Re: More on Index Linked
Posted: July 21st, 2019, 12:13 am
Just looking at this thread a year after the post.
Here are my thoughts on the behaviour of bonds and bond funds in a downturn of equities.
Scenario: Say Equities index is 50% down.
Corporate Bonds (or Credit Bonds): The prices will fall on the fear of default. The lower the credit quality and the longer the duration the bigger the price fall. Poor quality will have falls similar to the equities.
Government Bonds: The assumption is that the Central Bankers will lower interest rates after a crash to stimulate growth. Rates down = bond prices up. So people pile into regular Government Bonds because there is little to no chance of default pushing the prices up and The Bankers do indeed cut rates so prices rise further. As has been suggested the rises are modest compared to equities flux and depends on the duration of the bond or fund. Nevertheless you generally make some money. Of course it goes without saying that the professionals will buy such bonds at the first hint of trouble and so retail investors cannot hope to make significant bonds gains unless they held them before the downturn occurred.
Government Inflation Bonds (linkers or TIPS): Assuming the economy was growing leading up to the crash and in general high growth tends to stimulate inflation (not allowas). So inflation expectations will be say moderate and after the crash growth will be less and so inflation expectation will be lower and therefore these bonds generally fall in value. But of course there are other considerations. Say The Bankers do lower rates making the currency is less attractive meaning imports are more expensive and goods and services rise causing an increase in inflation but here is a lag (6m+) before this is reflected in the inflation bond prices. On the other hand if every country has just lowered their rates then there may not be much of an inflation event.
This is roughly what I observed after the 2008 crash.
Here are my thoughts on the behaviour of bonds and bond funds in a downturn of equities.
Scenario: Say Equities index is 50% down.
Corporate Bonds (or Credit Bonds): The prices will fall on the fear of default. The lower the credit quality and the longer the duration the bigger the price fall. Poor quality will have falls similar to the equities.
Government Bonds: The assumption is that the Central Bankers will lower interest rates after a crash to stimulate growth. Rates down = bond prices up. So people pile into regular Government Bonds because there is little to no chance of default pushing the prices up and The Bankers do indeed cut rates so prices rise further. As has been suggested the rises are modest compared to equities flux and depends on the duration of the bond or fund. Nevertheless you generally make some money. Of course it goes without saying that the professionals will buy such bonds at the first hint of trouble and so retail investors cannot hope to make significant bonds gains unless they held them before the downturn occurred.
Government Inflation Bonds (linkers or TIPS): Assuming the economy was growing leading up to the crash and in general high growth tends to stimulate inflation (not allowas). So inflation expectations will be say moderate and after the crash growth will be less and so inflation expectation will be lower and therefore these bonds generally fall in value. But of course there are other considerations. Say The Bankers do lower rates making the currency is less attractive meaning imports are more expensive and goods and services rise causing an increase in inflation but here is a lag (6m+) before this is reflected in the inflation bond prices. On the other hand if every country has just lowered their rates then there may not be much of an inflation event.
This is roughly what I observed after the 2008 crash.