With my clubbing days long behind me – unless incipient membership of Saga counts – I get my weekend kicks these days by studying the yields on long-term gilts (UK government bonds).
And for the past couple of weeks I’ve been entranced by a low-coupon gilt maturing in 2061.
This bond is known to wonks as ‘UKT 0.5 2061’ – or just ‘TG61’ – on account of it being:
- a UK government bond/gilt (‘UKT’)
- with a 0.5% coupon
- that matures in 2061
Now, those numbers may not seem exciting to you.
But for the past couple of years they’ve made TG61 the most popular bond since Sean Connery.
Bond jargon explainer: if you’re confused (or you’re about to be confused) by the terms in this article, please refer to our bond lingo lexicon. I won’t make this post even longer by explaining what duration is for the umpteenth time. Our guide makes everything clear.
The appeal of TG61 isn’t completely new to me. I even owned some for a short while last year.
But every time I look at it I’m flabbergasted anew.
One of these bonds is not like the others
What’s so weird about TG61?
Mostly that its yield-to-maturity is meaningfully lower than the similarly long duration gilts sitting either side of it on the curve.
Check out this industrial-strength bond data from Tradeweb:
Source: Tradeweb
Okay, that’s a lot of numbers. But the key and wacky thing to note is the yield column.
Compared to the bonds maturing either side of it, TG61 sports a yield that’s nearly 40 basis points (i.e. 0.4%) lower than its brethren.
So is there something special happening in the year 2061?
Or does TG61 come with a special maturity bonus, like those promotional saving accounts that nab a spot in the Best Buy tables with a last-minute kicker?
No – or at least not exactly.
The lowdown on low coupons
You see, there is something sort of special – though hardly unique – about TG61. Which is that in common with a few others issued in the near-zero interest rate era, it boasts a very low coupon rate.
This low coupon means that while the yield you can expect from TG61 – if you hold to maturity – is 5% (or 4.985% to be precise) only a small proportion of your return comes from income.
Mostly you’ll get a capital gain.
- You can see TG61 currently costs just over £25. But it will mature in 2061 with a face value of £100.
- The uplift from £25 to £100 – known as the ‘pull to par’ – delivers the bulk of its 5% yield.
That pull to par works out as a 300% capital gain. The 0.5% coupon is just the cherry on top.
In fact for private investors that little income cherry is more sour than sweet. That’s because as we’ve previously covered, gilt income is taxed but capital gains on gilts are not.
Which means that wealthy folk facing a lot of taxable interest on savings held outside of ISAs and SIPPs can buy TG61 instead, and look forward to a much higher realised return than the equivalent from cash.
Betting on interest rates with Treasury 2061
Well, I say look forward to. But even with my healthy diet and a fairly active lifestyle, let’s just say me seeing 2061 is a stretch goal.
Indeed holding TG61 to maturity might be ambitious for many of the richer folk who own it.
That matters, because TG61’s low coupon and distant maturity date make it a very long duration bond indeed.
Which in turn makes its price very volatile – because it’s very vulnerable to shifting expectations for interest rates and inflation between now and 2061.
- Just a 1% move in interest rates could see the price of TG61 move by c.30%!
On the other hand, if you can stomach the volatility then this is another reason why you might own TG61.
As I say, thanks to its low coupon and long duration, TG61 is especially responsive to changing interest rates.
Hence if you want to bet on lower rates, you get a lot of bang for your buck here.
An L-shaped graph
None of this is news. Savvy active investors have been hunting for opportunities in long-term gilts since the crash of 2022.
The only snag is that interest rates have stayed higher for longer than many expected.
So even if you grabbed your TG61 after the price falls from the post-Covid bond rout, you’ve had to be pretty nimble with the buy/sell button to bank a profit:
Source: Hargreaves Lansdown
Zoom in on that grim flatlining since 2023 and it’s a story of small rallies followed by lower lows.
Anyone buying and holding TG61 hasn’t got much to show for it yet.
So who would buy a bond like Treasury 61?
Perhaps you’re wondering who would own such a racy gilt, even with its tax advantages?
I mean, they haven’t outlawed bungee jumping and downhill skiing. There are plenty of other ways to get your thrills.
On which note: when I mentioned the long-term, low-coupon gilt trade to my co-blogger The Accumulator, he almost had a SWR-boosting cardiac event at the thought of buying a gilt that doesn’t mature for 36 years.
(He later calmed down with reflection and a hot cocoa).
However kicking things about in text chat, Monevator contributor Finumus pointed me to a recent [paywalled] Bloomberg article claiming the TG61 trade is super-popular in the City.
It’s hip in the Square
Describing the ‘most talked about bond’ as a ‘losing bet’, Bloomberg noted that:
As far back as 2022, a UK bond maturing in 2061 was one of the most popular plays, with City bankers buying them for their own personal accounts and brokers reporting a surge in trading volumes from wealthy clients.
Instead, they’re turning out to be a losing bet. The notes have plunged, wiping out more than half their value since 2022, in a selloff across longer-dated notes that’s been fueled by concerns over government spending. At a time when “buying the dip” is paying off for stock traders, the UK’s 2061s stand as a reminder that it can also be a treacherous game.
“People are still holding onto the position hoping that it will work,” said Megum Muhic, an interest rate strategist at RBC Capital Markets, calling it “the most talked about bond” in the City.
