I have written a few times in recent years urging Monevator readers not to give up on gilts. (That is, UK government bonds.)
That wasn’t because I’m a diehard gilt groupie. On the contrary, for most of my investing life my allocation to bonds has hovered closer to the flatline than investing orthodoxy would think wise.
However even as rootin’, tootin’, stock-lovin’ active investor I could see that many passive investors were throwing the bond baby out with the bond bear market bathwater.
Who could blame them after the post-Covid, post-Liz Truss bond rout?
As interest rates rose with inflation coming back from the dead, grossly-overpriced bonds crashed. The result was one of the worst stints for UK investors in government bonds of all-time.
Here’s how the iShares core UK 10-year government bond fund swan-dived into the Liz Truss lows of 2022:
Source: Fiscal AI
You don’t need to be Warren Buffett to guess what seeing ‘safe’ assets plunge like this did for investor appetite.
“Be greedy when others are writhing on the floor, breathless, and calling for mummy”, anyone?
No thanks, said many shell-shocked would-be bond buyers.
Once more unto the breach
However, if investors did make a mistake in trusting the market’s wisdom before the bond crash, it was by buying bonds on negative yields that could only deliver a negative return in the long run.
Yet following the bond rout that troughed in 2022, yields-to-maturity were positive across the curve.
At least in nominal terms, gilts were now priced to actually reward investors for holding them.
So it seemed to me some investors were closing the door on gilts after the horse had bolted, run into a ditch, and been winched out looking beaten-up, sure, but ready to run again.
Note: I wasn’t suggesting UK government bonds were a surefire winner. Nor that they’d give Bitcoin or the Magnificent Seven mega caps a run for their money.
It was just that with yields restored to something closer to normal, I felt they could be added to portfolios once more without all that existential negative yield drama.
Gilt trips
So how have gilts performed since those dark days of 2022, when Britain pondered whether a lettuce would do a better job of steering the ship of state?
Well, if you’d muttered “jog on Investor” on reading my articles and kept on shunning gilts, you’d be happy enough. That’s even if you’d parked your money in cash or money-market funds – let alone bought more equities instead.
Because gilts have meandered around doing nothing much since. Indeed with hostilities in Iran, the resultant inflation scare saw the 10-year gilt yield break briefly above 5%, before it fell back on news of a tentative ceasefire:
Source: CNBC
Remember, yields move inversely to price with bonds. All things equal, higher yields on gilts reflects lower prices for existing gilts in the market.
Cor Blighty
As an aside, it’s worth noting that Britain is still considered something of a basket case by international investors.
As CNBC reported towards the end of March:
One of the most alarming aspects of the sell-off in risk assets after the attacks on Iran, from a British perspective, has been how gilts – U.K. government IOUs – fell more sharply than bonds issued by any other G7 economy.
Take the 10-year gilt, the most liquid and most widely-traded of all gilt maturities and the best proxy for the U.K. government’s long-term borrowing costs.
At one point […] the yield hit 5.115% – a level not seen since the global financial crisis in April 2008.
These moves were much sharper than for other G7 countries. Indeed among similar economies only Australia has a higher 10-year yield.
The CNBC author covered the reasons why:
One is that the Bank of England’s policy rate was already the highest of any G7 central bank and Britain’s rate of inflation is higher than that of its peers.
A second is that interest rate expectations for the U.K. have changed more dramatically than any other G7 economy. Before the conflict, the Bank was expected to cut its main policy rate this month – sparking a sharper reaction in gilts.
A third is that, Japan aside, no G7 economy depends more on imported gas – the price of which has surged.
Fourthly, investors dislike U.K. politics. The surge in energy prices has raised fears of higher spending – funded by growth-destroying tax increases or more borrowing – to support households. They also fear that May’s local elections, should the governing Labour Party perform poorly, will result in a leadership challenge to Prime Minister Keir Starmer and his possible replacement by a more left-wing rival.
But demanding a premium to hold gilts is not new. It was reinforced to the British public most starkly in recent times when, in September 2022, gilts sold off violently after Liz Truss’ government unveiled a mini-Budget including £45 billion worth of unfunded tax cuts.
