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Government Bond questions

Gilts, bonds, and interest-bearing shares
moneybagz
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Government Bond questions

#184316

Postby moneybagz » December 2nd, 2018, 12:25 pm

Hi,

Could somebody offer some advice to a newbie please?

In Ray Dalios all weather portfolio he recommends:
15% Intermediate US Bonds (7-10 year treasuries)
40% Long Term US Bonds (20-25 year treasuries)

In Tim Hales 80/20 Global Style Tilts portfolio he recommends:
10% Short Dated Bonds AA (0-5 years)
10% Inflation Linked Bonds AA (0-5 years)

Tim Hales argument is that short term bonds will provide the necessary protection during a market crash. The performance of them during the last two crashes is shown below:

Tech wreck 2000-2003
-46% FTSE All-Share index
+23% FTSE British Govt (0-5 years)

Credit Crisis 2007-2009
-41% FTSE All-Share index
+13% FTSE British Govt (0-5 years)

I'm confused which bonds to choose. Should I go short/intermediate/long or a combination of them all? Global or UK based?

Many Thanks

Alaric
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Re: Government Bond questions

#184326

Postby Alaric » December 2nd, 2018, 12:46 pm

moneybagz wrote:Tech wreck 2000-2003

+23% FTSE British Govt (0-5 years)

Credit Crisis 2007-2009

+13% FTSE British Govt (0-5 years)


Short term bonds as with all bonds go up in price when interest rates fall. With 0% a natural floor for bonds that aren't linked to price inflation, there's little scope for further rate falls at current interest rates.

toofast2live
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Re: Government Bond questions

#184386

Postby toofast2live » December 2nd, 2018, 7:47 pm

Recency bias.

You have to go back to the '70s for rising interest rates,and rising inflation. Bonds and equities toasted you and destroyed a generation.

Gold, my man, GOLD will be the only asset that saves you. Even then it is humbling to learn that NO ASSET has risen more tha 5% this year (USD). Nowhere to hide?

GoSeigen
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Re: Government Bond questions

#184407

Postby GoSeigen » December 2nd, 2018, 11:08 pm

toofast2live wrote:Recency bias.

You have to go back to the '70s for rising interest rates,and rising inflation. Bonds and equities toasted you and destroyed a generation.

Gold, my man, GOLD will be the only asset that saves you. Even then it is humbling to learn that NO ASSET has risen more tha 5% this year (USD). Nowhere to hide?


Funny definition of asset... presumably you mean no asset class, but how big is a class?

I have some successes in my portfolio but far fewer than I'd like, I must admit.

I agree with Alaric, there is not much upside left in gilts; yet I can see another phase of the bull to come, based perhaps on exactly what toofast2live was highlighting: if everything else is performing miserably then gilts will look good even with poor returns. I'm still waiting for these boards to be filled with people saying how great gilts are before I'll believe they are ready for a crash.


GS

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Re: Government Bond questions

#184436

Postby OwenSwansea » December 3rd, 2018, 10:01 am

If UK 10 Year Gilts are currently a good investment, the outlook must indeed be very grim.

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Re: Government Bond questions

#184452

Postby OwenSwansea » December 3rd, 2018, 11:24 am

The last time I invested in Gilts, the yield was 14%, I sold them when the yield went down to 8%.

I might be tempted if the yield goes to 8% again, which it might do under a Corbyn Government.

[PS. Brexit for ever! ]

GoSeigen
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Re: Government Bond questions

#184513

Postby GoSeigen » December 3rd, 2018, 3:42 pm

GoSeigen wrote: I'm still waiting for these boards to be filled with people saying how great gilts are before I'll believe they are ready for a crash.
GS


Replies on this thread kind-of prove the point. Poster could have held gilts from yield of 8% down to practically zero. Sold them all. Now again thinks they are a poor buy. I would be confident betting that he is wrong again.

Today I took the chance of switching some 10-year gilts into long-dated gilts. The yield spread at 0.8% is at its widest since late 2013. Probably too early for this trade but portfolio is loaded with shares so it's a decent hedge. If yields fall back to 2016 levels long gilt prices will rise some 30%.


GS

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Re: Government Bond questions

#184536

Postby OwenSwansea » December 3rd, 2018, 5:32 pm

If GoSeigen is right about Gilt yields, and he might well be, I would prefer to take my chance with UK Prefs. yielding 6.5%.

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Re: Government Bond questions

#185047

Postby shaunm » December 6th, 2018, 11:32 am

OwenSwansea wrote:If GoSeigen is right about Gilt yields, and he might well be, I would prefer to take my chance with UK Prefs. yielding 6.5%.

I would agree with your view regarding Preference Shares, in particular as they offering in the region of 6.5% yield
The high yield probably reflecting a possible future "Labour" government which I think is highly unlikely, however the infighting over BREXIT within the Conservative party is my zapping my support for them. The Liberal Democrats should have an opportunity of filling the gap. In South Northamptonshire, in a recent Councillor election, a Liberal Democrat got elected in a what I say was a very "Tory Blue" part of the country.