“It’s quite strange. It’s almost turned into a religion or something.”
I knew TG61 had fans. But I didn’t appreciate it was the new lap-dancing for London’s traders and bankers.
A cheap insurance policy
As it happens, I know one of these supposed cultists. It’s the same chap I’ve mentioned before as a recent-ish convert to the long-term gilt game.
My friend is also a Mogul-level Monevator member. So he kindly agreed to share his motivations, as follows:
Let’s start with some caveats.
For my sins, I’m one of those naughty ‘active investors’ that The Investor occasionally speaks of – the sort who owns individual stocks, some of which are obscure, illiquid, and occasionally interesting for the wrong reasons.
So I would say I’ve got a higher-than-average tolerance for volatility and esoterica in my portfolio. That’s important, because the very long-dated, low-coupon gilts I’ve been buying are definitely not for everyone.
As 2022 reminded investors rather forcefully, these instruments can be stomach-churningly volatile. You might wait decades for them to return to par – or even get close to it.
Passive purists, you may want to scroll down a bit (or at least look away politely) for the next few paragraphs.
I began building a position in these bonds in 2023. Now aged in my mid-30s, it felt like time to ease out of the 100% equity allocation I’ve held since my teenage years and start introducing some ballast into the portfolio as I get closer to potentially drawing it down.
Happily, gilts were having a moment – or rather, a markdown. After a generation of yields being miserly, suddenly we had discounts that would make TK Maxx blush.
Now long-dated gilts make up about 7% of my portfolio. I plan to keep adding opportunistically, for as long as yields look attractive to me.
Take that TG61 gilt maturing in 2061: based on Tradeweb data, it’s offering around 5% yield to maturity today.
Inflation could do anything between now and then, but a 5% government-backed return strikes me as a reasonable deal – especially since, all being well, I would be in my early 70s when it matures.
I’m willing to hold it for that long if prices and yields stay at these levels.
So I can’t claim this is a clever short-term trade, or that I’ve chosen to do it as part of an elaborate tax wheeze. It’s a basket of long-term holdings that nudges my portfolio closer to something suitable for eventual drawdown. So far, not so naughty.
But I did buy these gilts with one eye on the ‘option’ they provide.
Just as these long bonds got crushed when rates surged, the opposite could be true if rates fall. To me, it’s not outside the realms of possibility that – even within the next five to ten years – central banks could dust off the same playbook that ‘saved’ the global economy (and markets) during the last two major crises.
A return to quantitative easing might seem far-fetched today. Inflation still feels like an uninvited guest who won’t leave, and geopolitical tensions are bubbling away.
But in my experience, it’s always hard to see past the immediate mess – especially when markets have just taken a beating.
If that happens, these long gilts could soar – just when the rest of my (still equity-heavy) portfolio might be flagging.
In the meantime, I’m happy to have this option in my back pocket while holding onto my bonds, and if nothing else I’ll achieve the long-term yield on offer.
But I can’t help but feel that UK gilts will have their day again – at least at some point in the next 30-odd years. And I can’t shake the sense that the market will take these bonds off my hands in a time of crisis before then.
Who knows? With a bit of luck, I’ll be back here in 2061 to tell you how it all panned out.
Well there you have it, folks. They walk among us!
(Don’t tell The Accumulator…)
Won’t anybody think of the kinks?
My friend is unusual in that he’s buying a range of long-dated gilts. Also, since he’s mostly using tax shelters he’s not super-wedded to the tax advantages.
For most people though, I think you’d only buy TG61 rather than the higher-coupon gilts that flank it if your holding is subject to tax.
After all, you’re getting a much lower yield with TG61. That difference will really add up over the decades.
To illustrate this, Finumus bunged me a yield curve graph that shows what an outlier TG61 is:
As is his wont as a hard-charging captain of finance, Finumus hasn’t labelled the X-axis.
But what we’re looking at is how yields rise as you go out over the decades – before violently glitching down then spiking up again on the right-hand side of the graph.
That ‘woah’ moment? That’s the yield to redemption of Treasury 2061.
Remember my table at the start of this piece? We saw similar long-dated gilts offered yields of almost 5.4%.
The 5% on TG61 looks a very poor deal by comparison.
However you must calculate the after-tax yield – especially for higher or additional-rate tax payers – to truly grok the appeal of the Treasury 2061 gilt.
You can easily get this data from a service called YieldGimp:
Source: YieldGimp
Again, lots of numbers. But the columns to note are the ‘net redemption yield’ for a 40% taxpayer and the ‘equivalent grossed up yield’.
- The former shows us that a higher-rate taxpayer being taxed on their gilt income can expect a roughly 1% higher redemption yield from owning TG61 instead of TR60 or TR63.
- The latter calculates that as of today, TG61’s expected return is equivalent to a taxable cash account paying 7.49%.
In this light it’s pretty obvious why those cash-hoarding City boys love it.
Short(er) kings
Obvious… but I don’t think it’s quite a slam dunk though.
There are gilts maturing in 20 to 25 years’ time that offer similar redemption yields to TG61, without you having to go full Bryan Johnson to live long enough to see it mature.
Of course, the very high duration of TG61 – that also makes it such a great play on interest rate cuts – is providing some extra boost to its appeal.
Or maybe there’s some macho thing in the Square Mile about having the cojones to own such a volatile long-dated bond…
…though in that case we need to talk about Treasury 2073!
