the consumer prices index adjusted for housing costs (CPIH), which the majority of its bills are now priced against.

I wonder if this is a problem for UK-focused infrastructure assets more widely?

You would certainly want to dig deep into the individual trusts, or at least buy a basket. They are all slightly different under the tin. And often in ways that will only become apparent under duress – such as the sudden death of the zero-interest rate era.

Moreover some assets – particular with renewables – may only be leased to the trust for 25 years. They aren’t perpetual owned. (This isn’t necessarily a bad thing. But you need to know.)

Oh, and as for my schadenfreude at infrastructure trusts finally falling from their sky-high premiums…

…well, over the past six months or so I invested just under 2% of my net worth into infrastructure trusts at various prices – and they’ve continued to fall.

Ho hum.

Commercial property REITs and funds

Same again. Valuations smashed with rate rises, big discounts on REITs, debt an issue especially with some smaller players, superficially attractive dividends, and a nervous market.

Commercial property is perhaps even riskier than infrastructure in that the one thing that really seems to have changed following the Covid pandemic is the demand for office space.

Then again, property – and property funds – are age-old assets, whereas the track record of listed infrastructure and renewable trusts is only a couple of decades long.

Eventually you’d think redundant buildings could be put to new uses (apartments, say) or they may fall off the market in disrepair, increasing the value of what’s left standing.

In theory the replacement cost of offices has risen with higher inflation, too. And normally rents would also be rising – if it wasn’t for that pesky virus.

It’s a bit of a mess, and I’m not foaming at the mouth. Once bitten, twice shy.

Still, never say never again.

NS&I savings certificates

I’m mentioning these because many of us have a legacy holding that’s among our most cherished portfolio constituents. They have been the best inflation-proofing asset a retail investor could own.

You can’t even buy new inflation-protecting savings certificates from National Savings anymore. But for the past decade or so you’ve been able to rollover expiring certificates into new multi-year certificates, albeit at derisory yields.

Indeed a savings certificate that’s rolled over in July 2023 will bag you the princely interest rate of 0.01%, plus inflation linking on the CPI measure.

Against that linkers now offer real yields as high as 1% or more. And until 2030 index-linked gilts will continue to track RPI inflation. As mentioned, RPI is typically higher than the CPI measure.

It’s worth noting too that a little discussed change to the certificate small print means you can no longer cash in NS&I savings certificates early. You must hold them to term. That surely further reduces their attractiveness and versatility versus index-linked gilts.

So is it time to switch to linkers?

Maybe – or at least maybe partially, if you have an outsized holding. The certificates’ real yield is derisory, the inflation measure is now less attractive, and NS&I appears determined to kill them off.

However I’ll be keeping mine. They are only 2% or so of my portfolio, and once you cash them in that’s it.

Also certificates have one big edge left over linkers.

Unlike with index-linked gilts, the index-linking from certificates is effectively suspended if inflation turns negative. This would make certificates more attractive assets to hold in a deflationary period. Even their tiny coupon could be very valuable.

No alternative to making your own mind up

As ever, I’m sharing all this to offer a snapshot of the landscape – particularly for those of you who (for your sins) invest actively.

I am not – as the house troll put it in the comments the other day on one of my co-blogger’s commodity posts – “pushing” any of these assets.

You’d hope that’s clear from the fact that I’ve raised loads of downsides too. This on top of the even more obvious point that there’s nothing in it for me to ‘push’ this or that asset onto readers.

Push membership? Sure, fair enough. That’s existential for the future of our site.

But we don’t benefit one way or another if you buy commodities, gilts, or anything else. Completely obviously, you’d think.

Trolls are gonna troll I guess.

For most of us this a difficult time to face decisions as an investor. Indeed a huge benefit of investing passively in index funds according to a preset strategy is you avoid all this mental drama.

Those of us who do deviate will always face risks. Our troll will continue to never put a foot wrong, and compound his billions into trillions thanks to the benefit of hindsight. Here in the real world the rest of us will win some and lose some.

It could well be that we’re still early into this great rate rout, for all that it feels late in the day. So please do your own research and make your own mind up.