Market participants spoke of investors demanding a ‘moron premium’ to hold gilts over bonds of equivalent duration issued by peers.
As I’ve pointed out many times in our debates about Brexit, Britain is a relatively small nation that relies on trade for its economic health and ‘the kindness of strangers’ to shore up its finances. It’s been prone to higher inflation than the continent for generations. In leaving the trading bloc we’ve increased those vulnerabilities.
Add in an energy shock and an anti-climactic regime change in Downing Street and there’s still very little for global bond investors to get excited about.
Greater expectations from gilts
So far, so soggy then for gilts.
However there’s still that silver lining to higher bond yields. Namely higher expected returns.
As we pointed out back in 2022:
Rising bond yields are positive for long-term investors who can ride out the capital losses and eventually take advantage of fatter income payments.
Much of the doom and gloom after the Financial Crisis concerned the fact that low yields meant miserly long-term bond returns. It dragged down the equity risk premium as well.
Now, rising rates and a return to the old normal is leaving that particular threat in the rear-view mirror.
Higher coupons should lower bond volatility. They plump up your safety cushion against equity losses, too.
For sure as our article pointed there was a risk that yields would continue to rise.
Inflation will always be a threat to conventional bonds, too.
But the main point was that investors reeling from nominal losses of 30% or more in their gilt allocations were very unlikely to suffer that again from the 2022 starting point. An unusually extreme situation had unwound.
And sure enough, we haven’t seen a repeat of that carnage. While gilt returns have been the definition of ‘meh’ since then, they’ve not blown up any portfolios.
Rather, here’s how owning that iShares 10-year gilt fund (ticker: IGLT) and reinvesting the coupon has performed since the end of 2022:
Source: Fiscal AI
Okay, nobody is posting rocket ship emojis on the back of a 3.4% total return. But it is positive.
What about long duration index-linked bonds? How have they done since I pondered a potential opportunity in index-linked gilts in summer 2023?
Well here’s the total return of IGLT’s index-linked sister fund from iShares (ticker: INXG):
Source: Fiscal AI
That return is negative, which is disappointing – but it’s not negative by much.
Also the opportunity my article was flagging (early) was the emerging chance to buy a positive-returning index-linked ladder at last.
Still, I can’t deny I thought INXG might bounce back a bit more quickly than this.
Short thrift
On the other hand – and especially in his articles since 2022 – The Accumulator has repeatedly suggested that nervous would-be gilt investors should shorten their bond allocation’s duration.
That is, that they should plump for shorter-term bonds (or bond funds) that are less susceptible to interest rate risk.
So here’s how Amundi’s 0-5 year gilt fund (ticker: GIL5) has done since the 2022 annus horribilis:
Source: Fiscal AI
That’s more like what most people want from their bonds!
If we could guarantee even modest ‘up and to the right’ returns from gilts then we’d all be up for owning them. (Spoiler alert: we can’t guarantee that.)
Long odds
At the other end of the spectrum, those ultra long-term gilts like the cultish Treasury 2061 (ticker: TG61) we looked at last summer did rally, but they’ve more recently spluttered out with the war and inflation fears.
For the record, as I type you can lock-in a yield-to-redemption of 5.3% on TG61.
My friend who I quoted in that 2025 article owns his allocation of ultra-long gilts for tail-risk depression insurance. And where else can you get insurance that pays you a decent income while you wait?
It’s sure to have its moment in the sun some day… isn’t it?
Gilts: complex
What you think this wander through the recent returns from gilts proves perhaps depends on what you thought back in 2022. There’s a bit of something for everyone.
I’d hope though that if you honestly expected the intense bond pain to continue, then you at least now take the point about a one-off reset from negative yields, and also how higher yields are good for future returns.
More generally, let’s filch a graphic from The Accumulator. Here’s a quick reminder for why most investors would want to own some government bonds:
You’ll notice ‘stonking gainz’ is absent from TA’s summary.
Most investors aged over 30 or so are advised to own some bonds (or similar lower-risk stuff such as cash) because going all-in on the likely best-performing asset – equities – may be too risky and volatile.
