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Bond market worries

Gilts, bonds, and interest-bearing shares
DKing
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Bond market worries

#227152

Postby DKing » June 5th, 2019, 11:07 am

Is anyone else worried about the falling yields in the bond market?

GoSeigen
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Re: Bond market worries

#227156

Postby GoSeigen » June 5th, 2019, 11:13 am

DKing wrote:Is anyone else worried about the falling yields in the bond market?


Yes!

GS

AleisterCrowley
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Re: Bond market worries

#227164

Postby AleisterCrowley » June 5th, 2019, 11:25 am

No! ...

everhopeful
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Re: Bond market worries

#227167

Postby everhopeful » June 5th, 2019, 11:33 am

Why?.

Snorvey
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Re: Bond market worries

#227168

Postby Snorvey » June 5th, 2019, 11:37 am

GoSeigen wrote:
DKing wrote:Is anyone else worried about the falling yields in the bond market?


Yes!

GS


I think you've been worried about falling yields in the bond market for about ten years now :D

GoSeigen
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Re: Bond market worries

#227203

Postby GoSeigen » June 5th, 2019, 1:34 pm

Snorvey wrote:
GoSeigen wrote:
DKing wrote:Is anyone else worried about the falling yields in the bond market?


Yes!

GS


I think you've been worried about falling yields in the bond market for about ten years now :D


Who said I was worried? I just am pretty sure someone else is worried.

GS
P.S. If the OP wants an intelligent discussion he needs to flesh out his post a bit!

Snorvey
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Re: Bond market worries

#227211

Postby Snorvey » June 5th, 2019, 1:57 pm

Who said I was worried? I just am pretty sure someone else is worried.

Ah. I see what you're saying.

Gan020
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Re: Bond market worries

#227215

Postby Gan020 » June 5th, 2019, 2:16 pm

It is my view yield has been chased since March with insufficient regard to risk and that as an asset class most are overpriced.

AleisterCrowley
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Re: Bond market worries

#227222

Postby AleisterCrowley » June 5th, 2019, 2:53 pm

Time to short bonds then ?! (easier said than done , although XUGS:LN has been suggested)

hiriskpaul
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Re: Bond market worries

#227245

Postby hiriskpaul » June 5th, 2019, 4:23 pm

DKing wrote:Is anyone else worried about the falling yields in the bond market?

Well I am usually worried about something. Not that long ago it was on narrowing credit spreads, now I am worried about widening credit spreads, particularly in high yield. I am worried about the inverted yield curve. I am worried that Trump's protectionism may be the final straw that pushes the world into recession and brings the long bull market to a thumping end.

One worry that keeps coming back is that 5 years ago I would not have dreamt of holding half the stuff I do now at the current yields/valuations. RAVP being a recently discussed example, but also US shares. I have a nagging feeling I may be suffering from recency bias!

As always, the difficulty is deciding what to do, if anything, about the worries.

88V8
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Re: Bond market worries

#227305

Postby 88V8 » June 5th, 2019, 8:00 pm

hiriskpaul wrote:As always, the difficulty is deciding what to do, if anything, about the worries.


Yes.
If nothing much happens one would feel a mug for having sat in cash.
Perhaps oilies and tobacco safer. And currently with decent yields.

After all, there will be another banking crash and it will contage (new word) associated Financials.
Just wish I knew whether/when to unload all my lovely Prefs.

V8

Gan020
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Re: Bond market worries

#227310

Postby Gan020 » June 5th, 2019, 8:28 pm

Interest rates have been low for a decade but for the first five years of this five year period there was a level of stress in the bonds markets which meant you a decent return over LIBOR. So, let’s say you are retired and needed 5% a year. This was easy enough with minimal risk and the way things worked out if your fixed income included preference shares you got capital appreciation as well. Bonds appreciated in value too if not run to maturity.

Then we reach about 5 years ago. Bonds and preference shares are being called or mature and almost no new issues come on the market. I think the last decent retail bond was BUR3 paying 5% although you might count PMO1 which has worked out ok in retrospect as oil prices fortuitously moved. It’s got a lot harder to make that 5% now.

Many of those investors requiring my notional 5% broadened their horizons to REITs and Infrastructure funds as they had fewer and fewer options to turn to. In addition whilst the base rate went up the actual 5 or 10 year gilt year didn’t move with it as the premia over LIBOR compressed (a simplification but I’m sure you are following me). Again most of these have appreciated in capital value.

Which I think leaves us with an issue as I think the prices of many popular retail fixed income investments have been bid up too high and the price does not reflect the risk. IPF1 was yielding 5.75% just before the new bond. The new bond is 7.75%. RE.B down 20% today.
It is my view all the pref shares are overpriced but the market does not agree with me. Take Aviva. If you take a view that interest rates are going to 4% sometime in the next 30 years then by then they will be around par. If for the next 25 years the interest rate is less than 1% you are quids in, if however the interest rate is over 3% starting at year 5 you are not. Somewhere in the middle of my two extreme examples there is a “sweet spot”. Of course, you may argue an interest rate range of 0-4% is not extreme at all and I would agree with you.

It’s also my view that the premia to NAV on some the REIT’s and infrastructure funds are looking unjustified. Not all of them of course, there are opportunities out there but I find sifting out the quality very challenging.


So, if you want 4% return with little risk that’s easy enough and not that surprising as you can get 2.75% on a 5 year building society bond although of course you cannot access your money. Anything over 5% and it seems to me the risk/reward equation has become too skewed with too much risk for the reward.

In summary I find it very difficult to find anything in fixed income I find attractive, which is not surprising as I think interest rates will go up faster than the market expects over a ten year period. And I guess that’s really the call everyone has to make. Do we really believe that 10 year gilt yield? Would a Corbyn government with a chancellor who is supportive of printing money to fund all their plans leave inflation untouched or might we see 10%. Even a labour coalition government would have excessive spending plans. And what of Brexit? Who knows? On the upside Trump will have to do something if he wants to get re-elected and that’s now only 18 months away. Eventually too I think (hope) our politicians will become realistic about Brexit.

I have learnt over the years to sit on the sidelines when I’m uncomfortable. The challenge is sitting on the sidelines has an opportunity cost and whilst I'm good at talking about sitting on the sidelines I'm not so good as executing it in the real world, when my cash is sitting there in my account staring at me every day yelling at me that doing nothing is costing me money.

OwenSwansea
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Re: Bond market worries

#227401

Postby OwenSwansea » June 6th, 2019, 10:44 am

Gan020 is quite right, if interest rates return to “normal” the current yield on Prefs. will have to go up. The big question is when, and no one knows the answer to that one.
I expect that I will take the soft option and hold onto all my Prefs. on the one hand, and pile up as much cash as possible on the other to mitigate my losses if and when the crash comes.

Owen.

hiriskpaul
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Re: Bond market worries

#227462

Postby hiriskpaul » June 6th, 2019, 12:40 pm

As I have posted on numerous occasions, there is very little connection between the yields on short dated interest rates and long duration and/or high yield fixed income securities.

In July 2007 NWBD had a running yield of about 0.6% above the BoE base rate, which was 5.75%.

Yield curves do not march in lock step with base rates.

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Re: Bond market worries

#230670

Postby rippleog » June 19th, 2019, 9:50 am

It is good to worry about yields....

But not sure why you are worried about UK Bank preference shares.....

Credit risk is down..
Event risk (post Aviva) is down...
Spread over Gilts is Up....

STAB for example are 500bp over UK Gilts...surely that is a very attractive annuity like return..

And then we have Nationwide CCDS with a 6.85% running yield...and we all know that Nationwide is the best bank credit in the UK.


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