Oh, and incidentally, as I always stress but some never hear, these alternatives aren’t mutually exclusive. You don’t have to choose, say, linkers over certificates. You can own both if you want to.

Investing isn’t like Xbox versus PlayStation. The more the merrier with diversification, up to a point.

That ‘point’ is where the assets no longer deliver any attractive returns in themselves. If you buy a small and overly-indebted property REIT and it goes bust, don’t go crying to the memory of Harry Markowitz!

{ 38 comments… add one }
  • 1 Seeking Fire July 7, 2023, 8:03 am

    Great article, interest rates are like gravity as someone much richer than I said, now the punch bowl has been firmly taken away, everything should be repriced slowly or quickly, which will be painful but ultimately for the better. It’s been coming for fifteen years – which is a longtime for us individually but no more than a blip in an investing lifetime.

    Good news is if you are still accumulating it’s getting closer to a golden age compared to the last fifteen years in some assets such as bonds, some equities. Keep stuffing away.

    Saving for a house? 2 year gilts are 5.5% tax free now and you can watch the inevitable fall in at least real house prices and probably nominal over the next couple of years.

    Gotta big mortgage that’s up for renewal shortly? Hammered.

  • 2 xxd09 July 7, 2023, 8:58 am

    Interesting article as always but not a new dilemma.These situations repeat themselves regularly but each scenario has its own particular twist
    Long ago I came to the conclusion for an amateur like me using the stockmarket for pensions and savings (self employed professional) the safest rule was first to have saved a lot!
    Being diversified-via equities and bonds was a help
    Being invested in global index trackers was another position to take because who knows what the stockmarket will do except it rises in the long term-we hope!
    Index trackers were also the cheapest stockmarket investment available -investment costs are crucial
    Then lived “below the salt” ie frugally as much as possible
    Not very exciting but seems to have worked over my 20+ years retirement -so far
    On another note it does seem we are headed for a recession which will sort everything but is brutal especially on the poor -as always
    Our leaders(and us) have a problem with reality ie spending more than we earn)
    Tis the human condition?

  • 3 Mr Optimistic July 7, 2023, 9:17 am

    Well I have just bought back into bonds for much the same reasons as espoused here ie hoping we are nearer the end than the beginning.
    It’s odd that I am happy to make moves based on longer term thinking but still feel put out when the short term moves are against me, as I supposedly reconciled myself too.
    Also took a bit of a punt on ishares LTAM as a high yield alternative (Brazil & Mexico) and BBGI for infrastructure without too much UK bias.
    Thanks for the article, and your honesty !

  • 4 Neverland July 7, 2023, 10:15 am

    Index linked gilts now offer guaranteed real returns and annuities are now decent – what’s not to love?

    It’s instructive that the run through of alternatives doesn’t show much attractive

    If you had gone to sleep in 2007 and woken up on 30th June 2023 you wouldn’t think you had missed much except how much the Nasdaq has gone up

  • 5 Naeclue July 7, 2023, 11:54 am

    It is interesting how quickly the market for “safe” assets has changed. A few years ago retail deposits, even NS&I, offering a significant advantage to bonds. Now it seems to me a no-brainer to go the other way, with convential gilts offering better after tax returns than deposits and linkers offering risk free real returns. Both with an instant access option, albeit subject to market risk.

    I have filled our boots out to 6 years and will add more, if favourable conditions continue, as our deposits mature.

    Annuities, again going from terrible value to very reasonable. A harder decision though as it is irreversible. Something to properly consider in the autumn when we have more time.

  • 6 Time like infinity July 7, 2023, 12:14 pm

    Superbly written, thorough & thoughtful article as always @TI. On infrastructure ITs, the anomaly of having the sector on large discounts is a strong attraction for those ITs within it with CPI linked income streams; but you’re right to highlight the worrying exposure of some infrastructure ITs to water sector liabilities.

