3.5% War Loans
Discussion
Am I right in saying that the value of these on the open market rises as interest rates fall?
I have a fair bit tied up in some that were bought by my grandfather, but since 2006 the value has dropped like a stone.
The 10 year peak was just short of £92 / unit in Jan. 2006, the low being around £72 in June 2007.
With the latest cut in interest rates, they appear to generate interest above the base rate, so should I be expecting to see the value rise?
I figure that, if they get back to the 2006 peak, I may well be better getting shot of them and using the money more productively.
I have a fair bit tied up in some that were bought by my grandfather, but since 2006 the value has dropped like a stone.
The 10 year peak was just short of £92 / unit in Jan. 2006, the low being around £72 in June 2007.
With the latest cut in interest rates, they appear to generate interest above the base rate, so should I be expecting to see the value rise?
I figure that, if they get back to the 2006 peak, I may well be better getting shot of them and using the money more productively.
Alfa_75_Steve said:
Am I right in saying that the value of these on the open market rises as interest rates fall?
I have a fair bit tied up in some that were bought by my grandfather, but since 2006 the value has dropped like a stone.
The 10 year peak was just short of £92 / unit in Jan. 2006, the low being around £72 in June 2007.
With the latest cut in interest rates, they appear to generate interest above the base rate, so should I be expecting to see the value rise?
I figure that, if they get back to the 2006 peak, I may well be better getting shot of them and using the money more productively.
IIRC war bonds have no set redemption date unlike the majority of gilts/bonds so there is no redemption yield to worry about, just the running yield. In effect your grandad lent money to the govt. without them having to say when they'll give it back I have a fair bit tied up in some that were bought by my grandfather, but since 2006 the value has dropped like a stone.
The 10 year peak was just short of £92 / unit in Jan. 2006, the low being around £72 in June 2007.
With the latest cut in interest rates, they appear to generate interest above the base rate, so should I be expecting to see the value rise?
I figure that, if they get back to the 2006 peak, I may well be better getting shot of them and using the money more productively.
Because of this basically, yes you would expect the value to increase as interest rates drop - esp as your investment is now paying interest higher than base rate and is underwritten by the treasury !
If interest rates are at 3.0% and your bonds pay a 3.5% coupon (assuming a nominal value of £1), I would expect them to be trading IRO £1.16 - not sure about this tho?
As an investment it's horses for courses - looks like it's lost about 3-4% over the past 12 months vs 25-30% for the FTSE!
Edited by djmck30 on Saturday 15th November 16:06
Jasandjules said:
Yes, the War Loans have no redemption date, and until interest rates go below 3.5% they won't be redeemed..........A bit of a con by HMG to play on the patriotism of the country.
Indeed. Although they have returned 3.5%, consistently, since around 1918?On the other hand, the money my grandfather 'invested' in war loans back then is equivalent to £1.7m today
Alfa_75_Steve said:
Jasandjules said:
Yes, the War Loans have no redemption date, and until interest rates go below 3.5% they won't be redeemed..........A bit of a con by HMG to play on the patriotism of the country.
Indeed. Although they have returned 3.5%, consistently, since around 1918?On the other hand, the money my grandfather 'invested' in war loans back then is equivalent to £1.7m today
Olf said:
INteresting subject - where can I read more about these chaps?
Do a google search on '3.5% war loan'.As things currently stand, they look like a pretty solid investment.
Not exciting, but solid enough to make them worth a punt if you want guaranteed growth. Obviously they only work at the moment whilst interest rates are low.
Alfa_75_Steve said:
Olf said:
INteresting subject - where can I read more about these chaps?
Do a google search on '3.5% war loan'.As things currently stand, they look like a pretty solid investment.
Not exciting, but solid enough to make them worth a punt if you want guaranteed growth. Obviously they only work at the moment whilst interest rates are low.