Or maybe not. The tax-adjusted yield on TR73 is much lower for private investors than on TG61 and others. It’s one for institutions where tax breaks aren’t a factor.
Treasury 2061: another market oddity
Talking of the institutions, it’s a bit of a mystery to me why the TG61 yield anomaly persists.
Shouldn’t the yield differentials be arbitraged away by the deep and liquid gilt market?
I guess the first thing to note is that the market isn’t quite as ‘deep and liquid’ as a bond tourist like me might imagine.
There’s only £26.5bn in TG61, for example, according to YieldGimp.
A big number for sure. But, you know, only 50,000 or so half-a-milly City nest eggs.
More seriously, doesn’t it seem odd that a hedge fund can’t step in and arb the differentials away?
Finumus muttered something about “weird basis risks” when I joked with him that we should set up a vehicle to do it ourselves.
What he means, I think, is that such a fund would use futures contracts and lots of leverage to actually express your view that the yield to maturity on TG61 ought to converge to be roughly the same as its compadres. And these structures would be imperfect enough – especially given the very long timeframes – to make the trade unviable.
Still, it’s interesting to think about, since in my opinion the lower yield on TG61 is really odd.
I’m no expert, but it’s not even obvious to me that the secondary very high duration as a means to get more interest rate risk oomph argument adds up.
Usually in investing you’d expect a higher expected return to compensate you for extra risk.
So it’s all about the income tax break I’d say.
A long and winding road
I do like my friend’s insurance policy angle for owning long-dated gilts though. And I suppose that is much the same as chasing Treasury 2061’s high duration.
Personally, I’ve already tried to tuck some very long gilts away for the same potential crash-protection properties that my pal alludes to.
But, as is my wont, I sold them for a small gain soon after.
Perhaps – unlike my friend, who despite being an investing fanatic can go a year between making trades – I’m just not cut out to own a gilt that matures around the same time I’ll be looking forward to a telegram from King George!
Brilliant article! I’ve been also building a position in TG61 for years on dips due to its tax-advantages, that rates will eventually come down in my investing lifetime and employing a portfolio roughly based on the Permanent Portfolio/ Golden Butterfly and this fulfils the long-bond part of it.
There are a couple of M&G Bond Vigilante posts on this which make some interesting additional points:
– Institutional investors also get the benefit of lower cash outlay for duration vs other bonds (seems a weak argument though)
– The DMO could capture the lower yield by issuing new low coupon gilts but then they have the full face value in debt figures (issue £10bn face but only raise £2.5bn cash); the deficit would look lower though as lower interest cost although the lower yield likely disappears at primary auction
One point the Bloomberg article doesn’t mention is that gilts are carved out from compliance policies so it’s often one of the only things people in finance can take a single security view on.
https://bondvigilantes.com/blog/2024/04/we-need-to-talk-about-the-61s/
https://bondvigilantes.com/blog/2025/04/the-great-british-borrow-off-baking-efficiency-into-gilt-sales/
I’m still too scard of gov debt..here and abroad..
I won’t be here in 2061 and by them fiat will be long gone it with the digital currency . How
the exchange rate over
from Fiat to digital will
work might be a loosing
game for anyone holding
cash products of any type..
Excellent insights and fine writing as always. With thanks to @TI.
Ok. Now the hard questions:
– Why use nominals? Conventional gilts held to maturity only guarantee you par value and a return on and of nominal capital, but not a return of purchasing power.
– Notwithstanding the RPI to CPIH switch in 2030, wouldn’t ILG TG51 0.125% be a safer bet here? It has ten years less to maturity than TG61, but, unlike TG61, it also guarantees an inflation uplift on a 2.27% p.a. real yield, which is equivalent to 4% p.a. plus inflation for a 45% AR taxpayer.
– Isn’t moderately high inflation part of the unspoken HMT/BoE/DMO strategy now, given the deficit position, and no likelihood of meaningful future UK productivity growth? On the rosy OBR 1.5% annualised main case scenario of real increases in output per hour, net UK government debt still gets to 270% of GDP in 2074, which is worse than Japan now. But at just 0.5% p.a. for productivity growth that burden rockets in 2074 right up to 642% of GDP. Surely that won’t be allowed to happen, and inflation will do the heavy lifting of reducing the rate of increase in the size of the national debt relative to the nominal size of the economy, bearing in mind that running a balanced budget seems politically, if not societally, impossible. Path of least resistance.
– If the unofficial inflation cap (above which base rates eventually get hiked, even if recessionary) in effect goes to 4% p.a. sustained (from the official 2% CPI target now) then the uplift for RPI, and soon CPIH, from ILGs will given them the upper hand over conventional gilts, provided of course that they’re always held to maturity.
– ILGs gave potentially greater volatility than conventional gilts on the secondary market which could work in a buyer’s using a double down ‘DCA’ strategy if there’s a future rate shock in an upward direction. For example, the Yield Gimp app suggests that, in the event of a 5% increase in real rates, then TG51 ILG falls in price from about £58 today to around £17. Now, that’s an extreme rate shock for sure (the largest one which Yield Gimp models), but it’d probably map to something like conventional gilt yields and sustained inflation in the mid-10 percent range. That’s by no means without precedent. In 1979 base rates were hiked to 17%. Who is to say that it couldn’t happen again, especially given the generation long remaining durations of these long dated instruments?