And now gilt yields are normal again, their role as a potential portfolio stabiliser has been restored, too.
Indeed, turn your eyes from the stock market bull run and gilts arguably look quite attractive. The likes of Vanguard expect 10-year gilt returns of around 5-6% a year over the next decade.
This isn’t a bold prediction. The starting yield (to redemption) of gilts is a great guide to your expected returns. Remember, 10-year gilts are already yielding close to 5%.
Goldilocks gilts
Of course we all learned some lessons from 2022.
I’d still contend that Monevator was relatively cautious about gilt returns for a passive-focussed site in the near-zero years before the crash, as a search of our archives will attest. (This prescient warning by The Accumulator from 2016 about negative-yielding index-linked gilts is a case in point).
However it’s fair to say we took our lumps, too.
Our house view now is that prudent diversification should also consider holdings of cash, gold, and potentially commodities. As well as even more careful thinking about bond duration, and perhaps making use of gilt ladders if pure inflation hedging and/or a sequence of real cashflow returns is all-important to you (such as if you’re in retirement and drawing an income).
It’s also true that if governments eventually try to inflate away their ballooning national debts, then the returns from conventional gilts could yet be very poor in real terms.
On the other hand, perhaps they won’t or can’t. And there’s always index-linked gilts to own, too.
Remember all investment choices involve trade-offs. Nothing is 100% ‘safe’ and risk cannot be created or destroyed – only swapped for other kinds of risk.
In particular, if you believe there’s no downside to holding cash or MMFs instead of, say, intermediate-duration gilts, then The Accumulator has shown that historically it would have cost you via lower returns.
Finally, it’s been ages since we had a prolonged bear market for shares. The notion that you had to make the case for an allocation to fixed income will look very strange in such times, if history is any guide.
I lost money in a linker fund in the Trusscopalypse. My other problem is that “duration” to me means “period of time” and when I am told it means sensitivity to interest rate change I feel all confused
The good news is I have found a solution which is buy individual gifts with the intention of holding to maturity. I know how much I will get back at the end and in the interim, and it’s a pure bonus that I have the option of cashing out early (whether for a profit or a loss or neither)
This does probably rule out TG61 which matures a month or 2 after I turn 100.
@B. Lackdown — Glad you have found a solution that works for you.
However as I have said many times before, buying most individual gilts in the years shortly before 2022 would not have prevented holders from losing money, either in the ‘Trusscopalypse’ or if they held to maturity.
These individual bonds were on negative yields to maturity. That meant they were priced to deliver a negative return. What happened in 2022 was much of that negative future return was ‘pulled forward’ as prices fell, and in turn the yields went positive again.
For example look at Treasury 4.25% 2040:
https://www.hl.co.uk/shares/shares-search-results/t/treasury-4.25-07122040-gilt
Its price went from c. £160 in 2021 to below £90 recently. Ouch!
The primary benefits of holding gilts to maturity is you know exactly what cash flows you’ll get, and that there’s not the reinvestment risk you get with a bond fund (which after all just holds these individual gilts).
You probably know all this, just flagging as you mentioned 2022 as part of the motivation. 🙂
My approach has been to buy individual IL gilts to top up my defined benefit pension covering the next 15 years. Knowing this period is well provided for lets me then invest the rest of my stash as if I was a much younger man with a more distant investment horizon. If only I could get away with behaving 15 years younger in other ways……
It seems to me that holding gilts to maturity may be viewed as less an investment and more the purchase of a contractual cash flow.
I’ve not been able to convince myself to own any long term nominal UK treasuries. A 5.3% nominal yield to redemption on TG61…. Well, the ONS says annual CPIH between 1950 and 1988 was 5.8%. (It fell to 2.6% between 1989 and 2022 – but I can’t help but think that was largely down to a one-off imported disinflation from China.) Given all the incentives for UK governments to be weak on inflation control (see recent history, with cynical exploitation of fiscal drag), I wouldn’t expect much of a real gain from 5.3% nominal over 35 years, and the risk of a really bad inflation outcome and therefore negative real returns seems to me non-negligible.