Don't really want to change them into something more 'liquid' at the moment, prefer to sit tight on something guaranteed - unless they start to get close to 'face value' - which hasn't happened in living memory.
I still wish I could go back and tell my grandfather they're not a great investment. But I suppose back then, he was doing what he thought best for the country. Which is fair enough.
Now.... how about this British Leyland share certificate I have.... that's probably worthless to anyone other than some sad British car enthusiast.
I still wish I could go back and tell my grandfather they're not a great investment. But I suppose back then, he was doing what he thought best for the country. Which is fair enough.
Now.... how about this British Leyland share certificate I have.... that's probably worthless to anyone other than some sad British car enthusiast.
Alfa_75_Steve said:
Don't really want to change them into something more 'liquid' at the moment, prefer to sit tight on something guaranteed - unless they start to get close to 'face value' - which hasn't happened in living memory.
I still wish I could go back and tell my grandfather they're not a great investment. But I suppose back then, he was doing what he thought best for the country. Which is fair enough.
Now.... how about this British Leyland share certificate I have.... that's probably worthless to anyone other than some sad British car enthusiast.
But that assumes that if they hadn't been locked in that either your G-Dad or your parents wouldn't have spent the dosh on loose womenI still wish I could go back and tell my grandfather they're not a great investment. But I suppose back then, he was doing what he thought best for the country. Which is fair enough.
Now.... how about this British Leyland share certificate I have.... that's probably worthless to anyone other than some sad British car enthusiast.
Alfa_75_Steve said:
Obviously they only work at the moment whilst interest rates are low.
Not really. At risk of teaching you to suck eggs, the "3.5%" does not represent the rate of return an investor will achieve by buying these bonds. The investor's return depends entirely on the price at which he buys the bonds. If interest rates go up, the price of these bonds falls so that the expected return from buying the bond at the new lower price is equal to the new, higher levels of interest available on other investments. In general, the last thing you want to do (all else equal) is to buy fixed interest bonds when interest rates are already low. Assuming rates aren't (can't) go much lower, then there's little or no scope for the price of the bonds to rise much higher.Alfa_75_Steve said:
OK, yes, I understand that.
What I want to understand is what conditions in the economy would lead to them rising in value again, as they did a couple of years ago?
You need the longterm inflation outlook to look very benign, demand for long-dated gilts (from life insurers and pension funds) and government borrowing to be under control (so they're not issuing reams of new long-dated debt).What I want to understand is what conditions in the economy would lead to them rising in value again, as they did a couple of years ago?
In the short-term the recession and credit crunch will hold back inflation, but (surely?) the underlying story is one of increasing inflationary pressure ... i.e. a structural squeeze on commodities as India, China, etc expand ... every chance the monetary stance will be left too loose as we start to recover from the current credit crunch and recession in the coming years, governments spending borrowed or printed money by the heap. At the very least, I find it hard to see why any investors would have _confidence_ that we will never see inflation again in our lifetimes, and those are the exact sort of "new paradign" terms in which people were speaking a few years ago when these bonds' prices touched 90.
The price of these bonds is very, very sensitive to long term interest rates when interest rates are already low as they are at the moment. If long term interest rates move by 1% point, the price will vary by about 20% points. Currently those bonds are yielding about 4.5%. Without any obvious economic changes, those long term rates could easily fluctuate by +/- 0.3% just in the normal ebb and flow of the market, and that will drive the price of these bonds up and down by something like +/- 6% ... they're highly volatile. (That in itself works against them in thee nervous markets as people are risk-averse and looking to reduce volatility.) You might be able to sell them a bit higher than they are at the moment, but it would be a matter of luck.
To be honest, on a longterm view, these bonds are currently pretty well priced. Go back to the early 1990s and the prices were between 30 and 40. See Bloomberg chart below in all its hedieously coloured glory. The price at about 90 really does look like an anomally that isn't very likely to return ... an example of "irrational exuberance" as Greenspan used to put it.
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