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Floating rate bonds V index linked bonds

Gilts, bonds, and interest-bearing shares
colin
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Floating rate bonds V index linked bonds

#131631

Postby colin » April 12th, 2018, 10:42 am

What do other investors think of the way floating rate bonds which pay a return above LIBOR compare to index linked bonds in the manner which they would be expected to perform in changing interest rate scenarios?

Alaric
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Re: Floating rate bonds V index linked bonds

#131655

Postby Alaric » April 12th, 2018, 12:20 pm

colin wrote:What do other investors think of the way floating rate bonds which pay a return above LIBOR compare to index linked bonds in the manner which they would be expected to perform in changing interest rate scenarios?


It's going to depend on the relationship between the inflation measure (still RPI presumably) and the LIBOR rate. Money remains cheap with the risk free rate somewhat below recent inflation rates, as confirmed by the negative real yields on indexed bonds.

In terms of price though, isn't a floating rate bond going to hang around par regardless, whilst the price of an indexed linked bond would likely fall with a rise in interest rates, if the inflation outlook remained unchanged?

colin
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Re: Floating rate bonds V index linked bonds

#131720

Postby colin » April 12th, 2018, 4:57 pm

In terms of price though, isn't a floating rate bond going to hang around par regardless, whilst the price of an indexed linked bond would likely fall with a rise in interest rates, if the inflation outlook remained unchanged?


Yes that's what i'm thinking, that a portfolio of investment grade short term floating rate bonds would behave very much like a bank savings account with no fixed deposit term, so much less volatile than linkers ,would be interested to learn of any reasons why it might be otherwise ?

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Re: Floating rate bonds V index linked bonds

#131724

Postby Alaric » April 12th, 2018, 5:15 pm

colin wrote:Yes that's what i'm thinking, that a portfolio of investment grade short term floating rate bonds would behave very much like a bank savings account with no fixed deposit term, so much less volatile than linkers ,would be interested to learn of any reasons why it might be otherwise ?


Prices of individual bonds could fluctuate with a Company's credit rating. If the credit rating improves the bond rises above par and if it falls the price goes down with it. The effect would be limited by the ability of either the issuer or the lender to force repayment at par, after which it could be refinanced on the new risk basis. There are no doubt some bonds out there with complex terms designed to achieve or possibly prevent this. Margin over LIBOR might itself be changeable.

At least in principle it should behave like a slightly wobbly bank savings account. I've an idea there may be an ETF or two with that investment mandate. Reviewing the performance of these should give an insight.

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Re: Floating rate bonds V index linked bonds

#132086

Postby GoSeigen » April 14th, 2018, 7:24 am

colin wrote:What do other investors think of the way floating rate bonds which pay a return above LIBOR compare to index linked bonds in the manner which they would be expected to perform in changing interest rate scenarios?


colin, one can only really hand wave about such a broad question unless it is broken down further. Are you wondering about specific bonds and have a particular interest rate outloook? If not, it's a big subject. You'd want to treat the tenor of bond and the variation of interest rates as independent variables and then create some plausible scenarios. In general though, floaters tend to adjust fairly regularly as already discussed so most could be considered short-dated and tethered to par, while index-linked bonds have a range of maturities. Terms of individual bonds can very tremendously though.

If the jargon above is unfamiliar I'm happy to clarify.

GS

colin
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Re: Floating rate bonds V index linked bonds

#132108

Postby colin » April 14th, 2018, 9:23 am

It's going to depend on the relationship between the inflation measure (still RPI presumably) and the LIBOR rate.


So LIBOR as far as I can tell pretty much tracks changes in central bank interest rates which is pretty much what a collection of savings accounts will do, and that sometimes interest rate changes track changes in inflation and sometimes they can't.
At least in principle it should behave like a slightly wobbly bank savings account.

Yes this is what I am assuming. Less volatile than a fund of Linkers but no guarantee that returns will match inflation.
These funds are new to me and it is an asset class I am unfamiliar with so it's useful to garner opinions, thank you all.