Meanwhile the real yield to redemption on the 2062 index-linked gilt is around 2%. I’m continually surprised that the nominal yield to redemption that investors demand is *only* 5.3%.
I see the potential value in holding long nominal gilts as Depression insurance. But the risks in the UK seem to me much more skewed to inflation than to deflation. I trust in the capability of the British authorities to generate an inflation if and when they need to!
I agree that intermediate gilts are the best bet for most everyday investors, providing ballast to a portfolio in a stock market crash and delivering a bit of return at the same time, without the volatility of long bonds. True the latter should give you a greater rebalancing bonus in a proper stock market crash scenario, but such things are infrequent and there’s no guarantees they will anyway. (Say if it’s a hyper-inflationary induced crash…)
However the long bond depression insurance thesis remains intriguing to me. I haven’t been able to hold them for long whenever I’ve bought them, unlike my strategically slothful friend. (Seriously, if he invests in a new company it’s literally a meet up to discuss it moment. Despite his status as an active stockpicker some years he doesn’t! 🙂 )
Imagine holding just 5% in TG61 if Iran/AI/whatnot spiralled into a Great Depression scenario with deflation. Just returning to par from today’s prices would be a better than 200% gain. But given the behaviour of long bonds in the ZIRP era when after all stocks were very credible alternatives (versus potentially a Great Depression crash environment) I think it’d be reasonable to assume they might go well above par. Say £120.
Your £50K in a £1m portfolio could become £200K, even as your (say) £600K allocation to stocks slumps to, what, £200K? And if no depression / mega crash between now you get over 5% nominal and probably at least keep £50K in real terms.
But yes, I haven’t been able to commit to it either. And of course that’s just one finessed scenario. (What would the £50K grow to between, say, now and 2050 if in stocks instead etc).
TG61 has a running yield (on a 0.5% coupon) of 2.044% (at today’s mid-spread close).
Going from £24 to £120 (20% above par) in the run up to maturity in a Great Depression or extreme fiscal repression scenario is I suppose possible; but that still gives you just 6% nominal CAGR (over 35 years), including the coupon.
At par it’s 5.5% CAGR nominal if held 35 years to redemption.
Given the probable performance (on a total return, dividend reinvested, basis) of equities in a high liquidity (QE, low inflation and rates) environment (i.e. price stimulative for risk / growth assets); or even in a period of prolonged inflation (and elevated rates): is 5.5% CAGR nominal over three and a half decades worth it for the TG61 alternative?
Where TG61 might be worth it is in the event of a supply side, price push inflation surge (wonder what might cause that at the moment 😉 ) which then forced a substantial rate hike cycle thereby (inter alia) crashing TG61 to a much lower starting base than £24.
The US 10 year hit over 15% yield to maturity in Volcker’s double dip recessions of 1980 and 1981-2. That was the point to accumulate.
Presently DMO auctions are well covered and, for the most part, quite orderly.
The time to buy TF61 would be when it makes you sick with worry because everything looks a lot worse than now inflation and rate wise.
But even the longest night precedes dawn, and, if things were to look that bad, then there’d be plenty of other bargains competing for attention.
I read somewhere, not here, that for bond funds you should choose a duration which is 50% of your investment time horizon, for direct holdings you match the duration to the horizon. I suppose that doesn’t address the equity negative correlation aspect though, should you still believe in it.
Thanks to this wonderful site, I’ve a three bond ladder to help me over the line to SP & DB then I’m constructing a second ladder to boost my pensions for 67 – 72ish. Three down, three to go by the end of the FY. All at positive YTM, which is a nice bonus.
For a decumulator, they’re a god send!
Thank you TI and TA!
I still keep an eye on the shorter-duration alternative to INXG that you’ve covered before: iShares up to 10 years index linked gilt fund.
It shows a return of 12% since mid-2023 inception, so the comparison to INXG is a helpful reminder that duration matters: https://markets.ft.com/data/funds/tearsheet/summary?s=GB00BN091H11:GBX
(And Freetrade recently added it to their list of available funds)
@Paul — Hmm, interesting sounding rule of thumb. But yes, it does seem more related to the timing of cashflows than as portfolio ballast.