With government yields indicting a possible recession in 2020-21 the preference share market could out perform some of the other asset categories.

I already have 22% of my portfolio within prefs, so unlikely to add further,
Holding, AV.A, GACA, LLPC, NWBD, RSAB, SAN, ELLA & NTEA

GoSeigen
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Re: Government Bond questions

#185073

Postby GoSeigen » December 6th, 2018, 12:36 pm

OwenSwansea wrote:If GoSeigen is right about Gilt yields, and he might well be, I would prefer to take my chance with UK Prefs. yielding 6.5%.


And if I were right and OwenSwansea were right about Preference Share yields following gilt yields then preference share rises will only give a price gain of 15% (due to convexity). To this 15% of course can be added the extra 5%pa income so if the scenario plays out over more than three years preference shares win, for sure.

IMHO though, preference share yields will continue to be compromised by their exposure to capital reduction as discussed earlier this year and gilt yields will lead pref share yields downwards.


Preference shares and long gilts really are completely different animals. About the only commonality is the fixed nature of their income payments. So in fact it is more likely than not that their yield movements will differ significantly. Both can be sensibly traded in a balanced portfolio though not necessarily simultaneously.


GS

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Re: Government Bond questions

#185116

Postby Alaric » December 6th, 2018, 3:04 pm

shaunm wrote:With government yields indicting a possible recession in 2020-21 the preference share market could out perform some of the other asset categories.


Equally if there were a Corbyn government committed to spending money it didn't have, it might find that the price it had to pay for government borrowing moved from the current 1 or 2% out to 4 or 5% or beyond. In that context a Preference Share yield of 6%, being 4 or 5 % above Gilts would likely maintain its yield risk premium and move to a yield of 9 or 10%. The price would fall accordingly.

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Re: Government Bond questions

#185280

Postby shaunm » December 7th, 2018, 9:54 am

But if there was a "Corbyn government committed to spending money it didn't have", perhaps their cost of borrowing may be higher than a very prudent insurance company (Preference Shares)? Very doubtful, but nothing is certain these days!

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Re: Government Bond questions

#185982

Postby GoSeigen » December 10th, 2018, 3:28 pm

GoSeigen wrote:Today I took the chance of switching some 10-year gilts into long-dated gilts. The yield spread at 0.8% is at its widest since late 2013. Probably too early for this trade but portfolio is loaded with shares so it's a decent hedge. If yields fall back to 2016 levels long gilt prices will rise some 30%.


GS


With the yield spread on this trade having narrowed by some 30% in a week, I have decided to take some profit, selling 40% of the long-gilt holding. Will let the remainder run for now.

GS

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Re: Government Bond questions

#248729

Postby GoSeigen » September 2nd, 2019, 4:36 pm

GoSeigen wrote:Today I took the chance of switching some 10-year gilts into long-dated gilts. The yield spread at 0.8% is at its widest since late 2013. Probably too early for this trade but portfolio is loaded with shares so it's a decent hedge. If yields fall back to 2016 levels long gilt prices will rise some 30%.


GS


Took a bit more profit on this trade. Opened in December 2018, gain to date 30% or so. Not bad for gilts.


GS

hiriskpaul
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Re: Government Bond questions

#249025

Postby hiriskpaul » September 3rd, 2019, 8:02 pm

GoSeigen wrote:
GoSeigen wrote:Today I took the chance of switching some 10-year gilts into long-dated gilts. The yield spread at 0.8% is at its widest since late 2013. Probably too early for this trade but portfolio is loaded with shares so it's a decent hedge. If yields fall back to 2016 levels long gilt prices will rise some 30%.


GS


Took a bit more profit on this trade. Opened in December 2018, gain to date 30% or so. Not bad for gilts.


GS

Long duration has been flying along this year. I have been pondering cutting back on my extended duration (currently 25 years) US treasuries ETF, also up over 30% in dollar terms this year, closer to 40% in pound terms. Weighted average yield to maturity is down to 2.6%, but I reckon it could easily go lower. I might just reduce a bit and reinvest in lower duration.

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Re: Government Bond questions

#284988

Postby GoSeigen » February 17th, 2020, 5:31 pm

GoSeigen wrote:
GoSeigen wrote:Today I took the chance of switching some 10-year gilts into long-dated gilts. The yield spread at 0.8% is at its widest since late 2013. Probably too early for this trade but portfolio is loaded with shares so it's a decent hedge. If yields fall back to 2016 levels long gilt prices will rise some 30%.


GS


Took a bit more profit on this trade. Opened in December 2018, gain to date 30% or so. Not bad for gilts.


GS


Some weeks ago I sold the last of these gilts at about 198p for almost 30% gain over 15 months.

Other news today: announcement that London County 3% Consolidated Stock will be redeemed at par on 1 Mar. I don't mind losing the perp income as the return on 5 years holding is 15%CAGR, not too shabby for a UK government fixed-income security. Will recycle into my son's save to buy ISA for further govt guaranteed 8%+ CAGR over 5 years.