    Whilst HMG says environmental liabilities are only £56 bn, the House of Lords report (https://publications.parliament.uk/pa/ld5803/ldselect/ldindreg/166/16602.htm) of 10/3/2023 concludes that eliminating:
    “discharges from storm overflows by separating rainwater drainage from wastewater in the sewer network would cost between £350 billion and £600 billion….The Taskforce said that reducing discharges to zero in an average year through other options, such as building storage tanks to capture excess water during heavy rainfall, would cost between £240 billion to £260 billion.” That sort of figure is up there with the 2008 risks of RBS’ liquidity mismatch wholesale funding requirements. As it (and AIG state side) showed, when push comes to shove, no private institution is actually too big to not have its shareholders bailed out, and I doubt Thames Water or its peers would be an exception.

  • 7 tetromino July 7, 2023, 12:25 pm

    Thanks for highlighting the change to ILSC access. I hadn’t heard about it and it will make the renewal decision a little trickier when it comes around.

  • 8 Time like infinity July 7, 2023, 12:54 pm

    Should have given a reference for the HoL report quote – it’s HL Paper 166, Chapter 5, paragraph 185. [NB: http://www.parliament.uk gives publication date as 22 March 2023, but other sources cite it as 10 March.]

  • 9 Vic Mackey July 7, 2023, 12:58 pm

    That’s a fair point @TLI. As ever, profits privatised and losses socialised. Although fair to say as with the banks, it’s the senior employees and the debt holders that are bailed. The share holders generally carry the can…. Along with the tax payers.

  • 10 Al Cam July 7, 2023, 2:00 pm


    Re: Annuity providers use government bonds to back their guarantees. So there’s a direct relationship between annuity payouts and gilt yields:

    See page 65 [and earlier] at:

    And as Ned explains somewhere else in his paper even if the insurer wanted to use only government bonds there are just not enough to go around.

    I think it would be fairer to say something like: government bonds/gilts are a reasonable proxy.

    Apologies if this seems a bit picky, but this misunderstanding [re Annuities] is IMO not helpful.

  • 11 ZXSpectrum48k July 7, 2023, 2:24 pm

    @AlCam. Yes, you can’t really get away though with just Gilts. You need to hedge the longevity risk of those liabilities further out than 50 years. Plus you are paying quite a premium to go 100% Gilts.

    The sad thing about the LDI debacle in Sep 22 was, after having totally the wrong asset allocation in the 2000s (too much equity, not enough bonds), they probably had the right allocation by 2022. Broadly 80% Gilts and 20% equity. They were undone, not really by leverage (9.6% levered doesn’t actually kill you) but by shocking collateral management (if you have swaps, then you need margin for T+0 and they didn’t because they … lent out the collateral!). Err. The broad allocation though was ok and they have benefited from higher bond yields.

    Nonetheless, as I’ve said before annuity rates tend to trade as a function of 15y+ Gilt yields. If you are 50 and want to buy an annuity at 55, and want to hedge the annuity rate, you want to buy 15y Gilts, 5 years forward. The way to proxy that is to short 5y Gilts and buy 20y Gilts, cash for cash. Or a simpler proxy: buy 20y Gilts.

    There have never really been enough Gilts to go around. We have large pension and life industries, plus every global bond fund needs to own Gilts. We are fortunate to have such a captive audience for our debt. Which makes it all the less understandable why we didn’t issue more Gilts during 2020. Other countries overissued. Many EM countries couldn’t quite believe their luck to issue so much at rock bottom yields We didn’t. Too conservative (with a small c). Another missed opportunity.

  • 12 Neverland July 7, 2023, 3:00 pm


    “every global bond fund needs to own Gilts. We are fortunate to have such a captive audience for our debt”



    1. UK is only about 3% of world GDP

    2. We had a government last year that revealed some policies the bond market didn’t like and that government didn’t last a month after the bond market showed its displeasure. Its replacement (led by an unelected ex-financier) bent over backwards to unveil creditor friendly policies and continues to do so

    3. Last year Monevator compared the UK to Italy. Many italians complained

  • 13 LondonYank July 7, 2023, 3:24 pm

    Great article.

    I’ve been trying to take advantage (/catching a falling knife) of the re-pricing by filling my boots with infrastructure trusts, which have gone from a 0% to 15% allocation in my PF over the past six months.