@DH – I’m with you – inflation is the greater danger for me so linkers form the backbone of my defensive portfolio.
That said, there’s still a case for an allocation to nominals, which is only strengthened once you’re out of tax shelters. TI’s mystery contributor does say they’re only holding 7% of their portfolio in long gilts.
Incidentally, I also thought that section of the article was particularly well written and cogently argued 🙂
Couple of basic CGT questions re gilts.
I understand gilts not liable for CGT.
1) If you sell gilts of value greater than £50,000, do you have to declare that to HMRC due to it being over the £50,000 CGT disclosure limit, or because gilts exempt of CGT do you not have to declare it?
2) Does a gilt maturing count as a disposal/sale?
@Index #6
1) No, as the £50k only relates to chargeable disposals which gilt sales are not. See TMA 8C and TCGA 115.
2) Yes, any debt maturity is a disposal for CGT purposes but irrelevant for gilts in any case. See TCGA 22.
@platformer #7
Thank you very much.
And is the CGT situation the same for index-linked gilts?
Tax rules can be changed at any time. What are the odds of that CGT exemption still being in place in 2061?
@TI. I’m not sure there is much to arb away. Yield to maturity is a simple metric of value but it hides as much as it shows. More accurate metrics can get quite technical. I don’t think we want to discuss bond true asset swap spreads. In simple terms, though, stop looking at the bond in maturity terms and consider it in risk terms i.e. think about equivalent duration amounts of each bond. The market cares far more about duration risk than maturity.
1. Rather than plotting yield vs maturity, plot yield vs duration. The duration of the 2061 is more comparable to bonds such as the 2071 and 2073 (in fact it’s a bit longer). On a yield vs. duration chart, the richness of the 2061 vanishes.
2. Imagine holding the same amount of duration risk of the 2060 or 2061 Gilts. Say we bought £1mm of the 2061, that costs around £250k. To buy the same amount of duration in the 2060 costs around £420k. That additional £170k has to be funded and you will pay interest on that borrowing. So the yield of the 2060 needs to be higher to offset that. How much depends on your time horizon.
Basically, ignore maturity and think about risk and funding.
@ Index. Yes, same for ILG’s.
@ Andrew. 70:30? This last changed with Lawson, it could definitely change again. But given how much debt His Majesty’s Government has to sell in the years ahead – in a climate where the big domestic buyers (DB schemes) are winding down – it would be ‘brave’.
@ TI. I think you’ve nailed it with ‘mysterious’. Your friend buying long range gilts in tax shelters should definitely be buying the surrounding gilts with the higher yields. They’ll perform exactly the same in the scenario’s outlined (and all others), but better as they have a higher yield. About 0.4% a year better, every single year, as your helpful table shows. The only upside to the TG61 is the current tax treatment from its low coupon, which isn’t an upside for him if he’s in a tax shelter anyway.
For most people, I agree with DH – just buy the linker. A guaranteed real return rather than a maybe, with the same tax treatment.
Even in the esoteric case that you’re wedded to nominal gilts and want a long-dated one with a low coupon for the current tax treatment, it’s mysterious to me why you’d choose the TG61. e.g. the TG46 yields about 0.35% more with a 0.875 coupon. Or the TG50 yields about 0.30% more with a 0.625% coupon (versus the 0.50% coupon of the TG61).
Crazy theory: I think ‘numbers porn’ could be a factor if you’re not doing this for a living. There’s something cool about buying something at such a low number (25) which has a government guarantee that you’ll be able to sell it at a high number (100). Hang the fact that you can do better elsewhere in the same market however you look at it, surely that’s quadrupling your money!?
P.S. @ZX posted as I was writing. Good point!
@Index #7 Yes. The clue is in the last word of your question! 🙂
@ZX #10 The first M&G link is plotting yield against duration and still shows lower yields? Your second point M&G also makes (and what I obviously wrongly said seemed a weak argument)
@platformer. Taking the 2060 as a comparable, the spread between the 2060 and 2061 was at -50bp at the start of 2025. In the second week of January that spread moved to -67bp. It then popped straight back up to -50bp before moving in early April back to -71bp in another rapid one week period. Again it popped back up to and now the current spread is at -39bp.
This bond has a number of positives. For lifers it has very long duration. For hedge funds, it has a low price (and high convexity). For retail it has tax benefits given the low coupon. You’d expect it to trade expensive to the curve.
I’m pushing back against the idea the market is missing some sort of arb. It’s had two moments this year (Jan and April) where it got far more expensive. Both times the market quickly moved it back to a cheaper, but still somewhat expensive, value.
Thanks TI, interesting as always, and always a good sign when an article prompts helpful comments from experts like ZX and platformer.
ZX’s point about needing to look beyond maturity comes naturally to me now (even as a relative novice) if only because it reminds me of cashflow and risk analysis of construction projects from back in my uni days. Which are a long time ago but still closer than 2061…
The government is struggling to pay off bonds expiring today, never mind in 35 years’ time. You can only refinance for so long; in the end only cash will do.
Hard to imagine they’ll be able to meet their contractual obligations this far into the future other than via considerable currency devaluation. You’ll need a lot more than £100 in 2061 to buy what £25 gets you today. A 0.5% coupon while you wait isn’t going to plug the differential.
