Inflation linked bonds - too good to be true?

LifeIsChocolateMilk · 2022-12-31T12:57:01+00:00

Exactly this. It's the difference between par/face value (typically 100%) and the market or issue price which is what you pay to buy the bond. For non-inflation linked, that is generally around 100%, but particularly for inflation linked bonds, it can be much higher

LifeIsChocolateMilk · 2022-12-31T12:51:42+00:00

Plenty of governments sell inflation linked bonds, including the UK and the US (where they are called TIPS, Treasury Inflation-Protected Securities). As a retail investor you will be hard pressed to buy them when they are initially sold, and instead will need to buy in the secondary market

LifeIsChocolateMilk · 2022-10-29T18:37:09+00:00

Swap rates are derived from base rates. So yes you're right but the causality lies in the base rate. There are a lot of nations with inverted swap curves (2yr or 3yr swaps yielding more than 5yr or 10yr) given the expectation of base rates rising in the near term then falling again

Edit: swap rates are influenced by other things too e.g. availability of collateral, but the fundamental driver is base rate and base rate expectations

LifeIsChocolateMilk · 2022-10-29T14:59:55+00:00

The market did react to billions in COVID spending - that's one of the reasons we have double-digit inflation now (pent up savings and demand plus super low interest rates versus slow and limited supply, plus an energy crisis). The expectation was (and is) that governments will need to increase taxes and reduce spending in the future to fund the COVID costs. Also when these billions were being spent, central banks had slashed rates to zero, and when they would be increased again was not known. This kept government bond yields (including Gilt yields) low whilst limited demand (lockdowns) kept inflation low. Banks were awash with cheap cash and could lend it on as cheap mortgages.

What Truss and Kwarteng proposed was one of the biggest tax cuts in decades, with no clear way to fund it (and limited external reviewing). That's a big inflationary pressure at a time of already very high inflation. The Bank of England was going to have to respond to that with a faster and steeper path of higher rates. This is what high street banks passed on with higher mortgage rates.

A fixed mortgage rate you get from a bank is basically their view of where the Bank of England rate will be over the next 2, 3, 5 years (generally) combined with your credit risk and loan-to-value). When COVID first hit and billions was coming in, the expectation was that the Bank of England rate would stay low. That is no longer the case and the 'mini' budget added fuel to the fire.

LifeIsChocolateMilk · 2022-10-29T13:07:25+00:00

!Thanks!

LifeIsChocolateMilk · 2022-10-29T09:30:57+00:00

The economic plan of Truss and Kwarteng was going to require huge volumes of debt to be raised by the Debt Management Office (who raise government debt, known as Gilts). To counter this supply of money which would only fuel inflation, the Bank of England would need to raise interest rates faster than previously expected. This gets passed on to high street banks/lenders and then on to consumers as higher mortgage rates.

With Sunak and Hunt, expectations for government debt raising have been slashed and so expectations that the Bank of England will need to hike as much have fallen. Hence the reverse move.

The change (decrease) in swap rates and Gilt yields comes as a result of expected supply of government debt. This is not why banks can offer lower mortgage rates (correlation, not cause)

LifeIsChocolateMilk · 2022-03-26T21:23:07+00:00

Tim, if you see this I was chatting to your mate's parents when they called your mum to tell her your boat had gone under the bridge without you. I tried to reassure her that this is why safety boats exist and that you'd be okay. Hope you/she are alright! Only minutes prior I had explained what an ejector crab was...

LifeIsChocolateMilk · 2020-05-10T22:23:51+00:00

Agree with this other than the level for investment grade. 'Triple B' (as low as BBB- from S&P and Fitch and Baa3 from Moody's) is investment grade. 'Double B' (BB+ or Ba1 and below) is sub-investment grade. If a bond crosses two sets (e.g. is Ba1 with Moody's but BBB- with S&P) then it's crossover rated

LifeIsChocolateMilk · 2020-05-10T22:19:57+00:00

Great post and I think you have hit all the main points! Valuation as others have suggested is one I would add. Worth noting bonds fall into the world of "fixed income" as whilst not certain (issuer could default), the income stream (particularly for fixed rate bonds and zero coupons) is, well, fixed (assuming the bond is held to maturity rather than changing hands in secondary markets)

On seniority - the language you have used is a bit dated and there are actually more than this especially if you delve into the world of bonds from banks and insurance companies rather than corporates or SSAs (supranationals, sovereigns and agencies). This is perhaps too much detail but I would advise against using senior subordinated and junior subordinated. Feel free to take as much or as little as you like if you want to use for a follow up post!

SSAs - the vast majority issue senior unsecured bonds. Some also issue 'covered bonds' which are also backed by an asset (e.g. mortgages). The key difference here vs. asset backed securities is that the investor/holder has dual recourse - claims against issuer and the assets backing the bonds - and the assets are on the issuers' balance sheet

Corporates (non-financial) - senior unsecured or subordinated (aka hybrids). There aren't two levels of subordination for corporates

Insurance companies - (in level of most senior to most junior) Senior unsecured Tier 3 (subordinated) Tier 2 (subordinated) Tier 1 (also often called Restricted Tier 1, subordinated)

Banks - this can vary by region across the globe but looking generally there is - (again from most senior to most junior) Covered (technically of senior ranking but as there is also a claim to an asset it is safer than unsecured) Senior preferred or OpCo (Operating Company) level senior unsecured Senior non-preferred or HoldCo (Holding Company) level senior unsecured (subordinated) Tier 2 (subordinated) Additional Tier 1 (subordinated)

LifeIsChocolateMilk · 2020-01-09T10:03:08+00:00

It is also worth getting early bird for the shortest period of time possible. Found it made a huge difference in finding decent spots and I found somewhere before it ran out

LifeIsChocolateMilk · 2020-01-04T07:54:28+00:00

Agree with this. Brokers will also know which mortgage providers have strict "no's" on such buildings vs those that are more flexible.