For me, I’d ask a diversified passive investor why *not* say a 20% holding in intermediate gilts? If it delivers just 3-4% it’s not going to derail your retirement. But there are certainly scenarios where it makes it possible, or at least improves the timing.
Of course if you’re an active investor then anything goes, and right now the returns don’t look especially attractive for the risk. But that could change on a dime, that’s how bear markets work. 🙂
Each to their own, I’m not the asset allocation guru in this house.
I just wanted to reiterate again that the ‘gilts are toxic’ argument hit its height at the very moment when they stopped being toxic (IMHO) and I don’t really believe many expressing those sentiments were differentiating between bonds of different duration. 😉
@DH: You write:
TG61 has a running yield (on a 0.5% coupon) of 2.044% (at today’s mid-spread close).
Going from £24 to £120 (20% above par) in the run up to maturity in a Great Depression or extreme fiscal repression scenario is I suppose possible; but that still gives you just 6% nominal CAGR (over 35 years), including the coupon.
I think this understates the *timing* of when you’d get your 6% nominal return, doesn’t it?
In the same way that long bonds lost 50%+ in the bond rout of 2022, in the depression insurance scenario you’d be getting a huge chunk of your return very rapidly.
As I showed in my comment above, a 5% holding could (in that entirely arbitrary hypothetical case) swell to match the value of your plunging equities! If that were to happen I doubt you’d be muttering about 5.5% CAGR as you let out a sigh of relief. 😉 And perhaps had the firepower to deploy to invest in something beaten up, which was so lacking in the 1930s…
Of course that’s an arbitrary ‘what if’ scenario but that is how insurance works.
What if a bus hits me? What if a lithium battery catches fire? Etc. 🙂
@tetromino — Oops, posted over you. That’s interesting, yes. I should update that old initial article — I did feel it was an interesting fund from the get-go.
Agree with what has been said in terms of the reasons for being reticent to hold duration. In the resource scarce (or at least more resource competitive), deglobalised world we have and in the context of really poor fiscal health its hard not to feel like it’s now a narrower scenario in which duration as depression insurance pays out as intended via lower bond yields, the horribly pernicious combination of recession combined with bond yields buoyed by inflation and fiscal worries seems (in my mind at least) likely to show up more frequently in the UK for all the well covered reasons, maybe it is just recency bias but duration feels particularly risky these days.
The tax efficient cash management opportunity at the short end of the curve of course remains a no brainer
Very good point on timing / dry powder @TI.
Would an equivalent duration ILG not offer even more upside still though? IIRC (before YieldGimp started charging to use) the clean price of the 2050s and 2060s maturities collapsed from £300 to £400 in the throes of the pandemic to high £50s to low £60s at the lowest point (price wise) since.
“I agree that intermediate gilts are the best bet for most everyday investors”
How about the codger investor – say mid-to-late seventies? Would a level annuity give him some of the advantages of gilts while also giving him risk-pooling and longevity insurance? If both he and his wife die sooner rather than later, wot the hell? Maybe 40% would otherwise have vanished in inheritance tax anyway.
The logic of gilts makes sense to me right up until the point you compare them to cash. If it’s low-risk we’re after then near-zero nominal downside and near-perfect liquidity seem the perfect offset to risky equities. Gilts only get you most of the way there.
Nuances to this argument:
– If you’re a wealthy enough individual to exceed FSCS limits at all practical institutions, or an organisation/charity not covered at all, then gilts are way safer than, say, shoving all your cash in a tiny Icelandic bank offering too-good-to-be-true interest. I think there’s a world of difference being under or over these limits and so a strong argument for gilts being a hugely important instrument for institutions while also being easy to ignore for most individuals even with good diversification sense. This is emphasised most by the pre-2022 negative yields.
– Index-linked gilts certainly have some appeal. But it feels niche.
– Saving cash sadly requires a bit of shopping around and avoiding loyalty penalties. Tedious considering it’s supposed to be the lowest-risk part of the portfolio.
