Gilt Yields Historic Low Warning

Gilt Yields Historic Low - Investor Warning

Back in October 2012, gilt yields fell to an historic low of just 2.94% on 10 year, medium dated gilts.  Gilt Yields have continied to remain low for the last few years but what does it all mean? 

What is a Gilt?
A Gilt is a Government Bond.  It is Treasury Stock.  In simple terms, you have lent money to the Government ….  Remember all that public sector borrowing ….  A gilt is what they issue when they borrow from us.

What does the Low Gilt Yield Mean?

• Because interest rates are so low, people look for a higher return elswhere.  Gilts are either fixed rate or they are index linked (inflation protected).
• Fixed rate gilts have a coupon … this is the interest rate they pay.
• For example a £100 Gilt, 10 year, coupon 5%.  Means that the gilt will pay £5 per year for 10 years and then in 10 years tiem you get your £100 back, guaranteed.
• When investors are concerned about the ecomony or looking for a safe investment, they go to Gold or Gilts.  As the government have made significant moves to reduce spending, more investors are confident of the UK’s ability to pay interest on these Gilt debts.  Confidence in them has increased even further.

Demand Means Prices Go Up, Yields Go Down

• Taking the above example of a £100 Gilt, 10 year, coupon 5%, i.e.  paying £5 pa.
• If confidence and demand increases, then prices go up.  For example if you want a 2.5% return on your money then for the above gilt, the price you would pay in the open market for the above Gilt is £200.
• £200 to buy a “£100 Gilt, 10 year, coupon 5%, £5pa” means a real return for you of 2.5% i.e.  £5 income on £200 invested.
• This is what is happening now.  This is why Gilt yields are at record lows i.e.  the acceptable return for them is just  the GIlt Yield e.g.  2.94% pa.

What if Interest Rates Rise?

• If interest rates rise, then people will be less inclined to buy gilts as they can get a safe return in bank and building society cash deposits.
• If interest rates rise, for example, to 5%, then this would be the same return as the Gilt coupon above.  It would also mean that the market price for the Gilt would fall back from £200 to £100 par value.

What does that mean?  Our Warning

• Many people have fixed interest funds in their pensions and investments.  These funds buy gilts.  As a result, over the last few years, you will have seen very steady and acceptable returns in the order of 6-8% per year.  Huge when compared to 0.5% in the bank and capital growth on your fund.
• If interest rates rise, which they may do over the next year, your fixed interest fund will definitely fall in value.

Our Golden Rule:

When you see headlines such as record high, or record low or market crash.  This is the time to take action.  Do not be greedy and try and wait for a little more growth.  In this case:

WE RECOMMEND WHEN GILT YIELDS ARE LOW, THIS IS THE TIME TO TRANSFER OUT OF FIXED INTEREST FUNDS THAT MAINLY CONTAIN GILTS.

WHEN THERE IS AN EXPECTATION OF INFLATION< IF YOU ARE IN INDEX LINKED GILTS OR INDEX LINKED GILT FUNDS THEN REMAIN INVESTED

Contact us today and take action.