A gilt ladder involves purchasing UK government bonds (gilts) with staggered maturity dates. Each gilt matures at regular intervals, providing predictable cash flows that can be used for income or reinvestment, effectively managing interest rate risk.
A gilt ladder is used by investors who want absolute certainty in future cash flows. By purchasing a sequence of UK government bonds (gilts), investors secure payments at predetermined intervals, effectively matching future financial obligations without the risk of default. This strategy is particularly useful for managing long-term financial plans and ensuring reliable income streams.
In contrast, a corporate bond ladder involves investing in a sequence of corporate bonds to secure regular cash flows. Unlike gilts, these bonds carry default risk tied to the issuer's financial stability. Investors typically choose corporate bond ladders to pursue higher yields, accepting the trade-off of potentially less certainty regarding future payments.
This app abstracts the gilt ladder concept slightly and hedges the forward rate profile of a cash flow. It aims for an accurate hedge but exact cash flows are not the target. The implicit assumption is that users can manage short-term cash requirements and the hedge portfolio seeks to provide sufficient resources to cover these, regardless of changes in interest rates.
When a gilt matures, you receive the principal back. You can then either reinvest these funds into new gilts/bonds, spend them, or allocate them elsewhere depending on your financial strategy.
Interest from gilts is typically taxable as income. However, capital gains from gilts are usually tax-exempt for UK residents. Always consult a financial advisor or tax professional for personalised advice.
The forward gilt curve represents the market price for the Government borrowing on one date and lending on the next. The version I use is the continuously compounded forward curve, which I set as flat between future MPC meeting dates. Technically, this is called a constant piecewise forward curve. It's calculated by extracting a non-arbitrage discount curve from representative Gilts. I don't show it on the App, as the exact shape or level doesn't change the results materially.
Gilt ladders provide certainty in timing and amount of cash flows, with minimal default risk and often higher yields than savings accounts. Unlike annuity payments, the cash flows are not conditional upon your survival, and any residual holdings not matured will remain part of your estate.
The hedge ratios are the results of the linear regression and show the nominal amounts of the bonds that "hedge" the cash flow profile. Stored and measured as a portfolio, it might be used as a benchmark against which to measure investment returns of a portfolio designed to meet those cash flows. This is not investment advice.
The forward rate exposure displays the sensitivity of the assets and liabilities to changes in the forward rate curve (a way of displaying the discount curve - see explanation). If the forward curve is a bp (0.01%) lower across its whole length, the liability or asset values will increase by the total area shown. If one part of the forward curve moves down, the liabilities or assets will increase in value by the area under the part of the curve that has moved. The total area is similar to the concept of duration.