YieldGimp.com on a desktop allows you to view the yield curve plotted against Macaulay Duration (measured in years – but a measure of interest rate risk). This helps see the genuine “richness” of the low coupon gilts.
The analysis in the article is completely flawed because it doesn’t take into account that higher coupons effectively reduce the term of the gilt.
If you wanted to check if TG61 is overvalued or not (on a gross basis) you would need to look at the cashflows from TG61 and then discount those cashflows using the nominal spot rates from the yield curve. Spot rates are the theoretical yield for a zero coupon gilt. The spot rates for discounting coupons will be the yields for the term from now to payment date of the coupon. And the spot rate for the maturity proceeds will be the yield for the period from now to maturity.
You would then add up the discounted values of those cashflows and compare that with the current price. Do that for every gilt and compare that theoretical yield curve price against the actual price. And then if the calculated yield curve theoretical price for the low/high coupon gilts was consistently above/below the actual price, you could then tentatively conclude that the price was affected by private investors preferring capital gains. One practical issue is that the spot yields are at half year terms so some form of interpolation is required for other terms but that shouldn’t introduce too much error.
I actually did that a while back for all the index linked gilts, as I read somewhere that the DMO claimed that they only published a GROSS yield curve because they said pricing wasn’t detectably affected by the tax status of investors in those gilts, so presumably pension funds that don’t have preference for capital gain over income determine the pricing, and private investors using a taxed account who may prefer capital gains don’t affect the price. Unfortunately I can’t find where I read that. My conclusion from my own analysis was inconclusive. I got fairly (but not very) close to the actual price in every case (within about 2%) and there certainly wasn’t any clear pattern of the lower coupon index linked gilts having a higher price (relative to the theoretical price) than the higher coupon gilts.
Found the DMO reference to tax effects on pricing incorporated into the official yield curve. Scroll down to ‘tax effects’. It’s quite an old document (2000) so I’m assuming nothing has changed recently
https://www.dmo.gov.uk/media/nozauetl/yldcrv.pdf
Thanks for this very interesting article. I had seen people pushing TG61 on FT comment section a while back but didn’t quite get the fixation with it back then.
On the topic of outlier gilts, does anybody happen to know why TR26 seems so cheap?
See it on
– https://giltsyield.com/bond/inflation/
or
– https://www.dividenddata.co.uk/index-linked-gilts-prices-yields.py
It’s an outlier compared with gilts maturing in subsequent years: real yield is might higher, and implied annual RPI growth of 2.15% seems low.
I haven’t quite figured out if it’s truly a bargain or I’m missing something.
I know that gilts on the short end often behave weirdly (especially with the inverted yield curve), and that linkers’s indexation lags the RPI series by a few months (3 months for this particular one.) I also know that inflation is cyclical — could it be the inflation is expected to drop for the next months, even though the annual figure is high?
Thanks for all the comments, which as has been noted in many cases have happily come from experts in the area.
As I say in the piece I’m a government bond market tourist, and definitely approaching all this with a beginner’s mindset.
To that end the piece wasn’t meant to be a definitive ‘look at this market glitch’ more than ‘this looks like a glitch, what’s going on?’ and I did tentatively explore some options.
I hear the points about duration versus maturity. As I understand it, essentially if grouped/graphed in some other way (by duration, say) then TG61 would sit closer to other bonds of a similar YTM? With perhaps a bit of leeway for tax effects.
Also hear you @snowman, though given my premise reiterated above I would gently push back against ‘completely flawed’… 😉 Funnily enough I came to my own clumsy realisation of something like the same thing this morning — I woke thinking about the coupon reinvestment, and thinking that there is more uncertainty re: TG61 because the price you’ll pay to reinvest the small coupon is so variable, as well as the coupons themselves being so small, versus a bond trading closer to par and with a chunkier coupon? Which isn’t exactly what you’re saying I know but is a close cousin to it.
Still, it’s a bit interesting to me that a lot of people who clearly know what they’re talking about are saying very slightly different things…albeit around the same areas?
Hence I don’t know that I think there’s *nothing* to see here. Even if the story turns out to be ‘aren’t bonds weird and hard to parse?’ more than ‘the market is showing some kind of exploitable / unexploitable anomaly’…
To reiterate, I’m quite prepared to believe there’s no market/exploitable anomaly here. It was notable to me that there seems/seemed to be, rather than that I thought I’d really spotted something that hundreds of billions hadn’t. 😉
Still, to my simplistic way of seeing things, if I put T60/61/63 — all backed by the same UK Treasury and State and theoretically fungible — in three black boxes, and so ignore the volatility and risk, and open them in 2063 I’m probably going to see quite different returns, beyond the fewer/extra year of return, going on the YTM. That does strike me as at least a little odd and notable, even if the various other factors everyone has raised means it’s not. 🙂
RE: numbers/wow factors, yes I can quite imagine the media/public appeal of TG61 is partly in that nailed-on dramatic pull to par, even if there is nothing mathematically interesting going on after all. 🙂
Re: Inflation and linkers, well of course my answer is one can own both. My friend has done that too, although it’s true he went for the nominal first IIRC.