– The depression argument is somewhat persuasive. But I agree with others, for a highly developed economy like the UK, with a very globalised stock market, to suffer a 90% crash seems.. well not exactly implausible, but it would require very different circumstances now than it did in 1929. The more likely scenario is deep recession, a panicky anti-bubble, and dividend cuts for 5-10 years, and what you most want in that scenario is cash to spend so you’re not forced to sell under-priced equities (even better cash spare to buy-up bargains). Gilts may well be up but everyone is only riding out a temporary situation so it’s difficult to imagine making a killing even on the long-dated ones. Plus, if it’s a very difficult situation are you confident of actually wanting to sell them or do you sell them only to cover immediate cash needs until they come back down anyway? The other scenario is the total-doom one. 1940s Germany, global nuclear war. And then gilts likely aren’t doing anything for you, and cash-in-the-bank is arguably a bit safer as long as you can react quickly and buy up all the tins of beans, or N95 masks and toilet-roll, in the supermarket before the next guy. (Beyond cash for low-risk there’s of course physical gold, prepper gear, etc, but these are unproductive assets so I think need a very different, more philosophical assessment).
@ B. Lackdown #1 “My other problem is that “duration” to me means “period of time” and when I am told it means sensitivity to interest rate change I feel all confused”
I sympathise with your confusion, it is because there are 2 types of duration:
Macaulay Duration, which is the period of time (measured in years) for the bonds discounted cash flow to repay its price. (Which is what I think you are thinking of).
Then there is the Modified Duration, which is a bond’s sensitivity to changes in interest rates. This is only an approximation, but is OK for small movements in interest rates, but becomes less accurate for larger ones.
Here is a web page with a bit more information on them:
https://bondscanner.com/blog/macaulay-duration-vs-modified-duration
There is a formula linking them directly. Sometimes you have to work out which type of duration people are talking about from the context they are using the word ‘duration’ in, which doesn’t help.
@Dearieme see your point. Also fits a floor and upside approach. For longevity protection wouldn’t you want rpi scaling ?
@Paul(18): re RPI scaling. For this codger and his future widow we have inflation protection on our State Retirement Pensions and some good but incomplete protection on our occupational DB pensions. So perhaps, maybe, could be, that we could dispense with it on an annuity. In other words we could use the annuity for diversification as our only fixed interest investment. On the other hand an income that declines in real terms doesn’t look a wonderful idea at an age where expenditures must be expected to increase as we pay for more help with tasks we used to do ourselves.
Lastly, I assume an annuity is better protected from any future “cognitive decline” (such as pleasant euphemism) than is any self-managed investment habit such as, for example, gilt ladders.
This is all thinking out loud and soliciting insights from others, so thanks for your point.
@dearieme (#15 and #19)
At the moment, a joint annuity (100% beneficiary) taken at 75yo, has a payout rate of 8.2% if level and 6.0% is RPI protected. Assuming constant inflation of 4%, the instantaneous income will crossover after 8 years. Four years of 10% inflation or 16 years of 2% inflation, would also see the instantaneous income from the RPI annuity exceed that of the level. Of course, the realised outcome is only known later!
If you buy enough income for current purposes using the RPI annuity, then it is likely remain reasonably sufficient with time, whereas that will almost certainly not be the case with the level annuity. So, from the point of view of a once only purchase, RPI protection may be better.
Finally, using an annuity as a substitute for fixed income does make sense in that it reduces the volatility of overall income (assuming portfolio withdrawals are volatile). FWIW, once all of our flooring is in place, we will reduce fixed income holdings (inc. cash) in our portfolio to 20%, or possibly less, since it will only then be used for ad-hoc income.
@Alan S,
Re #20
If you have them to hand, could you possibly add how many years it would take for the cumulative income from the RPI linked annuity to exceed the flat one.
FWIW, I find that a more useful stat, especially in the scenario @dearieme describes. I say this because he want to buy flat but at slightly too high a level initially – if you get my drift.
That is, survivor at 100% and RPI linked is possibly too much IMV. And flat at say 120% of initial income need with 100% survivor might be worth exploring.