    The infrastructure trusts, in my view, represent some of the best risk adjusted return opportunities out there. The sector has de-rated because investors have largely compared the yields on offer with those of nominal gilts. However, this ignores the high degree of inflation linkage built into these vehicles and that the cash dividend yield doesn’t represent the total return potential. For example, you can now buy the renewable generators (likes of TRIG, UKW, JLEN) offering steady state returns of c.9% with significant explicit (via ROCs) and implicit (via power prices) inflation protection. The core funds have even better inflation protection built-in (HICL has a 0.8x correlation, for example). Compare this with 1% real yields on offer from linkers and infrastructure (offering >600bps above this) seems like a no-brainer.

    I am still considering adding some linkers to my portfolio, but largely as a replacement for the likes of CGT/RICA, which hold a large amount of these. The post-tax return will be better for holding these directly than through a collective, with the addition of management fees. Interestingly all of these have de-rated as well, so I wonder if investors are coming to the same conclusion in this new world of higher rates…

  • 14 tom_grlla July 7, 2023, 3:29 pm

    Wonder if you’ve been looking at BHMG as an alternative. Another one at a fair discount instead of the usual significant premium. Admittedly NAV is down this year, which is highly unusual, but possibly unsurprising given the lack of volatility, which could always change in the second half…

  • 15 Joe July 7, 2023, 3:37 pm

    Hi – Can you suggest any good ETF / Fund for very short term bonds / gilts rendering c5.5%? thanks

  • 16 LondonYank July 7, 2023, 4:19 pm

    @ Tom, yes I have 4% in BHMG…was 5% six months ago so very aware of the de-rating! I think this is one of those ones which will disappoint for periods but prove it’s worth when sh*t hits the fan. I see it in the ‘tail risk’ protection category.

  • 17 ZXSpectrum48k July 7, 2023, 5:34 pm

    The problem with Brevan is simply it’s size. By early 2018, it was say $2.5bn with 20 single PMs or small teams. So each PM/team makes $25mm (average), that’s P&L $500mm. So basically 15-16% post fees was easy to do.

    Now, they are over $30bn, and have over 120 PM/teams. There is no reason to believe any team will average more. In fact there is a strong risk of canibalisation of P&L between teams. The move from a fixed management fee to cost-pass through is cheaper for the client but they assume the netting risk between teams.

    Their ability to generate good returns is now a function of rate volatility being sustained at the very high levels of the last five years. This year was always likely to be a “transition year” after the tightening cycles of 21 and 22. Alan is saying they will not go above $50bn but $30bn is already big for what is still primarily a macro rates fund.

  • 18 mr_jetlag July 8, 2023, 2:34 am

    Thanks Monevator for taking the linkers comments from last week and making a cogent, even handed article for their inclusion in our portfolios.

    Thanks also to ZX and Neverland – the punch and judy nature of the commentary occasionally throws up some gems: “3. Last year Monevator compared the UK to Italy. Many italians complained”

    I will say, the last few articles have felt like a pendulum swing away from “do not sell” and the calm reassurances to just keep buying I remember from the Pandemic flash crash. The end of ZIRP and QE have seen a lot of pain over the last two years – and in response I’ve gone 10-15% cash and redeployed it to bonds/gilts. I’m sure others have also felt the urge to tinker – will we look silly when equities return to double digit returns? Or prescient when they stagnate over the next decade? Does it really matter? More news at 10.

  • 19 Meany July 8, 2023, 6:18 am

    Can anyone give a quick calc on:

    If we buy the 2028 Linker, Treasury 0.125% 10/08/2028, for £95.47,
    assume £0 holding cost,
    and assume _roughly_ Statista’s forecast (from March, I think, so it
    should be a safe lower estimate!):
    RPI at aug 2023 coupon: 10.25%
    RPI at feb 2024 coupon: 8.9%
    RPI at aug 2024 coupon: 5.25%
    RPI at feb 2025 coupon: 1.6%
    RPI at aug 2025 coupon: 1.3%
    RPI at feb 2026 coupon: 1%
    RPI at aug 2026 coupon: 1.35%
    RPI at feb 2027 coupon: 1.7%
    RPI at aug 2027 coupon: 2.25%
    RPI at feb 2028 coupon: 2.8%
    RPI at redemption: 3%

    what’s the total nominal return please?

