Gilts Guaranteed to Lose You Cash

THE WEEK: Negative rates in government bonds? Morningstar columnist Rodney Hobson says you're better off in cash

Rodney Hobson 30 September, 2016 | 2:42PM
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The name’s Bond. Gilt Bond. Minus 1.77 and licensed to kill your savings. UK Government debt stands well above £1.6 trillion, we are not halfway to balancing the budget and new Chancellor Philip Hammond is set to raise spending in his Autumn Statement.

More than one third of government debt in developed countries offers a negative yield

Yet in the Gilt auction on Tuesday, investors proved they were willing to pump another £870 million into government coffers in return for only £400 million worth of gilt-edged securities. In fact, the Treasury could have sold three times the amount it was trying to raise, so this week’s auction is likely to be repeated soon.

It will be 36 years before this issue is redeemed and although the rate of interest paid on the bonds is linked to inflation, investors will effectively lose 1.77% a year in real terms. All UK index linked gilts are trading at a negative rate of interest, as is much of the £1.1 trillion of conventional government stock.

We are not alone. Finance house UBS calculates that more than one third of government debt in developed countries offers a negative yield.

I have in this column and elsewhere scorned those who put money into savings accounts for paltry returns but at least a paltry return is better than nothing. Don’t mess with Gilt Bond. That red stuff is ink.

Black Gold Dust

As a shareholder I was delighted to see Royal Dutch Shell (RDSB) top the leader board on the day that the oil-producing cartel OPEC announced a tentative agreement to reduce output and thus drive the oil price higher.

Alas, as so often in investing it is best to read the details and not just the headline. Another meeting will be needed to set quotas and that will not be held for nearly two months, during which time wells across the world will be pumping out in a frenzy of overproduction.

Nor do we know who is going to reduce production apart from an unspecified quantity from Saudi Arabia, whose patience with its less compliant cartel members has worn noticeably thin. Iran wants to increase its production and Venezuela, Algeria, Libya and Nigeria can’t afford to cut back.

Among non-members, Russia and the US will pump away and Kazakhstan starts ramping up at the giant Kashagan field just before OPEC delegates reassemble in Vienna.

I’m happy to keep my stake in Shell but I certainly won’t be adding to it at this stage. If you disagree, remember the B shares are for UK investors, not the A shares which are for our Dutch partners.

Brexit: Too Soon to Say

I was reminded on Twitter – where you can follow me on @RodneyHobson – by an angry remainer that a vote for Brexit is not the same as actually leaving the EU. Nonetheless there were dire warnings ahead of the vote of the effect that a Brexit vote would have on the UK economy.

Most economic figures so far have covered the period running up to the vote but it is still reassuring that GDP for the second quarter has been revised upwards to 0.7%. We can be pleased that pre-referendum uncertainty did not hold us back. Even better is that the services sector grew more strongly than expected in July, after the vote.

It’s still early days and we haven’t even begun to negotiate our way out of the EU. However, for the time being at least we can remain chirpy.

Takeover for Royal Mail

Deutsche Post is offering to put shareholders in UK Mail (UKM) out of their misery. I’ve warned readers against investing in this struggling company but if you ignored my advice you are in for an undeserved reward. Unless someone comes in with a better takeover bid by first class delivery, grab the Deutsche Post offer with grateful hands.

Pier into the Future

After so many examples of that great Victorian feat of engineering, the seaside pier, have collapsed into the sea or succumbed to arsonists, it is good to see that Brighton Pier (PIER) has crept into profit. The shares look far too much fun for an old misery like me but are worth a look if you fancy a highly speculative long term punt. 

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.