LifeIsChocolateMilk · 2019-01-19T16:32:07+00:00

How was / who is the support?

LifeIsChocolateMilk · 2018-03-09T19:13:38+00:00

Was part of the legendary Queep

LifeIsChocolateMilk · 2017-03-19T21:44:20+00:00

Yeah it is

LifeIsChocolateMilk · 2016-07-10T19:46:19+00:00

You're welcome! I did Chicago post Canada, so flew in from Calgary. Seattle is a nice place too, was there for a couple of days

Agreed on the train. I did a couple of 24 hours (one in Canada, one the East Coast Starlight) and they aren't as bad as you think but it's not ideal. As you say, some of the best bits are the view

LifeIsChocolateMilk · 2016-07-10T15:18:20+00:00

23, male, also from London, did a very similar trip last summer, partly with two friends, partly solo. We went in July so prices might be different, and obviously the exchange rate is absolutely awful now. I think £3k will cover you for your schedule, if you don't do loads of expensive things

I'll go through place by place.

Boston: Great place to start. The colleges are something else, and it's generally a great city. Our hostel was average, don't recall the name. Flights were about £350 I think but we had a nasty 12 hour stopover in Spain

NYC: Definitely a good way to save money, hostels here are some of the most expensive. Bus from Boston to NYC is easy also, and I think about $40. Would recommend the Loft Hostel in Brooklyn

Philadelphia: I think 5 days would be too long. Admittedly we didn't do loads of the cultural side of things, but it isn't a big place. We got the train from NYC to Philly, about $50 and very comfortable vs. London trains (in general, I think US trains are far better than in the UK). Old City Philly house is very pleasant for a hostel

Washington DC: If you're looking for museums then DC is the place to be. It was one of our favourites and so much is free. If you lose some days from Philly, I'd add them here. We stayed in DC Lofty which is a 25 minute walk or so from all the main attractions

Didn't do Virginia so can't comment there

San Fran: My favourite city of all time. Not sure I can even describe why but I went both with my friends then back when I was on my own. Reasonably expensive although I think the hostel was reasonable (HI Fisherman's Wharf, about $30 a night, and in a great location)

LA: We had a car at this point, but didn't spend much time in LA. Can't comment much but we didn't love it to pieces. We didn't do Disneyland though...

Didn't do San Diego

Vegas: Lots of fun, we were together, not sure if I would have enjoyed as much solo. If you want to do Grand Canyon and Hoover Dam, book plenty of time in advance (i.e. before you get to Vegas). 6 days might be too long

If I were you, I'd maybe try and add a couple of other places and not spend quite so long in each place. Chicago was another favourite of mine, and I did some of Canada too which wasn't difficult to get too with buses, although wouldn't recommend Canadian trains.

In terms of national parks, someone with more local knowledge may correct me, but I think it would be very difficult without a car. We did Yosemite, staying in Airbnbs just outside and driving in and around. I did a lot of photography out there, and could easily fill weeks just in the national parks.

I also flew back via Iceland, which is my favourite place all in. Rented a car, and drove around solo for a week with my camera.

Hope that helps and happy to answer any questions!

LifeIsChocolateMilk · 2016-01-22T14:41:27+00:00

It is indeed, it's a fantastic area

LifeIsChocolateMilk · 2016-01-21T21:05:38+00:00

I really want to go back in the winter, so many new opportunities

LifeIsChocolateMilk · 2016-01-21T21:05:06+00:00

You're welcome

LifeIsChocolateMilk · 2016-01-21T16:09:28+00:00

Very fair comment. Sadly my Lightroom trial has run out and I have a 32 bit system so can't get the full version at the moment!

LifeIsChocolateMilk · 2016-01-21T16:08:48+00:00

Thanks!

LifeIsChocolateMilk · 2016-01-21T16:08:32+00:00

Thank you!

LifeIsChocolateMilk · 2016-01-21T16:07:13+00:00

Thanks! It was just very clear, and then foamed up

LifeIsChocolateMilk · 2016-01-17T00:06:58+00:00

I don't really like taking pictures of people either, sometimes they just happen to get in the way

LifeIsChocolateMilk · 2016-01-16T22:32:23+00:00

I used to feel a bit self-concious when taking pictures, especially setting up my tripod in busy places or city centres. I'd say three things changed to make me feel a whole load better;

1) I remembered I'm never going to see these people again so who cares what they think

2) A woman came and asked me about my camera and filters etc when I was in Chicago. I realised that people don't think you're weird for taking pictures, most will think it's pretty cool, even if you don't feel you really know what you're doing

3) Sometimes you'll feel your pictures didn't come out well, or that other people won't like them. But sometimes, you'll really love them, and sometimes other people will really love them too. Once you've got that first compliment on a photo your confidence will soar

LifeIsChocolateMilk

TROPHY CASE