Of course I’m bound to caution here against recency bias, given everyone has been bothered about inflation for the first time in 20 years in the past couple of them. 😉
Equity holdings, which most around here are probably well-stocked with if not overweight, can provide some inflation beating qualities over the long-term. So can real assets like our homes. However there’s not much in the war chest against deflation except cash and nominal bonds. And it’s easy to see potential forces of deflation still stalking the land, not least the much-discussed AI ‘could-be revolution’.
Again, not a reason not to buy linkers! Just a pushback against any reflex to say why not linkers *instead*.
Thanks for all the comments, under the cosh with Weekend Reading *reading* today but like others I’m sure will continue to enjoy the thread and thoughts.
@LateGenXer
I think you have worked it out yourself. Without looking fully at it, I’m sure it will be down to seasonal affects of price changes together with significant variation in prices that can happen over a single month. A lot of things go up in price every year in April for example and so you will see a relatively big jump in the RPI index each April. This April the index (as opposed to the 12 month increase) went up 1.75% in April from the March figure which annualised is over 20%pa. But of course the 12 month RPI for April will be similar to the 12 month RPI for other months because the seasonal affect disappears because you are always looking at a full year. Given that indexation on TR26 is a mix of April and May RPI indices currently then the indexation up to December 2025 and January 2026 on which the maturity value is based will be accordingly less because it doesn’t include an April price increase in it for example. And so the annualised future RPI index increase to be added to maturity will likely be less than the 12 month RPI at maturity.
@TI – I don’t think a preference for linkers can easily be cast as recency bias just because we’ve actually had an outbreak of inflation lately. Especially as that period was an extremely bad advert for linkers, though not as bad for nominals.
I think we can get further by framing the debate in terms of an individual’s balance of risks.
A crude schematic might be:
– Retiree more exposed to the risks of inflation than deflation.
– Young investor more exposed to the risk of panic and selling out of equities. Nominals more likely to help.
Obvs that’s simplistic but maybe helpful in terms of understanding where people are coming from?
Of course, holding both makes sense but I think there’s a good debate to be had over whom might favour one type of bond over another.
Appreciate your pushback was in the interest of debate rather than a reflex against a reflex. Consider this to be in the same spirit 🙂
@ZX #13 Thanks – got you now. Thought you were saying there is no “richness”.
@Snowman #17 I’ve seen someone do similar using Z-spread which avoids any manual work (you can change the curve used to gilt in Bloomberg). A Z-spread of zero for a given gilt indicates fair value.
On a tangent, if the intention is to avoid tax on savings interest, Google’s new AI search explained, in relation to my offset mortgage savings account “A 4.74% tax-free interest rate is equivalent to roughly an 8.62% taxable interest rate for an additional rate UK taxpayer in the 2025/26 tax year.”
Risk free and flexible.
As evidenced in this thread, the long duration contained in that security isn’t for civilians. The natural buyer base for those bonds has historically been liability matching final salary pension schemes. The FT ran an article recently pointing out that as these roll off, so will demand for these securities. The Treasury will be forced to issue shorter duration.
Unless you’re in the business of duration matching, it’s hard to see an investment case here.
Great Friday food for thought. Underpinning a lot of the debate around duration is how yields are calculated. There is an implicit assumption that the same rate of return on will be earned on reinvestment. To remove distortions from reinvestment when analyzing whether a particular gilt is cheap or dear I tend to look at the spread between the gilt and the Interest Rate Swap curve. Similar to what @Snowman #17 was suggesting but using the swap curve gives an indication of return compared with parking the money in a bank account earning SONIA – an inter-bank rate which tends to closely match BoE base rates.(Caution- no guarantee that BoE base rates will move inline with what’s imposed by the swap curve !)
At one point you could buy gilt strips (literally strips of the coupons or maturity). Strips have fallen out of favour with institutional investors. Likely too fiddly/illiquid/actuarial for day to day trading – who needs to perfectly match a cashflow in n years time? If strips are still around and you can stomach the dealing costs that would give you 100% capital return.
Did some calculations for TR60 (22/1/2060 maturity, 4% coupon), TR63 (22/10/2063 maturity, 4% coupon) and TG61 (22/10/2061 maturity, 0.5% coupon) to calculate the yield curve implied prices for those gilts, by summing the discounted cashflows using the spot yields from the yield curve applicable for the term of each cashflow.
The actual price for TR60 is about 1.4% cheaper than the implied yield curve price. So good agreement.
The actual price for TR63 is about 1.4% cheaper than the implied yield curve price. So again good agreement.
But the actual price for TR61 is about 9.9% more than the implied yield curve price. A 0.4% reduction in gross redemption yield for TR61 is equivalent to a price increase of around 10% which gives an indication of the effect on yield of that premium.
So while comparing yields of similar maturity date gilts is flawed if you don’t take into account the effective shorter term of the higher coupon gilts, numerically in this case it just happens that this doesn’t really affect things much here.
So it does appear that the price of TR61 is being bid up by private investors using taxed accounts who prefer capital gain to income (e.g. private higher and basic rate taxpayers who’ve used up their savings allowance etc) and that explains the lower gross redemption yield compared to TR60 and TR63.