Cats, skins, etc, etc
OOI, are you able/happy to say what you plan to do with any excess fixed income you might have once all your flooring is in place?
@Chris – That average inflation number 1950 to 1988 doesn’t lead to the conclusion that the UK is a high-inflation country bar a helping hand from China.
For most of that period, UK inflation rate would look quite normal to our contemporary eyes. But the average is jacked up by a couple of shocks. Mostly due to the 1970s. Annual average inflation peaked at 23% in 1975 and was still in double digits in 1981.
1951-1952 – another double digit price shock – associated with reconstruction in Europe AIUI.
UK gilt portfolio is more exposed to index-linked bonds than comparable government stocks – so we definitely have an incentive to keep inflation under control. Governments lose elections over the cost of living, too. It’s not in anyone’s interest to let it get out of hand.
That said, I think you’re right that inflation is the more likely threat. We have an open economy with a tendency to import inflation. It’s our economic reality rather than government conspiracy.
I’d always hold some nominal bonds though to help cope with a long demand slump. We’ve suffered plenty of those too.
@Chris, @TA
ONS (or anybody else’s) CPIH data from before 2006 is IMV of questionable use/value – see e.g. https://simplelivingsomerset.wordpress.com/2026/01/19/the-proposed-2030-change-to-the-retail-price-index-rpi-and-what-it-might-actually-mean-for-folks-with-a-db-pension/ and in particular the section called: What is CPIH?
@Al Cam (#21)
For cumulative income about, 23, 15, and 7 years for inflation of 2, 4, and 10%, respectively. As you well know, inflation is ‘lumpy’ and not smooth and such comparisons are highly dependent on ‘sequence of inflation’.
Your second question is probably a bit OT for this article, but is an interesting one.
@TA (#22)
Since the UK came off the gold standard (early 1930s), annualised inflation has run at about 4.5% (BoE calculator). Start and end points of such calculations have a significant effect on the outcome.
As well as the oil crisis, another ‘shock’ in the early 70s was the end of Bretton Woods (although currency crises had already been problematic in the late 50s and 60s).
One of the reasons ILGs were introduced was to provide confidence in the bond markets that the UK wouldn’t inflate debt way – see an interesting history Oliver, Michael J. and Rutterford, Janette (2020). ‘The capital market is dead’: The difficult birth of index-linked gilts in the UK
@Alan S (#24):
Thanks.
Yup, SoI is rarely explored.
FWIW, in the cases you have given 4% seems a fair bet. My own view was (prior to jumping ship) and still is 3.5%PA, but …
I asked my 2nd Q as I think it is a hard nut to crack – well at least I have found it very hard!
@Alan – Agreed. The start and end point really do matter. Owning index-linked gilts certainly gives me confidence. TG61 is a bit rich for my blood. Then again, I’ll regret it if Great Depression II is around the corner 🙂
By Great Depression we mean a big recession plus deflation, right?
Entering the last Great Depression wasn’t the UK on the gold standard, and so couldn’t inflate itself out of it until it came off? I can’t see how we could have a deflation in the UK today with our own free-floating currency. A deflation would be calamitous for a government with lots of debt, and the UK government has the power to create inflation if it wants to. So, the UK government has the incentive and the power to end a deflation.
There was lots of talk in economist circles of the potential for another Great Depression in 2008/09. The authorities deployed unprecedented firepower to stop it from happening. They could do so again, and would have even more incentive to do so given the greater debt burden they have today. What am I missing?
The alternative to a Great Depression – stagflation – isn’t great either, but my point is only that it wouldn’t be good news for TG61!
@Chris – The Japanese had two decades of deflation and stock market decline despite a free-floating currency.
It wasn’t the gold standard that was the problem it was adopting the wrong policy response.
The UK could have come off the gold standard at any time. That happened immediately upon the outbreak of World War One.
We eventually did leave the gold standard during the Great Depression in 1931 – once our political leadership realised that dropping interest rates was the correct prescription.
