Bond bull market is over

[GoSeigen]

A lot of interest on this forum recently in bonds and gilts in particular.

I think it should be stressed that the secular bull market in bonds is now well and truly over and from here on there will be headwinds for bonds. It would be a very good idea for people to have a little think about the meaning of fixed interest, especially if they were not invested in gilts for large parts of the gilt bull market.

An example of the faulty thinking is people arguing during the recent tender for Bank of Ireland fixed interest securities that "they have traded at least ten percent higher in recent years so the tender is not very generous." Yes, BOI traded at around 220p for a while a few years back but ALL of that price differential has been wiped out in the intervening period by declines in buying power of the capital invested in those bonds. This is not a one-off, it is likely to be a trend -- and the bond market has seen it and signalled the fact with the breaking of the bull in March/April 2022.

Inflation is bad for bonds, and the era of declining or non-existent inflation is over now. Bond issuance by governments across the developed world has been huge and future issuance is going to be driven as much (or more) by debt servicing pressures as by fiscal deficits. This reality is going to be increasingly priced into bonds, while of course equities, which are geared to rising prices, will benefit.

So I'd just like to encourage Fools to be cautious about diving into gilts just because their yields have risen sharply. It's worth reminding oneself that when a collapse of a sector or asset class occurs, as with government bonds, there is usually an underlying structural cause and the repair to those structural problems can take a decade or more. Look at banks: they crashed in 2008/9 and are only just recovering now.


Good luck and don't forget, I'm talking my own book to an extent. [Disclosure: Practically zero allocation to gilts/cash. About 25-30% allocation to equity-like corporate FI.]


GS

[Lootman]

Yeah, all this talk here recently about buying gilts has me worried that is possibly a warning sign.

I get that a short-dated, low-coupon gilt has a safe pre-determined return, and is tax-efficient. But there is also an opportunity cost to that - equities typically give you double the 4% to 5% returns that are available on government securities. So a gilt allocation is still for me only a substitute for my cash allocation.

Frankly if you missed the 40 year bull market in bonds then this is not the time to pile in now, in my view.

[MrFoolish]

I think it should be stressed that the secular bull market in bonds is now well and truly over and from here on there will be headwinds for bonds. It would be a very good idea for people to have a little think about the meaning of fixed interest, especially if they were not invested in gilts for large parts of the gilt bull market.

They are either good or bad going forward. It is irrelevant what people were invested in historically.

[bluedonkey]

Yeah, all this talk here recently about buying gilts has me worried that is possibly a warning sign.

I get that a short-dated, low-coupon gilt has a safe pre-determined return, and is tax-efficient. But there is also an opportunity cost to that - equities typically give you double the 4% to 5% returns that are available on government securities. So a gilt allocation is still for me only a substitute for my cash allocation.

Frankly if you missed the 40 year bull market in bonds then this is not the time to pile in now, in my view.

Yes agreed, exactly my approach, a substitute for an existing cash allocation.

[mc2fool]

A lot of interest on this forum recently in bonds and gilts in particular.

I think it should be stressed that the secular bull market in bonds is now well and truly over and from here on there will be headwinds for bonds.

Maybe so, but the market is irrelevant if you're holding to maturity. You're talking as a trader but the recent interest, in gilts from me at least and I gather from others, is as alternatives to bank/b.soc. savings accounts and (the no longer available) NS&I index linked certs. A case of using them as "savers" rather than as "investors".

I know you've done well as a gilt "investor", and I definitely take your comments in that respect, but I'll be using them as a "saver"....

[gpadsa]

A Fools survey maybe? Idk how to set it up

Gilts: in the last 12 months did you buy or sell any, or have any redeem?
Yes/No
If yes, were those gilt transactions for the purposes of:
-holding to maturity
-bond trading

gpadsa

[ignotus20]

I can't say I'm piling in to bonds (of any kind) right now but charts like this encourage me to keep more of an open mind:

https://www.longtermtrends.net/stocks-vs-bonds/

The US is obviously different to UK, but are we talking about all bonds everywhere here? And what sort of holding duration?

Over equities and corporate debt, this is an interesting observation also:

https://www.msn.com/en-us/money/markets ... r-AA1etEyi

"The financial institution said since its data began tracking the information in 2008, it has never costed investors less to hedge against an S&P retraction over the next 12 trading months. The bank added that, as high rates align with low implied volatility and correlation it offers an historic entry point for protection."

[Wuffle]

There is always someone who is right, but goes too early.
Could it be Capital Gearings turn?

