The UK economy is in a state of low growth and high inflation, in other words stagflation. This is why I decided to buy an inflation linked bond. So in this video, I’ll share my experience of how and why I did that and what I hope the reward will be.
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Timestamps
00:00 Introduction
00:31 Stagflation
03:42 Stagflation Investing
04:18 UK Inflation Linked Gilts “Linkers”
10:09 My Return Guess
12:04 Buying A Linker Isn’t Easy!
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All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results….(read more)
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Why I Bought Inflation Linked Bonds
Inflation is a constant concern for any investor. The possibility of eroding purchasing power underscores the need for solutions that can offset the effects of rising prices. One such solution I recently turned to is inflation-linked bonds.
Inflation-linked bonds, also known as inflation-indexed bonds or simply TIPS (Treasury Inflation-Protected Securities), are a type of fixed-income investment specifically designed to protect against inflation. They provide a reliable means for investors to preserve their purchasing power over time, making them an attractive addition to any well-diversified portfolio.
The main reason I decided to buy inflation-linked bonds is their unique ability to provide protection against inflationary pressures. Unlike traditional bonds, where the interest payment is fixed throughout the life of the bond, inflation-linked bonds adjust their principal value and interest payments according to changes in inflation. This means that as inflation rises, the value of the bond increases, and so do the interest payments. This adjustment maintains the real purchasing power of the investment, ensuring that the bondholder’s return keeps up with inflation.
Another advantage of inflation-linked bonds is their low correlation with other asset classes. While stocks and traditional bonds tend to be negatively impacted by inflation, inflation-linked bonds provide a hedge against rising prices. By including these bonds in a portfolio, investors can reduce the overall volatility and enhance diversification, ultimately creating a more robust investment strategy.
Furthermore, inflation-linked bonds offer a predictable income stream that keeps pace with inflation. This feature makes them particularly suitable for investors seeking reliable cash flows to cover their living expenses in retirement or individuals with a long-term investment horizon. The reassurance of a regular income stream tied to inflation can provide peace of mind and help maintain a stable financial situation.
Investing in inflation-linked bonds also enables participation in potential deflationary scenarios. As the principal amount of these bonds is adjusted downwards in the event of deflation, the investor is protected from losses that typically affect other fixed-income investments. This dynamic ensures that the value of the investment remains stable even in a deflationary environment, offering an added layer of security.
Moreover, inflation-linked bonds come with the backing of the government, making them a relatively safe investment option. The principal and interest payments on these bonds are backed by the full faith and credit of the respective governments, which reduces the risk of default. This support from the government, coupled with the inflation-adjusted returns, enhances the attractiveness of these bonds to risk-averse investors.
In summary, purchasing inflation-linked bonds offers several advantages for investors. These bonds provide protection against inflation, diversification benefits, a predictable income stream, the ability to withstand deflation, and security through government backing. By incorporating inflation-linked bonds into my investment portfolio, I have taken significant steps to safeguard my purchasing power against the erosive effects of inflation.
Great video! Question: You say "I bought the bond when it had an uplift of about 50%" at 11:30. Is that uplift something that is published for a given bond on a given day or does it need to be calculated?
Where did you get the code 'TR24' from?
If i look at inflation linked Bonds ETF from US and europe the value of the ETF sharply dropped from 2021 to now?
Why is that? I thought they rise when inflation rises ?
Have I missed this opportunity already? The value of bonds these days seem very close to 100 so there doesn't seem to be much for an uplift opportunity.
Real Estate in an immigration positive area is a better investment than inflation linked bonds.
What are people's views on the pros/cons of buying an index tracker e.g. iShares Index Linked Gilt Index, instead of an individual bond? thanks
Well played Ramin, looks like you are making money after yesterday's announcement!
Why would you buy inflation protected bonds after the fact? we must be much closer to the end of the hiking cycle now, the the coupon on this will fall away rapidly as inflation drops, you can get 6% on a 5 year gilt, seems like a much better option to me right now.
Inflation linked bonds are interest rate sensitive instruments. If interest rates rise, then the value of the bond falls despite inflation remaining high. You will need to hold the bond to maturity in order to avoid losing money in such a situation. Speaking from experience buying Australian ILBs via Vanguard two years ago.