Re: 2008/09 – Are we talking about the chances of a Great Depression or whether it’s worth holding long-term bonds?
You’d have been a very happy bond holder as interest rates dropped to near zero during the GFC.
Same again during Dotcom Bust and Covid (though not in 2022 obviously).
Re: Authorities firing the big bazooka. They did do the right thing, I agree. There’s no guarantee a global response will be organised next time, though.
I mean have you seen who’s in charge of America right now?
It’s not just him. International collaboration has taken several steps backward since 2008.
Hence some hold a proportion of TG61 as a hedge against demand falling off a cliff. Or you could hold a gilts / global govie fund, which would be less sickeningly volatile.
I’m not an advocate for TG61. I’m an advocate for diversification.
@TA – yeah, good points. I guess you don’t need deflation and Great Depression 2 to actually materialise for conditions to be good for long nominal bonds, as we saw in 2008/09. That said, the authorities’ response to the financial crisis – zero interest rates and QE – was also great for equities in the years following, right? So while it was no doubt nice to have TG61 at the height of the storm, wouldn’t your money still have been better invested over the longer term in equities?
My difficulty is imagining a scenario in which demand collapses and the response isn’t a successful reinflation. But I guess that doesn’t mean it can’t happen!
@Chris – Cheers for the friendly discussion. The response following the GFC did work out just fine for equities in the end, you’re right.
But in the middle of that crisis many people sold out of the market, or just couldn’t bring themselves to buy back in.
If you had a cool head, then you sold your long bonds as they spiked and used the proceeds to buy equities on sale.
If you were decumulating then you could sell your bonds to pay your bills and conserve your equities.
I think I’m right in saying, there were years up to 2022 when bond performance over X years approached or even exceeded equities. (I’d need to go back and double-check). Not bad for a diversifier.
Re: failures of the imagination – which we’re all prone to – I think it’s worth considering Japan. The market was down 78% from its peak after 20 years:
https://monevator.com/japanese-stock-market-crash/
There’s no guarantee that something like that, or the Great Depression, couldn’t happen on a global scale.
Essentially, we just have to imagine a series of rolling crises which the authorities fail to contain for whatever reason. Either because they don’t know how to, they don’t have the firepower, or they screw it up.
The problems needn’t be catastrophic. It could be political or regulatory in nature. (This happened to the French stock market. It was a disaster for 40 years even while the French did very nicely for themselves.)
Ultimately, spreading your bets is the best antidote we have for very human failings like recency bias and all the other biases we’re at home to 🙂
I’ve just remembered, TI knows someone who bought into the TG61 strategy quoted him here: https://monevator.com/the-mysterious-case-of-treasury-2061/
It’s interesting. The guy knows his stuff. Like I say, it’s too much for me. I still hold some nominals but this is too much duration for my blood.
One last thing! And I appreciate I’m outstaying my welcome here 🙂 There’s a paper out there, by Ed McQuarrie I think. He argues that there’s no intrinsic reason why equities should outperform bonds. His theory is that different economic regimes can favour bonds over equities for extended periods. Mostly he calls upon 19th Century data to make his point but not exclusively. The modern manifestation of this is Emerging Market bonds beating Emerging Market equities over decades.
Among the currently cheapest asset classes, long and intermediate durations conventional government bonds (especially Treasuries) and ILGs and TIPS are the most negatively correlated to equities.
Recent data shows the traditional negative stock to bond correlation has returned (or turned less positive in the curve “belly” / intermediate durations) as inflation moderates and growth concerns shift (unlike the positive correlations of 2022–2024, driven by inflation shocks). This may make high quality fixed income a diversifier.
Value/EM equities and credit remain positively correlated to global equities (though value often has lower beta than growth).
Gold/commodities show low correlations overall, but are not the primary cheapest asset class anymore (at this moment). On the other hand, aside from now and 2022, commodities have underperformed for one hell of long time. That’s a bullish mean reversion signal, even allowing for the recent strength.
So, it’s worthy of further research to explore whether, or not, government bonds are presently the best easily available equity hedge (with gold as the uncertainty hedge, and commodities as the stagflation / inflation hedge)?