  • 20 Gareth Ghost July 8, 2023, 8:29 am

    Follow-up question to Meany #19…
    How would tax work in that scenario in a non-tax-sheltered account)? For example, in Feb ’24, would you pay tax on the 8.9% payment or the on the 0.125%?

  • 21 Time like infinity July 8, 2023, 9:07 am

    @Neverland#12 & @mr_jetlag#18: re that Italy comparison: whatever the state of play now economy wise, Italians achieved rates of growth in the Golden Era far exceeding anything ever achieved over a sustained period by the UK. From Wiki:
    “The Italian economy experienced an average rate of growth of GDP of 5.8% per year between 1951 and 1963, and 5.0% per year between 1964 and 1973. Italian rates of growth were second only, but very close, to the German rates, in Europe, and among the OEEC [OECD predecessor] countries only Japan had been doing better.”

  • 22 Vroom July 8, 2023, 10:03 am

    @ Meany, you’re overcomplicating it. If you bought that 10/8/28 Linker (T28) on Monday at 95.47, the real yield would be 1.04% (from Excel, for example).

    So if you held to maturity, the total return would be RPI each year +1.04%, compounded up (technically you use RPI with a 3 month lag, so that the starting RPI to use can be straight-lined from the April and May RPI readings of 372.8 and 375.3, https://www.statista.com/statistics/306748/united-kingdom-uk-retail-price-index-rpi/)

    Of that total return, some would be in semi-annual coupons and some would be in the principal repayment at the end.

    If you choose a low coupon bond like this 0.125% T28, the coupon payments are trivial (each 1/2 of 0.125% uplifted by inflation, so half of naff all), the rest of the return would be as a capital gain as the final principal is uplifted by RPI.

    e.g. for £10k invested. T28 has a current Dirty Price (Tradeweb) of 126.6, so current inflation uplift of 26.6%, so current coupons would each be 0.5 x 0.125 x 1.266 = 0.079%.
    So for £10k invested, semi-annual coupons of £7.91 each, £15.82/year.
    Even if inflation doubles in 5 years, your coupons would be under £32/year…

    @ Gareth Ghost

    Those trivial coupons are taxed as income, same as income on savings at a bank or building society.

    The capital gain (RPI +1.04%/year compounded up – those trivial coupons) is totally tax free.

  • 23 The Accumulator July 8, 2023, 10:09 am

    @ TLI – spot the connection between those three countries 🙂

  • 24 ZXSpectrum48k July 8, 2023, 10:31 am

    With regard to the foreign ownership of Gilts in Global govt bond funds. It’s nothing to do with GDP. Nor actually is it anything directly a function of total global govt debt. Most institutional indices will still exclude the likes of China, plus all EM countrie, since they are covered by different govt bond indices. It’s really just the G10. This increases the relative size of many govt bonds markets in those indices. Plus many institutional indices tend to cap the weight of any single country at 10%. This downgrades the US and Japan and increases the everyone else, including the UK.

    End result is a much larger allocation to Gilts that would be deserved from a simple weighting from debt capitalization. Hence why we are very fortunate. It may not continue forever as indices start to include the likes of China in their mandate.

  • 25 Gareth Ghost July 8, 2023, 11:03 am

    @Vroom (#22)
    How did you calculate the real yield to be 1.04%?

  • 26 Vroom July 8, 2023, 11:10 am
  • 27 Meany July 8, 2023, 12:08 pm

    Thanks @Vroom.
    You’re quite right – too complicated approach.
    I was trying to get a sense of what the likely return is for linkers vs other
    fixed income.

    So, say I want probably the most in 5 years from fixed income,
    Linker 2028 should be the best choice if the market RPI estimate is too low; Gilt 2028 should be the best choice if it’s too high. Right?

    Except, when I look at RPI forecasts, those March estimates say we’ll have 19% on RPI by 2028, that’s quite a bit below the 32% I can get from a 5-year fixed bond at 5.75%. But there’s probably another 6% expected RPI in the models by now, and there’s also the 5% deviation from par 100.00 on the linker, so probably buying the linker or the fix gives about the same return, assuming 25% on RPI is right…..

