indexed linked gilts?

Discussion in 'Economics' started by morganist, Jul 1, 2009.

  1. Doesn't show real inflation... and since it's just a combination of a straight bond and a future contract, there's probably some premium involved that you're paying for.

    So I doubt it's worth it.
     
  2. I disagree with you, PI...

    The IL gilt mkt is, in my view, a good way to hedge against inflation, provided that it's a part of your portfolio. The biggest advantage of having these bonds indexed to RPI is that RPI factors in the housing component in a very transparent and straightforward way (through MIPS and the housing depreciation component). That's in contrast to the mess that's the OER in the calculation of US CPI. Secondly, the ONS, comparatively, does a pretty good job with the other elements of RPI, (e.g. electricity/gas prices), making the calculation very straightforward, again. Granted they were doing some stupid things in the past with some of their statistical methodologies, but they have corrected the majority of the most egregious errors (e.g. retail sales).

    Finally, yes, of course, you're paying the inflation risk premium, but that's how things work. The more problematic aspect is that the supply/demand situation in the UK IL mkt is very much skewed towards demand, so linkers, esp long-dated ones, are very expensive.
     
  3. Can the same be said of the index linked govt bonds of the Euro zone ? How do you tell whether they are expensive ? Is that just looking at break even rate vs your inflation expectations ?
     
  4. Not to the same extent in EURland...

    I know they're expensive from bitter painful experience.

    To see it you just need to look at the shape of the real yield curve. The UK one is VERY inverted (although less so than before), due to the structural bid for long-dated inflation.
     
  5. ok so there have been a couple of good posts on the pro's and cons on indexed linked products.

    although it seems a good idea to diversify a portfolio due to the shortage and the high demand it can only limit risk.

    so what other options are there. i have suggested precious metals but that seems unpopular here. any other suggestions.

    perhaps investment in foreign currency that is less likely to depreciate in value or investment in land. any views.
     
  6. A well-diversified portfolio of equities, IL gilts, property, arable land, gold, canned food and guns should do the trick (personally, I am not there yet, as I only own some IL24s and gold :))...
     
  7. fhl

    fhl

    If they can find a way to screw non indexed bondholders, and they have, you can rest assured that they will be able to find some way to screw indexed bondholders, too.
     
  8. i was a bit late for gold and it is too expensive now. i have some silver and some copper bullion. although you have to pay vat on them i am sure that they will at least hold there value if the shtf.

    i am buying seeds to grow when the economy goes bad i suspect in the next 18 to 36 months.

    what do you think will we definitely have a collapse?
     
  9. Indeed, my friend, anything is possible, which is why you do need a diversified portfolio, part invested in guns :)...

    However, I actually think that, due to the unique features of the UK IL mkt (huge pension liabilities, as well as public sector wages, are linked to inflation), screwing indexed bondholders would be a lot more difficult than screwing nominal ones.
     
    #10     Jul 2, 2009