W.

[JohnW]

Inflation is bad for bonds,

A nice broad overview of bonds ought not ignore inflation linked bonds, especially if the gun is being pointed mostly at government bonds. Linkers love inflation. And with the yield curve positive right out to 38 years this week for linkers, what’s not to like about a positive real return for nothing like equity-like risk?

[BullDog]

A lot of interest on this forum recently in bonds and gilts in particular.

I think it should be stressed that the secular bull market in bonds is now well and truly over and from here on there will be headwinds for bonds.

Maybe so, but the market is irrelevant if you're holding to maturity. You're talking as a trader but the recent interest, in gilts from me at least and I gather from others, is as alternatives to bank/b.soc. savings accounts and (the no longer available) NS&I index linked certs. A case of using them as "savers" rather than as "investors".

I know you've done well as a gilt "investor", and I definitely take your comments in that respect, but I'll be using them as a "saver"....

In the scenario of 1 holding quite enough equities 2 not having cash ISA available 3 concern about breaching tax free savings allowance. Then low coupon short duration gilts make a good deal of sense. For the first time ever I bought some a short while ago. Yes, as a savings vehicle rather than an Investment. So whilst the bull market is certainly over, there's sometimes a reason to hold gilts.

[kempiejon]

Maybe so, but the market is irrelevant if you're holding to maturity. You're talking as a trader but the recent interest, in gilts from me at least and I gather from others, is as alternatives to bank/b.soc. savings accounts and (the no longer available) NS&I index linked certs. A case of using them as "savers" rather than as "investors".

I know you've done well as a gilt "investor", and I definitely take your comments in that respect, but I'll be using them as a "saver"....

In the scenario of 1 holding quite enough equities 2 not having cash ISA available 3 concern about breaching tax free savings allowance. Then low coupon short duration gilts make a good deal of sense. For the first time ever I bought some a short while ago. Yes, as a savings vehicle rather than an Investment. So whilst the bull market is certainly over, there's sometimes a reason to hold gilts.

I have been getting my head round this idea. It's a bit tax tail wagging the investment but in a specific set of circumstance for those with a big cash amounts buying below par holding to maturity squeezes a bit more from cash and stays tax free.

[BullDog]

In the scenario of 1 holding quite enough equities 2 not having cash ISA available 3 concern about breaching tax free savings allowance. Then low coupon short duration gilts make a good deal of sense. For the first time ever I bought some a short while ago. Yes, as a savings vehicle rather than an Investment. So whilst the bull market is certainly over, there's sometimes a reason to hold gilts.

I have been getting my head round this idea. It's a bit tax tail wagging the investment but in a specific set of circumstance for those with a big cash amounts buying below par holding to maturity squeezes a bit more from cash and stays tax free.

Yes, I see that. I really don't want to pay an already overly grasping treasury a penny more than I legally have to. It's savings rather than investment.

Compared to a fixed rate saving account paying 6% gross and probably pushing me into the 40% tax bracket and triggering a reduction in my tax free savings allowance by half. A return on gilts of £100 on say ~£90 to 95 give or take in 18 months and 30 months time doesn't look too bad to me. And if push comes to shove I can sell in the market, something not possible with the 6% building society account.

[mc2fool]

In the scenario of 1 holding quite enough equities 2 not having cash ISA available 3 concern about breaching tax free savings allowance. Then low coupon short duration gilts make a good deal of sense. For the first time ever I bought some a short while ago. Yes, as a savings vehicle rather than an Investment. So whilst the bull market is certainly over, there's sometimes a reason to hold gilts.

I have been getting my head round this idea. It's a bit tax tail wagging the investment but in a specific set of circumstance for those with a big cash amounts buying below par holding to maturity squeezes a bit more from cash and stays tax free.

Not only that. If you're after real (after inflation) capital preservation then below-par index linked gilts (held to maturity) are the only safe option available, given that NS&I index linked certificates aren't available any more (other than for rollover). And, like the NS&I certs, the low coupon ones are all but tax free.

[NotSure]

The bond bull market is over you say! I guess that explains why bond funds, especially longer duration ones, are down 30 or 40% from their peaks over the last year or two? I.e. a very firmly established bear market.

Of interest to me is whether the bear market is over rather than the bull market (I'm talking bonds broadly here, not specifically government and not specifically UK). I have more bonds than I did two years ago, but simply as a long term diversifier, hopefully anti-correlated with equities to some extent. They looked useless in this respect two years ago, but now look more plausible.