GS

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Re: Government Bond questions

#333062

Postby 1nvest » August 14th, 2020, 1:29 am

moneybagz wrote:I'm confused which bonds to choose. Should I go short/intermediate/long or a combination of them all?

A central bullet, such as 10 year, or a 1 year and 20 year 50/50 shorter/longer dated barbell broadly tends to compare in overall rewards. With the barbell however you have added optionality - such as you could decide to bottom draw (hold until maturity) some longer dated gilts bought, with hindsight, at very good yield levels.

Some investors look to jump in and out of assets, timing, where often that timing/beliefs are proved to be wrong. A simpler method is to set fixed percentage weightings to individual assets and periodically rebalance back to those target weightings when sizeable drift becomes apparent.

Many for instance are shying away from longer dated gilts, saying they've no more upside, only one way to go ...etc. but that's been a common mantra since 2009 and longer dated gilt returns have been over 100% since then.

In the Permanent Portfolio for instance each of the four stock, gold, long dated gilt and short dated gilts assets are assigned 25% weightings each. Usually one of those four will be doing or expected to do poorly, but other assets will counter that and usually more. I'm expecting long dated gilts to lose out as/when interest rates rise, but in including that in a portfolio at least you will rebalance (trade) to add more as the price declines, and potentially buy some at what will with hindsight have turned out to have been a great time to have bought some.

Whilst long dated gilts might lose a lot in isolation, the hit relative to the total Permanent Portfolio's portfolio value might be relatively light, and that could lock into having bought some gilts at great prices. If for instance recent 0.7% yields on 20 year gilts, sees yields rise to 8% perhaps in reflection of high inflation from all of the money printing we've seen, but that subsequently sees yields drop back down to more 'normal' 4% levels, the the PP might see a overall -3% portfolio value hit for that overall 0.7% up to 4% yields transition, and where some gilts were bought at 8% yield levels.

Image

A similar situation occurred with gold over the 1980's/1990's. Whilst stocks did well, gold prices declined, so with rebalancing you accumulated multiple times more ounces of gold over those years, of the order 6 to 10 times more ounces of gold, which more than offset the price declines in gold, and set you up well for when gold did perform well such as in more recent years. Simple rebalancing is trading, with a tendency to add-low/reduce-high naturally.

If you're clever/lucky enough to rotate into assets that do well over the period in which you hold them and can do that consistently, then fine. Most can't, and most will more often get it totally wrong. Otherwise just assign weightings and rebalance periodically. Even that however can be difficult as often emotionally your head might be screaming that its crazy to be selling some of A to buy some more of B. Whether you prefer to gold a broad stock index and a total bond fund, or opt for more focused holdings within that is a simple case of personal preference. Personally I don't like bond funds, paying a manger to manage holdings that I can quite easily do myself such as holding a bunch of high street cash deposits for the 'shorter dated bond' and a single 20 or 30 year gilt as the longer dated bond, in around equal measure as a alternative to a 10 year bond bullet (or bond fund).

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Re: Government Bond questions

#333079

Postby JohnW » August 14th, 2020, 8:26 am

moneybagz wrote:I'm confused which bonds to choose. Should I go short/intermediate/long or a combination of them all? Global or UK based?

Firstly, if Dalio’s and Hales’ suggestions are at odds, perhaps they are seeking different things from bond holdings. You’d need to look at where they fit in an overall portfolio to be too concerned that they seemed at odds with each other.
Secondly, Dalio is probably writing for Americans, and Hale for Brits. A non-American can’t always be best served with only USA bonds, surely?
Thirdly, you didn’t include inflation linked bonds in your postulated choices. It’s worth having an idea about how they and their cousins, nominal bonds work during inflation and deflation. As well, have an idea about the effect of interest rate changes and credit rating changes on bonds before you choose between government bonds or others.
With so little information about your other financial circumstances anyone would struggle to make a sensible choice for you. So consider what bonds would do in your asset mix as well.
1nvest wrote:Some investors look to jump in and out of assets, timing, where often that timing/beliefs are proved to be wrong.

To pull that off successfully you’ve got to be very good or lucky often enough. Bonds are no exception. Here’s how good the experts are sometimes:
'That underscores the difficulty of calling the direction of interest rates. It also makes all 67 economists wrong, as this chart of the benchmark yield shows:'
https://www.marketwatch.com/story/yes-1 ... e9103eb3f8

Lastly, you won’t know if you got your bond mix exactly right until the last day of your investing lifetime - then it will be too late to do anything. So make a sensible choice and don’t agonise over it too much. And after lastly, how many angels can dance on the head of a pin? Your final choice out of five options just might not make much difference.

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Re: Government Bond questions

#333080

Postby scrumpyjack » August 14th, 2020, 8:34 am

Bonds have done very well over the last few decades as interest rates have crashed from 14% to 0%. This could continue if you can see interest rates getting to -14%?

Personally I can't really see that happening.

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Re: Government Bond questions

#333091

Postby GoSeigen » August 14th, 2020, 8:55 am

1nvest wrote:[...]


This is a stale thread people. The OP asked his question in 2018.

GS
EDIT: ScrumpyJack: One word -- convexity.


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