  • 28 Vroom July 8, 2023, 2:09 pm

    @Meany. Might be overcomplicating again!

    Typically you’d compare a similar (so also low coupon) conventional Gilt to the same end date. If that doesn’t exist you make a best guess from the available similar bonds

    So again using that Yield formula, the 0.125% 31/01/28 Gilt with a price of 80.46 has a yield (ytm) of 4.97%
    & again using that Yield formula, the 0.5% 31/01/29 Gilt with a price of 78.76 has a yield (ytm) of 4.92%
    So, back of the envelope, a conventional gilt to your T28 linker date (10/8/28) would be expected to have a yield of about 4.95%

    So the choice then is between RPI+1.04% or 4.95%(ish).
    In the lingo, the ‘Breakeven’ inflation is 4.95% – 1.04% = 3.91%.
    That, by definition, is what the market “expects” inflation to be until 10/8/28, that’s where buyers and sellers of UK RPI inflation meet.

    If Statista (or whatever else) has convinced you that that Breakeven is too high, then yes, you’d buy the conventional Gilt instead.

  • 29 The Investor July 8, 2023, 11:29 pm

    Thanks for all the excellent comments everyone. Great discussion and I am certainly learning as much as I’m sharing over the past fortnight regarding fixed income.

    Special thanks to @Al Cam re: the gentle nudge towards being more precise about what backs annuities. Of course I was conscious I was over-simplifying (there’s a reason Monevator comment threads are often much longer than even Monevator articles 😉 ) and that the situation was substantially more complex, but I wouldn’t even have *guessed* that corporate bonds are the predominant asset class that’s employed by annuity providers to support their promised cashflows! So that and the subsequent comments are very interesting…

    (In my defense, a quick Google doesn’t throw up abundant evidence that this is the case, actually. I’ve no reason to doubt it, but it’s a sign of how opaque and under-discussed annuities are relative to their importance and complexity. Compare the info drought to, for example, the terabytes of information out there about being a buy-to-let landlord!)

    Regarding our recent talk of index-linked gilts and other assets versus the “Do Not Sell” rallying cry of March 2020, these are very different scenarios IMHO.

    This hasn’t been a panic in the markets over the past 18 months. There’s been a repricing.

    And clearly neither me nor @TA are saying (obviously?!) that people should sell all their shares and put it all into government bonds — even besides the fact that I almost never say I think people should “swap this for that” (I always favour a bit of both of almost everything! More varying the quantities.)

    But this shift in index-linked gilt yields is much more meaningful than might casually be realized. The first reason any of us are investing is to keep our current wealth level or ideally outpacing inflation*.

    For the first time in 15 years, you can do that and get a small nailed-on positive real return to boot. That’s huge!

    But of course it doesn’t mean equities are finished or they won’t rally strongly in the next three months or 10 years. (By far my largest exposure is equities, as usual).

    It is however indicative of a big shift in the investing landscape. Gravity has been turned back on and that has consequences and implications that I really wanted to flag up to readers. 🙂

    *yes, inflation comes in many shapes, sizes, and ambition levels 😉

  • 30 Al Cam July 9, 2023, 8:02 am

    Re: ” … but it’s a sign of how opaque and under-discussed annuities are relative to their importance and complexity”
    Exactly; annuities IMO are not risk free.
    Worth noting that Neds paper is nearly nine years old now, so the allocations may well have changed, but the facts re number and availability of gilts remain.

    There also seems to be something of a push by the annuity business to get remaining DB pension funds to move (post the leveraged LDI debacle) rapidly towards the bulk purchasing of annuities. And, this might just be concerning the BoE, see: https://www.bankofengland.co.uk/speech/2023/april/charlotte-gerken-speech-bulk-annuities-conference

  • 31 Kyle July 9, 2023, 12:32 pm

    I’m not entirely convinced annuities are so attractive. Your chart looks at a level annuity with a fixed rate of 4%. By fluke that’s pretty much the standard safe withdrawal rate, allowing inflation adjusted withdrawals with only a 5% probability of failure.