The running yield for TR61 is about 2%pa of the purchase price (=0.5/0.2529) whereas the running yield for TR63 is about 5%pa (= 0.04/0.7828) so that’s about a 3%pa income differential for the next year so about 1.2%pa (3% x 0.4) lower next year tax bill for TR61 for a 40% taxpayer not using a SIPP or ISA. Of course as TR61 moves to maturity the running yield reduces to near 0.5%pa as its price converges to the par redemption value. While you can’t look at a single year like that and need to consider all future years, as a sense check it doesn’t seem unreasonable the 0.4% lower gross redemption yield given the 1.2% initial tax saving. If I was a higher rate taxpayer looking to minimise tax my preference would be for low coupon index linked gilts not conventional gilts, but that’s a whole separate thing.
It would be interesting to have a breakdown of the institutional/private ownership proportions for these gilts; are pension funds avoiding TR61 (?). Certainly a private investor using a SIPP or ISA might want to avoid TR61, if held to maturity, as it’s sort of costing them 10% of the value of their investment because they are paying the premium that those taxed on income are creating. Makes you wonder if gilt tracker funds are holding TR61 which wouldn’t be great for SIPP or ISA holdings albeit the affect is minimal in the greater scheme of things.
@Platformer, thanks for that Z-spread suggestion (never heard of that before)
@snowman — Good stuff, thanks for coming back with the maths!
@moggers — Sorry, your very interesting comment went into spam and I accidentally deleted it when I was moderating! 🙁
Please do repost if you have a copy / the patient and time. Apols again
It is interesting to see the effect of tax on bond yields (there is another example at the very short end of the nominal curve, T26). Historically this effect was particularly significant in the early 1980s (e.g., see Figure 6 of my paper at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5192452) when gilts with a very wide range of coupons existed. It was interesting that the government of the day issued gilts with 3% coupons even though yields were much, much higher in order to reduce periodic debt repayment – a tactic alluded to by @platformer (#2).
Haha! No worries – I’ll try and remember it! I think i can improve it a bit too. I think it went a little something like this…
Funnily enough I’ve been playing with the 2061 gilt and INXG (the index linked gilt etf) this past year. They are very potent instruments for a different type of investing / trading.
Having reached ‘lean’ FI (but with no intention to RE), capital preservation is the primary goal. So the vast majority of my money is in Royal London Money Market at the moment – as close to risk free as possible, whilst still getting 4.5 – 5%, which is quite tidy. And I have BTC as a barbell – but that’s not to be touched. Don’t hate me.
Anyway – I’m an idiot. So I want a little extra action/alpha than that 4 – 5 % on total AUM. But how to do that without much risk? I’m not going into equities when my spidey sense says ‘these are crazy valuations’, so that’s out. Even when I continue to be wrong.
Enter these two, and my crazy thesis.
If you can manage to get in on even light panic – for instance a chancellor crying in the commons, the action on these can be fascinating.
Multiple times this year, we have seen yields temporarily spiking – the indicator is usually bonds making the mainstream news. You wait, patiently and you buy.
Then the goal is this – what I typically want is a very non greedy 4% capital gain, target time frame 1-2 months (which would be awesome annualised), and I’m out and back into the comfort of royal London. I do this on about 30% of the total AUM.
4 times this year I’ve done this. Jan, April, May-June, and now. A couple of times I’ve had the gain in a week. But I wait for the next (as I see it) slam dunk, and don’t chase.
But what if it goes wrong?
Well, that’s the thing. This isn’t an equity. I still will get a coupon. Even averaging down is A-Ok, – higher yield on the next bit, and if it means I can get out of the overall position later with my target – great.
It’s got risk to it, definitely. It’s not sophisticated, sure. But it’s also not chasing NVDA and waiting for the party to stop.
Honestly? It’s the most fun I’ve had managing my money in years. That 4% dopamine hit on a gilt weirdly enough hits harder than some 10 baggers!
One thing – my big mistake was doing this also with a US equivalent. The currency risk was unhedged, and despite it actually being a trade that worked out in $, I’m down in £. So I’m sticking to pound denominated ones hence forth!
@Snowman (#27)
“Makes you wonder if gilt tracker funds are holding TR61 which wouldn’t be great for SIPP or ISA holdings albeit the affect is minimal in the greater scheme of things.”
TG61 will meet the criteria for inclusion in both ‘All-Stocks’ and ‘over 15 year’ indices, so any fund omitting it will have a (small) tracking error. Anyway, as an example, a quick scout through the vanguard site finds that VGVA (All stocks ETF) is holding TG61 (0.55% of fund), Vanguard All stocks fund is holding 0.57% and their long duration gilt fund (over 15 years) is holding 1.89%.
I hold TR38 in my income-focussed SIPP and will be adding TR43, both with 4.75% coupon.
I have used short duration low coupon bonds in the past to shelter house sale money for a limited time in GIA, but back to having almost zero in my GIA and everything wrapped in SIPP and ISAs.
@Alan S
Thanks for looking that up. Holding 1.89% of TG61 is only going to depress overall annual gross returns on the Vanguard long gilts fund by the region of 0.008%pa (1.89% x 0.4%) so that’s a very small affect. And if they excluded TG61 then they would have to have slightly more of the lower coupon gilts of roughly the same term to balance the not holding TG61. And then it would throw out the income payments. And it would be detrimental to fund holders in taxed accounts. So not really surprising that they hold TG61 when you think about it.
@moggers — Thanks for reposting. As a naughty active investor of many flavours over the years I can quite see the appeal.
I was going to say that’s there’s a danger of picking up pennies and being flattened by a steamroller here, but that doesn’t really apply here as you say because of the known YTM (though on the nominal side a big inflation shock could be quite a steamroller if you weren’t paying attention).