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Re: Floating rate bonds V index linked bonds

#132159

Postby hiriskpaul » April 14th, 2018, 1:48 pm

The main practical differences between them are 1) floaters typically have lower duration than linkers, but carry credit risk; 2) linkers are predominantly government bonds and so have no (very low) Credit risk.

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Re: Floating rate bonds V index linked bonds

#132167

Postby colin » April 14th, 2018, 2:33 pm

These days some floaters have been issued by the US govt, one can by mixed floater funds of investment grade bonds and US treasuries.

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Re: Floating rate bonds V index linked bonds

#144824

Postby richfool » June 10th, 2018, 4:08 pm

With the expectation that US interest rates will rise further (and sooner), is there not a case for investing in US TIPS? And if, the answer to that is "yes", in theory, will the market already have priced that in?

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Re: Floating rate bonds V index linked bonds

#144988

Postby colin » June 11th, 2018, 5:04 pm

Index Linked Bonds are generally said to do better than conventional bonds when future inflation turns out to be higher than the market expectation,which is revealed in the yield difference between index linked and nominal bond of the same maturity date. So no, rising interest rates would not be good for index linked bonds , especially so if the rising rates are sufficient to reduce inflation.

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Re: Floating rate bonds V index linked bonds

#145031

Postby richfool » June 11th, 2018, 8:48 pm

colin wrote:Index Linked Bonds are generally said to do better than conventional bonds when future inflation turns out to be higher than the market expectation,which is revealed in the yield difference between index linked and nominal bond of the same maturity date. So no, rising interest rates would not be good for index linked bonds , especially so if the rising rates are sufficient to reduce inflation.

Thank you Colin, for that explanation.

What I am not 100% clear on (then) is why the the likes of CGT, PNL and Ruffer hold large quantities of index-linkers including US TIPS. I understood that it was to protect against rising inflation (which would go hand in hand with rising interest rates - to suppress that inflation), and as something of a counter-balance against falling equities.

colin
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Re: Floating rate bonds V index linked bonds

#145073

Postby colin » June 11th, 2018, 11:38 pm

Because they are betting that future inflation will be higher than the break even rate. If you read some of the annual reports of the trusts you mention you may well detect a belief that western governments are unwilling to contain inflation because a higher inflation rate will erode the value of debts. The strength of their convictions can be gauged by noting the maturity dates of the index linked bonds they have bought.
Index linked bonds will pay higher rates of interest as inflation rises but when interest rates rise all bonds will need to pay higher coupons so prices will fall.

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Re: Floating rate bonds V index linked bonds

#166080

Postby richfool » September 13th, 2018, 12:55 pm

Colin wrote:Because they are betting that future inflation will be higher than the break even rate. If you read some of the annual reports of the trusts you mention you may well detect a belief that western governments are unwilling to contain inflation because a higher inflation rate will erode the value of debts. The strength of their convictions can be gauged by noting the maturity dates of the index linked bonds they have bought.
Index linked bonds will pay higher rates of interest as inflation rises but when interest rates rise all bonds will need to pay higher coupons so prices will fall.

Just re-reading this one. So what would happen if inflation doesn't take off and/or instead we drop back into recession again (if for example the FED tightens too much)? And what would then happen to the Gov't bonds and TIPS holdings of wealth preserving IT's like PNL & CGT.

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Re: Floating rate bonds V index linked bonds

#166409

Postby toofast2live » September 14th, 2018, 6:01 pm

If inflation doesn’t take off they will preserve somewhat less of your wealth. PNL over the last year, for example.

On the subject of Floating Rate bonds the etf FLOT is a proxy for their performance I would imagine. Up about 1% in the last year according to HL.

colin
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Re: Floating rate bonds V index linked bonds

#166506

Postby colin » September 15th, 2018, 8:07 am

Up about 1% in the last year according to HL.

Hi
does that include dividends ?

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Re: Floating rate bonds V index linked bonds

#166568

Postby toofast2live » September 15th, 2018, 2:59 pm

Probably not

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Re: Floating rate bonds V index linked bonds

#166639

Postby Gadge » September 16th, 2018, 5:47 am



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