Sep 2022 – a momentous month

The Queen is dead. Long live the King.

The Queen is dead

The prime minister is gone. The prime minister is a goner.

The prime minister is gone

It has been a momentous month.

The prime minister is a goner

Monevator captured the chaos well with a tweet (that I am saving for the grandkids here) showing how the UK’s index-linked bonds have fallen by 50%.

It is times like this that I realise I simply don’t understand bonds enough. I do not understand, for instance, why the index-linked bonds (blue in the graph below) have collapsed so much more than ‘vanilla’ bonds (whole market shown in yellow – which includes the index-linked bonds). Especially when inflation is in fact shooting higher than expected.

UK government bonds YTD. Blue are index-linked, yellow are whole market

I am feeling thoroughly disillusioned with index-linked bonds. They represent almost half my UK bond position, having felt like ‘those bonds which *do* protect you from inflation’. For whatever reason, I have been sold a pup. By the time you read this I will have shifted my bonds position markedly towards the ‘vanilla’ versions while I still can (i.e. before the Bank of England’s temporary support expires in 10 days’ time).

Market movements in the month (in CC), Sep 2022

But while in the UK we have been assailed with ‘woe is us’ stories in the media, it turns out ‘woe is everybody’. US equities have plummeted in September – who knew? – and while the GBP has not fared well it turns out that the AUD fell more than 3% against, imagine, the GBP. The news you don’t get in the UK.

My levered position leaves me really feeling the pain. The markets I target exposure to, weighted to my exposure, fell by 8%. And, surprise, so did my portfolio.

My leverage is back to record levels. This is frustrating but there is a key reason for it – I found myself withdrawing over £50k during the month from my portfolios for angel/venture capital commitments, among other things. So my margin loan increased slightly in size during the month – despite my best efforts.

Leverage, by account, since 2016

I am significantly short of cash – hundreds of thousands of pounds so. This imbalance from my target is mostly in GBP – reflecting my (so far correct) expectation that the GBP will fall against the USD and EUR. Tho I am ‘overweight’ USD, this is still a USD debt position but thankfully a smaller debt than I would normally target.

Delta from target allocation, 1 October 2022

My overweight position is a bit light on UK equities, and has generally been light on UK bonds too though at the time of writing the Bank of England intervention has corrected that imbalance.

In better news, I have just had the second biggest income month in my history. This comes off a poor July and August, so I can’t draw too many conclusions. If it wasn’t for the withdrawals I had to make in September this income would have helped me reduce the size of my margin loan. In fact I ended the month with over £10k of spare cash in unsheltered investment portfolios – this will all go towards reducing reducing my debt over the next couple of weeks.

Which brings me, finally, on to my energy usage. I’m now tracking energy usage more carefully than my financial spending – and I had a pretty good month. I managed to resist turning the heating on. I used significantly less than 2k kWh, including the electric car. Unfortunately, temperatures have just taken a dip, just as higher energy prices kick in.

8 thoughts on “Sep 2022 – a momentous month”

  1. Does this mean that ILGs now promise a positive real return to maturity?

    Where should I look to find out?


  2. Index linked gilts had a much worse starting yield than vanilla gilts (most were at negative yields), which explains the fact that they dropped more.

    Liked by 1 person

    1. Oh and of course there’s a big difference in duration of the two funds! The Index Linked Gilt Fund is c18 years and the Vanilla one is c13 years.

      Liked by 1 person

  3. Suppose I consider buying the 2030 ILG and holding it to maturity. Where should I look up its price and real yield to maturity?


  4. I wouldn’t be selling your linkers if your current weighting is only 5% of your portfolio. You should be absolutely willing those linker yields higher. Last week, the real yield on the 30-year and 50-year linkers went for a short time above 2% (currently back at 0%). That was last seen in 2003. I agree it’s been a real yield earthquake this year but we did start the yield with the real yield on the 2068 linker at -2.3%, a price of 300. It was hardly a value proposition.

    We’re currently at 0% and while I’d love to see 2% again, I sort of doubt it would be sustained. A real yield of 2%+ on the 50-year would be an absolute gift to any pension fund, lifer, HNW or UHNW type. It’s a pseudo-annuity. Your own defined-benefit pension. Everyone would be averaging into linkers. If it went to 4% (1993 level), then people would be going all in. UK equities would be utter toast before long. You’d have to scrape them off the floor at those levels.

    Liked by 1 person

  5. I’m backing up the truck on long duration government bonds at the moment. I’ve found some with 7.x YTM with maturity around 2050. They’re in Indonesia, but that’s ok as I’m fairly settled here now (Bali). I had a pile of cash to build some more villas, but with those yields I really don’t see the need to incur the additional hassle of building / managing properties (just need to work out what to do with the extra land I bought – might just extend the garden). 10% final WHT here on govt bonds, so 90% of the coupon lands with you and that’s all for taxes. Biggest risk I see is that inflation / interest rates run away in the medium term, but if I hold to duration, I can ride the short term mtm losses. Never touched bonds before with interest rates being so low and always seemingly heading lower. But now seems like the right time to get long duration.

    Liked by 1 person

      1. Unfortunately IBKR doesn’t allow trading of IDR currency or Indonesian individual stocks directly (there are a few US listed Indonesian ETF’s I believe, but haven’t looked at them in detail). I’m just buying the bonds through local banks (spreading my purchases across a few to mitigate any potential CP risk). Some of the banks will allow foreigners to open accounts without residence permits (so it could be setup while on holiday for example). Some of the banks have it all online – so you can buy / sell the bonds online, see current Mtm, etc, but some of them are a bit more “old school” requiring some paperwork. There’s generally a spread of about 2%, but other than that, most of the banks don’t seem to charge any fees (I did see one had a custody fee, but I just avoided them).

        I’ve built a place here now and plan to be based here most of the time, so not so worried about the IDR FX exposure (as I have ongoing expenses here). With rates spiking up now, seems like a great time to lock in some duration and remove some variables from my retirement planning.

        Liked by 1 person

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