    Any analysis of the impact of inflation, even at the 4% priced into the markets, can have a devastating effect on the real value of income.

    Ask me I know. I’m from Zimbabwe!

  • 32 Mr H July 9, 2023, 1:43 pm

    @vroom. Can I ask a question? With reference to your comment #22. “If you bought that 10/8/28 Linker (T28) on Monday at 95.47, the real yield would be 1.04% (from Excel, for example).”. I plug these numbers into the yield function in excel.

    settlement 10/07/2023
    maturity 10/08/2028
    rate 0.125
    price 95.47
    redemption 100
    frequency 2

    And I get the answer 0.1375

    What am I missing?

    I have been trying to educate myself about gilts and build a simple Excel calculator to calculate YTM. But I am not getting very far.

    Or is there somewhere you can just look this info up?

  • 33 D July 9, 2023, 2:24 pm

    @Mr H
    The rate of 0.125 is 12.5%, your input above should read:
    Rate 0.125/100
    Likewise your answer 0.1375 is actually 13.75%.

    I’m not sure if I can link to the site but look up Yield Gimp.

  • 34 Mr H July 9, 2023, 2:34 pm

    @D Yield Gimp is just what I was looking for. And Excel calc now working. Thank you!

  • 35 Boffinboy July 10, 2023, 8:24 am

    I am struggling to wrap my head around valuing linkers, as considering buying shortish term bonds vs shortish term linkers. Is anyone aware of a good guide, or have I missed it? Maybe the member posts go into more detail?

    Where the current bonds price is below 100 I believe I can then work out the yield to maturity (assuming no indexing, price of 100) and then the overall yield will be that + RPI. But not sure if I’m right there! If that is correct, how do I value those which are priced above 100, presumably I need to know what the RPI growth is that the price is already based on?

  • 36 Time like infinity July 13, 2023, 1:59 pm

    @Mick #36-38: but is that the correct conclusion to draw from Bessembinder and Siegel? Yes, the former found that only 4% of companies (for US 1926-2016) generated all excess returns over T-Bills, but he also found return skew meant, for N number stock portfolios, the median portfolio underperformed both the mean of all such portfolios, and also the return from a whole market portfolio.

    By definition, the future ‘winning’ subset of stocks, ITs and funds will go on to beat the whole market portfolio. But that’s not useful info to know. What I’d suggest is useful info to know is whether a typical investor of no more than average skill and knowledge has a reasonable expectation of picking shares, trusts or funds which are drawn from what will go on to become the winning subset.

    As I read the evidence, the answer to that question appears to be ‘no’, which is also what you’d logically expect to be the case, as a pior, before looking at the evidence.

    I’m not knocking active stock selection and concentrated portfolios. All to the good, and each to their own. I do think though that, for most investors, the odds of them outperforming a broad market index are not in their favour if they rely upon selecting stocks based upon their assessment of companies’ idiosyncratic merits. They might individually be highly successful, and fantastic if they are; but, as a group, it does seem to be unlikely that, in aggregate, they will succeed.

    City of London is a great trust. But even it has, based on the figures which you quote #38, only outperformed the FT 250 index by 1% p.a. compounded over the period 1966 to 2022 inclusive. That’s not much outperformance for 57 years, even if it results in an extra 75% (£780k v £445k).

  • 37 Time like infinity September 4, 2023, 9:46 pm

    @London Yank #13: FYI discovered HICL is the infrastructure trust which is the most sensitive to changes the ‘risk free interest rate’ element of the discount rate used to value NAV. Essentially, it’s an almost 10 to 1 ratio relationship. So, if one thinks rates will fall, then HICL is the trust to be in, and if one thinks that they’ll keep rising, then it’s the one to avoid. See table from AIC here:


  • 38 Time like infinity October 7, 2023, 1:10 pm

    @LondonYank #13: just to give thanks for your excellent analysis of infrastructure & PE trusts over on discussion forums @ CityWire (handle @LondonYank84). I’ve found your reasoning to be very useful in shaping my own thinking. Thank you.

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