Citywire for Financial Professionals

View the article online at http://citywire.co.uk/money/article/a655886

Diary of a Dumb Investor: should I short gilts?

I have found a way to profit not once, but twice from a decline in UK government bonds. Tempting.

 
Diary of a Dumb Investor: should I short gilts?

I’ve spent the last couple of hours drowning in gilts, submerged in investment commentary and economic forecasts. I only allowed myself to return to the surface once I had found an answer. The question: should I seek to profit from the decline of UK government bonds?

How did I, a Dumb Investor, get here, poised to short – double short in fact! – UK sovereign debt?

It started with my bond fund. Despite being infected with fears about a bond bubble bursting, and the decline of gilts as the UK loses its ‘safe haven’ status, I decided against selling the fund. I’m holding on, you may remember, partly for diversification. And partly because the fund manager reminded me that he isn’t restrained to investing in expensive government bonds. This is no monolithic gilt grab.

My portfolio: Click to enlarge

That doesn’t mean I couldn’t take a more specific bet on the decline of gilts, I realised. After all, there is a strong argument that the UK will become the market’s whipping boy this year, not least as our finances start to look relatively weak in contrast to improvements elsewhere.

How could I do that? I could put some money into an exchange traded fund (ETF) that moves in the opposite direction to the returns of gilts. In fact I could go further and buy an ETF that gives you twice the opposite return of gilts, the db x-trackers II UK GILTS Double Short Daily ETF . So if gilt returns fall, I get a mirror image rise…times two, thanks to the magic of derivatives! And this happens on a daily basis.

But, I have decided against this. For now.

I do believe this is a bubble – as City gurus have been saying for several years now – but one that won’t burst yet. This is because even as normal investors pull out, several much bigger players in the market are still buying: foreign investors, praising the UK’s ‘consistent’ policies; the still-stimulating Bank of England; and pension funds, apparently for ‘liability matching’.

What’s more, Deutsche Bank, which sells the ETF I've been eyeing, describes it as a ‘day trading product’, one for ‘sophisticated investors’. I’m uncertain whether that this a standard ignorable small print warning, but it puts me off nonetheless. Seems like too much of a liability for a twice-a-week portfolio checker kinda guy like me.

Besides, I’ve got no cash. Barring a couple of hundred pounds, I’m fully invested. Last week’s risky £1,000 whirl on shares in AIM-listed Aurum (AURU.L) (which is incidentally up 7% today after announcing ‘encouraging gold prospecting results’ in western Spain) means I now must sell something in order to buy.

Still, I feel good. My original £10,000 portfolio is now worth £10,172.03 and I’m learning.

15 comments so far. Why not have your say?

YoungMoney

Feb 05, 2013 at 09:53

I'm aware of the problems with shorting share indices - e.g. SUK2 to short the FTSE 100 X 2 - it's in a constant down-trend and only suitable for very short term bets (I'm assuming due to fees and paying of dividends to the shareholder). Are there any similar problems in gilts - e.g. do you have to pay the yield while you borrow the gilts to short sell?

report this

Anonymous 1 needed this 'off the record'

Feb 05, 2013 at 13:18

Bursting bubbles cannot be timed.

report this

incogniti

Feb 05, 2013 at 15:48

What would the late great Mr Rothchild do, as in 1815?

report this

rik

Feb 05, 2013 at 17:35

Rothschild would read his pidgeon message very carefully!

report this

Michael Peters Fenwicks

Feb 05, 2013 at 19:17

I reserve comment as the thinking behind this latest strategy amuses me a little.

Simple comment ponzi strategy.

report this

Dennis .

Feb 05, 2013 at 19:17

With a portfolio of this size you need to be mindful of dealing costs and management charges (from the likes of HL). You might be better off just putting £10K into Fundsmith.

report this

jeffian

Feb 05, 2013 at 19:34

Is this the diary of a dumb investor, or a dumb gambler? Shorting is one of the few (the only?) activities where you can lose (potentially substantially) more than you 'invest' (or bet). It's clearly a useful tool in the arsenal of the daytrader, but whether it counts as 'investment' is highly questionable IMHO.

report this

Tom Bayley

Feb 05, 2013 at 21:15

Isn't it all gambling now that central banks have the markets rigged?

report this

jeffian

Feb 05, 2013 at 22:36

No, Tom, it isn't. Banks have nothing to do with the stock market. If you're referring to the LIBOR issue, it's even questionable whether the average Joe suffered at all, as the misreporting seemed designed to keep interest rates down!

report this

Tom Bayley

Feb 06, 2013 at 00:32

The thought hadn't crossed my mind. My (admittedly facetious) point was that all asset prices, stocks and property as well as bonds, have been influenced by central bank activity. Should have kept my mouth shut ;-)

report this

Cape Town

Feb 06, 2013 at 03:19

The people / organsiations who suffered from the LIBOR and misselling scams are not those being compensated. It is balckmail really - pay these fines or we'll expose you to court action. The governments get the fine money.

How just is that!

report this

Richard100

Feb 06, 2013 at 14:33

@Jeffian

"Banks have nothing to do with the stock market" What a pompous comment. The collapse of long-term interest rates by the Bank of England is a direct response to the self inflicted carnage in the banking industry that followed overtrading/ lending in speculative assets. Because the market no longer sets the long-term interest rate Tom is exactly right. Stock market trends are a function of policy not free markets. I hope the Central Banks have it right.

PS Jeffian seems to think that LIBOR manipulation is OK too. Does that mean that theft is OK if it only affects someone else or is it just banks that are exempt. LIBOR is used to mark prices in derivatives contracts. If banks move them around on key dates so that their derivative positions settle profitably then this is theft. No question about it. In a fair society this would be punishable by severe gaol sentences not fines. Not least "pour encourager les autres"

report this

jeffian

Feb 06, 2013 at 17:58

Oh dear. Well sorry to everyone I've managed to upset.

Just for the record, of course I don't "think that LIBOR manipulation is OK" nor did I say so. It strikes at the heart of one of the market's levers and undermines trust in the City of London. What I did say, and which is true I believe, was that the manipulation (which was designed to disguise which banks were in trouble) had the effect of lowering LIBOR and, therefore, inadvertently benefited the average Joe whose loans were set by reference to it.

Anyway, I'll creep off with my tail between my legs now!

report this

snoekie

Feb 10, 2013 at 15:12

A risky gamble. The stock market is risky, as you have found out, but the chance for gain is far greater than trying to second guess when the bubble is going to burst, and besides which divis are paid.

BTW, congrats in getting the account into 'credit'.

report this

John Osborne

Feb 11, 2013 at 10:05

When is RIT going to recover its poise ?

I think a question of patience a while longer with the new manager.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Look up the shares

  • Aurum Mining PLC (AURU.L)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More

More from us

What others are saying

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Investors brace for bond market meltdown

by Daniel Grote on Nov 25, 2014 at 11:43

Sorry, this link is not
quite ready yet