PUBLISHED Oct 5, 2022, 10:24:51 AM        SHARE

imgChimp Investor Blog

If you enjoy reading this blog, please leave a star rating on WealthTender. Thank you!

The ramifications of the big fall in Gilts will be far reaching

You may have heard or read that Gilt yields have been rising sharply recently. Rarely, however, is one told what the percentage change in the underlying Gilt has been, whether over the day or, of more relevance, a longer period.

You may also have heard that Gilts are low risk, perhaps from an investment professional. They offer steady - low risk - returns, you perhaps were told, because the UK government and others like it do not tend to default. The reason for this is that governments can always increase taxes if necessary in order to make coupon and principal payments to bond holders. Bond holders, in return, accept returns from bonds commensurate with the lower risk.

Below is a chart of the Bloomberg Barclays 15+ Gilt Index, or rather an ETF that tracks it. It is adjusted for inflation as indeed all financial asset prices should be - what £100 buys you today is very different to what £100 bought you 20 years ago, and two nominal amounts should never, in my view, be compared with each other. Unless, that is, they are first adjusted for the change in the price of goods and services over the 20 years...

pic Source: https://uk.finance.yahoo.com/

To be clear, the chart is of the real price of long duration Gilts, those with a maturity of 15 years or more. Short-duration Gilts will not have fallen nearly as much as long-duration Gilts, but they will still have fallen considerably, something you may well have been told they do not do. Unlike long duration Gilts which are low risk, short duration Gilts are very low risk. Blah blah.

Since April 2020, long-term Gilts have fallen by 58pct, equivalent to -30pct annualised. Over the last three months they have fallen by 29pct, equivalent to -75pct annualised. Low risk? Hmmm.

You may well think that similar falls have been seen in other bond markets. Wrong. Below is a chart of the real value of long-term Gilts relative to their US equivalents, real long-term Treasuries. Ouch.

pic Source: https://uk.finance.yahoo.com/

You may well also wonder if the big fall in Gilts is related to a big increase in their default risk. Again, this would be wrong. The chart below is of the UK 5 Years CDS (credit default swap) price. The CDS price as of Monday was 26.70bp, equivalent to an implied probability of default of 0.45pct (assuming a 40pct recovery rate). This is still low, and so the rise in the default risk since June will only have accounted for a small portion of the fall in bond values.

pic Source: http://www.worldgovernmentbonds.com/cds-historical-data/united-kingdom/5-years/

The ramifications of the falls in real Gilt values - whether recently or over the last two and a half years - will be far reaching.

Many, particularly those in retirement, will have been advised to invest in "safe" government bonds. Lower retirement income as a result of significantly lower bond prices will impact spending.

Other big holders of Gilts such as insurance companies will be nursing huge losses.

And if you are squeamish, don't look at the Bank of England's balance sheet...

As for the increase in borrowing costs for the UK government and thus for us as UK taxpayers, this will be substantial and felt progressively over the coming decades as old Gilts mature and new ones are issued at higher yields. The UK government may also wish to continue to increase total borrowing.

If markets let them, that is.

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
© Chimp Investor Ltd
Originally posted on chimpinvestor.com

Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
4 Reasons Why You Hate Financial Planning

Do you feel like your finances are all over the place? You have credit card debts pending, bills to settle, and goals to achieve, but it’s all in disarray.

Ready to own a business? Here are some things to know.

Continuing the theme of supporting small business, here are some things that you should know if you are planning to make that move.

Retirement Planning for Small business owners and self-employed

Saving for retirement when you are a small business owner, or self-employed doesn't need to be complex.

Money Mindfulness

As we wind down the year and start to plan for the New Year we wanted to get a head start in thinking about and sharing our January planning topic; Getting Organized, Being Mindful, and Having Focus.

Intel (INTC) Stock – Too Cheap to Ignore?! | Dividend Investing

Intel (INTC) stock is down 45% this year. The dividend yield has SWELLED up to 5%. As a dividend investor, looking for iconic dividend stocks, Intel stock may have too low of a stock price to ignore.

Dividend Kings In Focus: Lowe’s Companies

Lowe’s traces its roots back to 1921, when LS Lowe founded a hardware store in North Wilkesboro, North Carolina.

Are Target Date Funds Useful In Retirement?

Let’s discuss reasons not to use target-date funds during the retirement drawdown phase. A fund-of-funds (like a target-date fund) is simple, efficient, and easy during accumulation. Remember, though, during de-accumulation, everything changes.

Buy Stocks . . . Really?

In the Market . . . Timing Is Everything

Invest in Water Stocks

Water stocks are a unique class of utility equities. Water and wastewater treatment and service is often a municipal function.

Expected Rebound For US Economy In Q3 Fades

US economic activity is still expected to post a rebound in the upcoming third-quarter GDP report, but the projected bounced has faded to a crawl, based on the median estimate for a set of nowcasts compiled by CapitalSpectator.com.

NFT Scams: Types and Tips to Avoid Them

New To The NFT Space? Here are Tips and Tricks on How To Avoid NFT Scams

Top NFT Blockchains: A Layman’s Guide

Find out about the top NFT blockchains in this article.

Semblance of Calm Returns

After extending last week’s moves yesterday, the capital markets are mostly calmer today. Sterling is firmer, as are UK Gilts.


ESG investing includes an explicit assessment of environmental, social and corporate governance (ESG) issues in the context of investment decisions.

Top NFT Influencers in the World

Confused about NFT influencers to follow? Find out about the Top NFT influencers in this article.


The American Dream, it is something that is engrained in us as we enter the workforce. For many of us, the American Dream is being able to live a comfortable life, financially free while doing the things we love.

The 6 Best Infrastructure ETFs to Buy Now

Infrastructure is necessary to make the world go round in our day and age. Both developed and emerging markets make use of energy and transportation to connect their people.

Market Musing 9-26-2022, Are Market Coming Apart?

Fed Chair Powell is forecasting another 100 to 125 basis points higher rate before the end of 2022. On Friday, the markets hit the June lows of 24.5% correction. Please keep your hedges on through the Midterm elections.

Alexandria Real Estate (ARE): Undervalued REIT

Alexandria Real Estate (ARE): Undervalued REIT. The overall Real Estate Investment Trust (REIT) sector has been down a lot year to date. For example, the office REIT category has been down 21.9% since the start of 2022. In addition, the REIT Industrial category is down 18% year to date. This decline provides long-term investors with some opportunities in the Real Estate sector.

Best NFT Wallets in 2022

Looking for the best NFT wallets in 2022? Find out more in this article.

Resources for Publishers
Resources for New Investors