But I expect most have noticed the bull is over by now......

[RockRabbit]

But I expect most have noticed the bull is over by now......

Quite.

Right now, I would much prefer to have a large chunk invested in short term gilts/US treasuries (and linkers/TIPs) than most equities, particularly long duration tech. While I agree that inflation is likely to be higher over the medium term than the previous 20 years, I wouldn't be surprised to see low inflation in most countries by Q4 this year and into 2024. I am also positioned for a hard landing Q4 or Q1 2024 - that will not be kind to over extended equities.

[Borderline]

I hadn’t looked at Gilts for donkey’s years before Liz and Kwarti made them interesting again.
Long dated are useful for my wife’s SIPP and the short dated for keeping the tax bill down.
They are the most liquid bonds available and have very small spreads, especially with the short dated.
What puzzles me is why 10 year UK bonds are yielding 4.41% even though we have a AA credit rating whereas Portugal on BBB+ yield 3.29%, Italy on BBB yield 4.22% and Greece on BB+ yield 3.85%. Bulgaria on BBB are only slightly higher at 4.5%.
The downgrading of the USA credit rating is perhaps a wake up call for UK Gilt investors.
Might the same thing happen to us?

[Alaric]

What puzzles me is why 10 year UK bonds are yielding 4.41% even though we have a AA credit rating whereas Portugal on BBB+ yield 3.29%, Italy on BBB yield 4.22% and Greece on BB+ yield 3.85%. Bulgaria on BBB are only slightly higher at 4.5%.

Do you need to look beyond currency risk? Are the Portugal, Italy, Greece and Bulgaria bonds denominated in sterling or in Euros?

[richfool]

A lot of interest on this forum recently in bonds and gilts in particular.

I think it should be stressed that the secular bull market in bonds is now well and truly over and from here on there will be headwinds for bonds. It would be a very good idea for people to have a little think about the meaning of fixed interest, especially if they were not invested in gilts for large parts of the gilt bull market.

An example of the faulty thinking is people arguing during the recent tender for Bank of Ireland fixed interest securities that "they have traded at least ten percent higher in recent years so the tender is not very generous." Yes, BOI traded at around 220p for a while a few years back but ALL of that price differential has been wiped out in the intervening period by declines in buying power of the capital invested in those bonds. This is not a one-off, it is likely to be a trend -- and the bond market has seen it and signalled the fact with the breaking of the bull in March/April 2022.

Inflation is bad for bonds, and the era of declining or non-existent inflation is over now. Bond issuance by governments across the developed world has been huge and future issuance is going to be driven as much (or more) by debt servicing pressures as by fiscal deficits. This reality is going to be increasingly priced into bonds, while of course equities, which are geared to rising prices, will benefit.

So I'd just like to encourage Fools to be cautious about diving into gilts just because their yields have risen sharply. It's worth reminding oneself that when a collapse of a sector or asset class occurs, as with government bonds, there is usually an underlying structural cause and the repair to those structural problems can take a decade or more. Look at banks: they crashed in 2008/9 and are only just recovering now.


Good luck and don't forget, I'm talking my own book to an extent. [Disclosure: Practically zero allocation to gilts/cash. About 25-30% allocation to equity-like corporate FI.]


GS

Noting your post is about Gov't bonds/Gilts, may I ask, how does this philosophy apply to corporate bonds, such as NCYF, BIPS, etc?

My thinking is that their prices will be subdued (fall) whilst interest rates are high/rising, but once there are signs of reducing interest rates, demand will push up their SP's and the dividend yields fall. Currently NCYF offers a yield of c 9.75%.

[OldBoyReturns]

Almost by definition the bond bull market was over once base interest rate hit near zero. Depending on your view on inflation & interest rates from here the bond market could be close to the bottom at the moment.

I have been buying gilts as a safe home for cash outside of tax wrappers. Happy with the (largely tax free) yield to maturity (beats an annuity and the negative yields I have seen people opt for in the past buying Swiss gift bonds as a safe haven for cash) with added bonus of potential big increase in price IF inflation decides to take a hike.

[Borderline]

As OBR has pointed out long dated Gilts can also be a kind of raffle ticket that pays interest.
All the central banks are wedded to the 2% inflation target and determined to get inflation down even if it means crashing the economy.
I bought some Gilts in 2010 I think it was and sold them within 12 months for what was at the time the biggest capital gain I’d ever made.
If my memory is right [wouldn’t bank on that] they were yielding 4.5% when I bought them.
Or was it 5%? Either way not much more than they are now.