More on Index Linked

[billG]

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.

[gbjbaanb]

I noticed gilts went up in times of market turbulence, or worries. I even traded some gilts over a month or so when the Italian banks looked like they were going under, and almost did the same for German bank recently. Wish I had!

For me, gilts are somewhere to store your cash if you are worried about equity markets to invest in them. I also note that the gilts I traded in are now up a lot more than then... suggests the clever money has already started to shift to them. That might say something about the near future for equities in itself.

[richfool]

So what would be the prospects for a) TIPS and b) Corporate bonds, - if we run into a recession or bear market?

[Alaric]

So what would be the prospects for a) TIPS and b) Corporate bonds, - if we run into a recession or bear market?

Corporate Bonds rely on the issuing Company having enough cash flow or profit to pay the coupon on the Bond. A recession calls this into doubt, so yields might rise, meaning prices would fall.