Hi, I love your channel. You make sense and are easy to understand… But you don’t seem to use a lot of Australian data, as in you’ll throw up data against France, the US etc, but Aus doesn’t get a look-in really. If I joined your community, would the information be applicable to me as a principally Australian investor?
in US series i inflation bonds are yielding 8%. do we have any such bonds in UK?
Excellent video, but no mention of the risks with linkers in that if the inflation expectations change suddenly (such as big uplift in BoE % rate or aggressive QT) you can lose money on this gilt.
I moved about half of my pension into index linked funds in 2019. It seems that I have made the right call on inflation, but these funds dropped by more than 25% so I am still worse off than if they were left in stocks and shares tracker funds. I wonder what I am doing wrong.
What about Vanguard U.K. Inflation-Linked Gilt Index Fund instead?
Thanks for this video. It was very informative up to a point. However it didn't address what seems to me to be a very important problem, and one which has so far deterred me from buying linkers. If I'm not mistaken, you're buying the linker at a market price, and not necessarily at the price that would give you the desired returns of RPI + coupon. Did you check that you were buying at a price that would give you the those returns, and if so how did you do that?
Nice explanation, this video got me hooked so I did some research myself on this gilt.
Very quick question. The price it was reportedly bought for is £148.42. But searching this gilt on London Stock Exchange returns a current price of £99.61, and never shows a price that high. I am clearly missing something, has anyone got any clue where you can see the reported price?
This is the first time I have seen a financial commentator recommending Index Linked Gilts.
Whilst it is a guarantee to match RPI I felt you should mention difference between clean and
dirty prices (which can cause confusion] and daily interest adjustment on short dated stocks.
There is also an inflation rider published by BOE to calculate actual value at a given date.
As a large holder of ILGilts I am quite relaxed on the effect of inflation on savings.
an example of what you could lose if it goes pear shaped and what can make that happen is absent,
Ramin, just when I think I understand linkers, I have another question. You mention TR24. This matures March 2024 according to its info. Why do you talk about redemption about Oct 2024? (Great demo on the phone by the way; I am not sure any other YTer has done this. Fleshing out real examples of bond investing is really useful – just look at how many people in the comments are not even aware of dirty vs clean pricing.)
Thank you great video. Just curious, did you mainly buy in your ISA to avoid tax on coupons ? The bulk of the gain is in capital, wouldn't it have been better to utilise the ISA investment in something else with high return?
The Lade got shocked when heard she’s being recorded, but she’s coped well I think. Thanks Romin
Vanguard has a UK inflation linked gilt index fund. Why not invest through that? It is classed as a level 6 risk which seems high for a bond?
I would really like to hear your view as to why you think inflation will remain high! Or more specifically to the current situation, how and why do you think stagflation comes about?
Always giving relief information. Thanks for this amazing video
Hi Ramin thanks for this video – presumably the expected rate of inflation is priced into the bond already, and if you are earning a return better than the BOE then that’s because you expect the actual rate will be less than the one priced in? Is that how it works?
As always easy to understand and most educational. Great graphics and production too. Thank you.
I've got something similar, aka "Granny Bonds", but they changed from RPI to CPI the last time I rolled them over for an extra 5 year period. Unfortunately, they are not sold anymore.
Useful to know that I can invest in GILTS and use this as a vehicle to mitigate tax. Thanks for the video
In my humble opinion this is one of your best ever video explainers.
It's short, sharp and practical giving the viewer lots of useful information.
I watched this twice to make sure I captured all of the points.
Great work Ramin.
Great video as usual Ramin …. I bought some INXG 6 months ago thinking to gain from the inflation proofing and checked they had quite a lot of gilts maturing in 23/24 to tap into the rise. Also considering how rate hiking might slow down. However this is down about 5% from purchase. Which is fine given they are down about 30% on a year, maybe I was a wee bit early. If an individual linker is attractive now why are the ETF's not reflecting it?
In your return calculation you assume that the linker has redemption date in one and half year, but TR24 redemption date is March 2024