What caught my eye this week.

A friend of mine – someone in the investment business no less – was surprised when I mentioned I was looking into index-linked gilts for my latest Moguls membership article.

“Nobody normal knows about them anymore I agree – but nobody wants to either,” he laughed. “You should write about Apple. It’ll be $3 trillion again by Friday!”

My friend was right about Apple. But I think he is wrong about linkers.

Of course returns on these UK government bonds have been diabolical recently.

But for a would-be core asset class, that’s all the more reason to dig in now.

Index-linked gilt gore

Blowing off the mental cobwebs with linkers is necessary because it’s been a long time since they were attractively priced for anyone who actually had a choice about where to invest their money.

True, real yields were positive for a blink and you missed it moment amidst the Mini Budget chaos.

But linker yields were low or negative for a decade before that.

And of course it’s true that to bring us today’s more attractive opportunities, those already holding linkers suffered mightily.

Look at this five-year share price graph of the iShares index-linked gilt ETF (Ticker: INXG) – preferably from behind a sofa:

From nearly £23 in December 2021, this long duration basket of UK linkers has fallen 40% to under £13.50.

That the crash occurred during a bout of heady inflation must be particularly galling. (Even if you understand the reasons why.)

For those who heard bonds were ‘safe’ and didn’t read the small print, it’s been a rough ride.

No wonder many now seem to hate the asset class.

Here’s gains we made earlier

Realise though that the seeds for 2022’s losses were planted by many years of bountiful harvest, in which linkers delivered far more than was expected of them.

The low interest rate era was a windfall. Cop a load of INXG’s run-up to its gruesome swan dive:

An allegedly boring asset beloved of pension funds for liability-matching, doubling in a decade?

Nice returns if you can get them.

Linkers climbed even as alarm bells rang – not least for my co-blogger – and their yields went negative, causing a million economics textbooks to be earmarked for pulping.

If you liked linkers at -3%, you should love them now

Even when they were guaranteed to lose money in real terms, institutions (apparently) thought it worth buying linkers (presumably) for their known, inflation-protected cashflows.

In November 2021 the UK actually managed to sell a brand new 50-year linker on a negative yield of -2.4%.

What were the buyers thinking?

As John Kay put it recently:

That is none of my business’, replied Pooh Bah. ‘My job is to ensure that everyone is certain to get the pension they have been promised, even 50 years from now.

That seems to confuse security with certainty, mused the Emperor.

Like Kay, I don’t think regulators pushing pensions into negative-yielding bonds made much sense. Protection from inflation is valuable. But negative yields mean savers had to shrink their retirement pots to pay for it – or else take on some other risk to make up the difference. (Leverage, say.)

With that said, we must beware hindsight bias.

Maybe in some other reality, governments and central banks didn’t deliver the massive support during the pandemic lockdowns that they’re now being derided for, and we slid into a depression.

In that no-growth other world, perhaps INXG went on to touch £30?

Perhaps – but it’s moot. Because in our world, interest rates did go up again.

Incredibly quickly, in fact. And linker prices duly crashed.

Linker inkling

As a direct result of last year’s rout, you can now get a small but real positive return when buying into index-linked gilts – even while protecting your money from inflation.

That’s a huge change. And it’s why I wrote 6,000 words on index-linked gilts for Moguls, despite my friend’s objections.

As I’ve said before, if 2022 taught you that bonds are bad then you learned the wrong lesson.

Recent bond returns have been ugly for the ages. But at today’s prices they haven’t look so attractive for a decade.

Have a great weekend!

From Monevator

Commodities diversification: is it worthwhile? – Monevator

Opportunities in index-linked gilts [For Mogul members]Monevator

From the archive-ator: A landlord is someone who borrows money on your behalf – Monevator


Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Fractional shares in ISAs challenged by HMRC – This Is Money

UK house prices unexpectedly up 0.1% in June, but down 3.5% annually – Guardian

Water firms reportedly pushing for 40% price rises in England – Guardian

New rules to protect cash access and scam victims become law – Which

Harry Markowitz, father of modern portfolio theory, dies at 95 – P&I

The UK needs to match higher taxes with better taxes [PDF]Resolution Foundation

Relentless pressure on fees has stymied the returns of fund managers – Morningstar

Products and services

Households urged to take meter readings as Ofgem price cap drops – Guardian

An FSCS-protected savings account paying 6%, fixed for four years – This Is Money

Lloyds launches Best Buy cash ISA deals paying up to 5.05% – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Pet insurance claims hit a record high – Which

Why doesn’t the UK have 25-year mortgages…? – This Is Money

…and should you go for a two-year or a five-year fix? – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

A primer on EIS tax relief – Crowdcube

Is it time to fix your energy tariff? – Be Clever With Your Cash

How to pay for private healthcare [Search result]FT

Houses for sale for less than £500,000, in pictures – Guardian

Comment and opinion

How to spend more in retirement… – Of Dollars and Data

…although here’s another spending tip: don’t – Humble Dollar

How much should you save for retirement? [Podcast]Which

The tragedy of constantly getting more – Money and Meaning

Retiring early with better things to do – Humble Dollar

Overdoing delayed gratification – Life After The Daily Grind

Are there any glimmers of light in the UK gloom? – David Smith

The end of the ‘vibecession’? [US but relevant]Noahpinion

It’s not the rise in rates you fear, it’s negatively equity bringing up the rear – SLIS

Naughty corner: Active antics

Are funds making private investments ‘volatility laundering’? – Morningstar

Blackrock’s Midyear Outlook is buying the AI hype [PDF]Blackrock

Graham and Dudsville – Brooklyn Investor

Intangible value: modernising the factor portfolio – Alpha Architect

Are you prepared for the grind? – Safal Niveshak

Choosing a school versus selecting a fund – Behavioural Investment

Source of return – Verdad

AI winners and losers and Nvidia – Musings on Markets

Kindle book bargains

The Ride of a Lifetime by Bob Iger – £0.99 on Kindle

How to Own the World by Andrew Craig – £0.99 on Kindle

Environmental factors

What a Chinese heat wave means for the world – Semafor

Humans’ fondness for the odd and rare makes us overwhelming predators – Hakai

For how much longer will the Thames Barrier protect London? – Guardian

Deforestation surges despite pledges – BBC

Bitcoin is back, again, mini-special

The ‘thing’ about crypto ownership [Search result]FT

Why a bunch of US institutions are launching fresh Bitcoin ETF bids – RIA Biz

Speculation is BlackRock bitcoin ETF will get green light [Search result]FT

Bitcoin nears a one-year high – Wealth Management

Robot overlord roundup

BloombergGPT: a large language model trained for finance – Alpha Architect

Two lawyers fined for submitting fake court citations from ChatGPT – Guardian

The AI Apocalypse: a scorecard – IEEE Spectrum

Content is crap mini-special

Junk sites full with AI-spouted text are here and making money – MIT Tech Review

AI is killing the old web, while the new struggles to be born – The Verge

Henry David Thoreau’s wise words on what to read – Art of Manliness

A case study in online content pollution – OM

Twitter is no longer a filter for the good stuff – Drezner’s World

Off our beat

How the UK fell back in love with the microwave – Guardian

Why would Mark Zuckerberg agree to fight Elon Musk? – Slate

If you can eat it then you can drink it – Eater

A guide to not washing your clothes – Guardian

Reasons to be optimistic about 2050 [Couple of weeks old]Not Boring

And finally…

“Most of us prefer to believe we are the active subjects of our victories but only the passive objects of our defeats. We triumph, but it is not really we who fail – we are ruined by forces beyond our control.”
– Hernan Diaz, Trust

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