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Understanding Redemption Yields on 2.5% index linked treasury stock


crashmonitor

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crashmonitor

This is the Bank of England's explanation for redemption yields which includes index linked stock. I am still struggling with this. The current redemption yield on 2.5 % index linked treasury 2024 as of today is -2.27%. I take this to be on assumed inflation of 3% til 2024 the annual  yield to maturity would be 2.5+ 3- 2.27= 3.23%...still giving a positive return over inflation. That seems too good to be true and maybe I am misunderstanding the formula.

https://www.bankofengland.co.uk/statistics/details/further-details-about-yields-data

 

Just if we get Venezuela on Atlantic under Corbyn these might be one of the few ways to protect capital. Anybody got an understanding of the formula?

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I spent a bit of time looking into gilts and struggled to wrap my head around it all tbh. There is some good information on the LSE website and at the DMO https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/ that might help you.

https://www.londonstockexchange.com/prices-and-markets/retail-bonds/education/education.htm

https://www.londonstockexchange.com/traders-and-brokers/security-types/retail-bonds/accrued-interest-gilts.pdf

 

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3 hours ago, crashmonitor said:

Yep the bit about calculating cash flows is rocket science. 

There's an excel calculator here

https://www.londonstockexchange.com/prices-and-markets/retail-bonds/acc-int-calc/accinterest.htm

In the end I decided gilts weren't for me. It's a shame we don't have a retail/secondary corporate bond market like they do across the pond. Very limited selection we've got.

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crashmonitor

I rang Hargreaves re the linkers. The money yield of -1.75% is the amount you would lose assuming inflation of 3% ( including any coupon received) if held to maturity. In other words the insurance to Corbyn proof your capital is bloody expensive just now.

I guess he's got his insurance with his 7 figure superannuation package and house in Islington.

 

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  • 1 month later...
On 04/04/2019 at 11:44, crashmonitor said:

This is the Bank of England's explanation for redemption yields which includes index linked stock. I am still struggling with this. The current redemption yield on 2.5 % index linked treasury 2024 as of today is -2.27%. I take this to be on assumed inflation of 3% til 2024 the annual  yield to maturity would be 2.5+ 3- 2.27= 3.23%...still giving a positive return over inflation. That seems too good to be true and maybe I am misunderstanding the formula.

https://www.bankofengland.co.uk/statistics/details/further-details-about-yields-data

 

Just if we get Venezuela on Atlantic under Corbyn these might be one of the few ways to protect capital. Anybody got an understanding of the formula?

Best way to think about it is the quoted YTM of -2.27% ignores the inflation impact.  If you add in the expected 5yr RPI inflation of say 3.4% or so then you get back to an effective nominal yield of a bit over 1%.  Which funnily enough is what you will earn on a convention gilt of similar maturity.  Ignore the coupon unless you are specifically interested in cashflow timing - the bit you have forgotten is that you will be paying a price significantly above par for this bond - the coupon of 2.5% needs to be bought at a quoted YTM of -2.27%.

If you are keen on inflation markets the below is a rare public link for detailed institutional stuff:

http://cbs.db.com/new/img/Inflation_Doc.pdf

 

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