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.
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!
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
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
“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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