The risk is probably more of the ‘trade turned into an investment’ variety. i.e. You keep averaging down and end up in a secular bear market for bonds over, say, a decade, with much/most of your capital tied up into a relatively low YTM and nursing for some long time a capital loss on a marked-to-market basis that you can’t bear to pull the bath plug on.
So I guess maybe if I was doing the same I’d want to be disciplined and only invest in the genuinely panics/emotional moments, with a tight (notional) stop loss in practice, notwithstanding the averaging-down potential.
@TI – if I was at the early stages of building the war chest, I’d agree. At this point I kinda DGAF :-)! Those pennies, may or may not add up to a decent return over 5% – time will tell. I’m ok with either scenario.
The downside risk is always there, esp inflation adjusted. But I’m still stuffing £60k a year into a SIPP for now, and even at 5% growth, my assets make more than I do net.
That’s … disgusting to me – shrug, facepalm, wtf – I must be looked at as a muppet here – but once I truly got to basic FI, I reflected properly and said ‘it’s all true … capital makes more than my brain does. I’ve become like the BTL landlords I’ve railed against, just with a different asset distribution.’
But like any true madman, the cognitive dissonance this creates inspires action. So now I’ve gone crazy about trying to up my income – another job, some independent stuff. I can’t allow my capital to out earn me, it doesn’t sit right. So instead of easing off, I’ve floored it.
Which is all to say, messing about with bonds is the least of my problems when looking at my psychology!
(Btw – if all goes as it’s looking, I’ll be out of my latest inxg and 2061 positions this week! There is always a chance I’ll stop for the year then – I’m praying I do!)
Ok if we are going to start discounting things, then lets not use theoretical bond curves. Let’s use something homogeneous and that can be actually transacted.
First, buy your Gilt at a price DP (for Dirty Price, i.e. including accrued). Second enter to an interest rate swap, where you pay a fixed rate and receive a floating rate (SONIA). Set the fixed rate to be the same as the coupon rate on the Gilt. In the case of the 2061, that’s 0.25% every 6 months. So that the package (bond + swap) now has no net fixed rate coupons. Because that fixed rate is not the prevailing market swap rate, you will need to adjust the floating rate by adding or subtracting a spread to make the swap have a present value = 0.
The product you now have has no fixed rate exposure and instead you receive SONIA + spread every 6 months: a floating rate note (FRN). In the case of a Gilt, the spread will typically be negative, so you receive less than SONIA. An FRN has a duration equivalent to the maturity of the next payment (so in this case 6 months or less). These transactions are termed asset swap spreads. In this case, a “true” asset swap spread.
Do that for every Gilt on the yield curve. Whatever it’s maturity or duration, you’ve transformed them all into FRNs with the same very short duration but with different spreads over SONIA. That spread is a metric of how cheap or dear the bond is relative to the swap curve on a comparable basis. Functionally, you have discounted the cashflows of the bond, off the swap zero curve + spread to recover the DP of the bond.
Do that and you’ll see the 2061 is somewhat rich to the curve. It was richer earlier this year. Is that richness wrong? Not really. As I said above, it has specific advantages to certain investor classes. And not just retail.
Bond curves are not homogeneous. Nor are the investors. They often have very different objectives. Prices are formed from those aggregate objectives. It’s perfectly possible to have what may be termed an efficient market, whilst it being not efficient from the perspective of any specific investor type.
There could be an awful lot of tax changes between now and 2061 or whatever.
Do foreign holders benefit from the cgt exemption ( ie if they’re taxed at home rates on worldwide gains) ?
Buy and hold is fine but for 30+ years based on the particular current conditions?
As a trading position maybe.
Forgive me polluting a comment thread rich in technical precision with some wildly hand wavey speculation …but… on the bullish side of this idea, presumably Trump’s latest efforts to vitiate human society by corrupting the US central bank could be a catalyst. One way or another Powell is out by May and DJT is going to be appointing a successor with the ethical backbone of a jellyfish at a limbo contest. Whilst acknowledging the fed funds rate and the far end of the gilt curve are quite distant cousins, it seems plausible that Trump, abetted by a compromised Fed chair, could succeed to a certain degree in pushing the whole Treasury curve down and the Gilt curve, to a certain extent, follows.
@TI’s comment 35 hit the nail on the head of why I struggle with these trades though, the thorniest “risk” to my mind is long gilt yields go up a bit and stick there and your choice is take the loss or leave your longest term capital stuck at 5% nominal for decades. Tend to agree with others mentioning shorter dated alternatives, less juice in the trade seems a price worth paying to bring the holding period down if indeed you did get stuck in it and opted to hold it to maturity.
Great article and insightful comments. These esoteric and actionable ideas are super interesting.
Article along same lines – hope link works
https://macrocreditthinking.substack.com/p/the-downside-is-you-get-par-in-2061?r=3d2uk0&utm_campaign=post&utm_medium=web&triedRedirect=true
Would TG61 work as a form of low cost longevity insurance. Reach 2061 and know that your pot is getting topped off somewhat tax efficiently. You can give away more / spend more sooner. Seems rather inflexible though.
A really thoughtful piece. I think most informed investors owning long-duration gilts are doing so as a directional bet on interest rate rises, rather than long-term yield play.