The Lemon Fool

richfool wrote:

GeoffF100 wrote:As I have said, if the market believes that the pound will fall against the dollar, it will demand higher interest rates from UK bonds. That view will also be reflected in the pricing of US bonds hedged into sterling. If you believe that the market has got it wrong, and that the pound will fall further against the dollar than the market expects, then you are free to bet against the market.

Geoff, VUTY (US Treasuries) shows a yield of 4.02%. Whereas VGOV and IGLS show yields of 1.6% - 1.67%. Wouldn't that, on the face of it, suggest that US Treasuries represent a higher risk than UK Gilts? Accepted their respective pricing will also be a factor. But whatever, the US treasuries are providing a higher (immediate) income.

The historic yields are irrelevant. VGOV has a YTM of 4.4%, a credit quality of AA- and a duration of 9.5 years. VUTY has a YTM of 4.6% and a credit quality of AA+ and a duration of 6.0 years. The US government's credit rating is a little better, and the US Treasury Bonds have a slightly higher yield, but over a shorter period. Both the US and UK yield curves are pretty flat between 6 and 9.5 years. The market seems to think that the dollar will fall a little relative to the pound over the next six years. I do not see any justification for accepting the higher volatility of VUTY. I do not want a duration as long as 9.5 years either, which is one reason why I favour VAGP (or the accumulating version VAGS).

https://www.vanguard.co.uk/professional ... stributing
https://www.vanguard.co.uk/professional ... stributing
http://www.worldgovernmentbonds.com/cou ... ed-states/
http://www.worldgovernmentbonds.com/cou ... d-kingdom/

Actually, on second thoughts. Looking at the yield curves, interest rates are higher on the sorter dated bonds. If we truncate the UK yield curve at 6 years, that will increase the average rate of interest, probably to more than VUTY. Nonetheless, as I said, there does not appear to be much in it,

Bonds are a zero sum asset. Neither a lender or a borrower be.

The average stock might borrow (sell bonds) to around half of its book-value, £100M book value, borrows £50M, £150M combined capital where it achieves a 13% return on capital (£20M profits), and investors bid up the price to £200M market cap (twice book-value) share price, because they're content with a 10% reward rate.

Should a investor with £200M buy entirely that stock, or perhaps scale down their stock exposure and buy the £50M of bonds that the stock issued and invest the remainder £150M into the stock? In buying the bonds - they'd be both borrowing and lending to themselves, unproductive use of capital, paramount to sticking £50M of hard cash under a mattress solely for 'comfort' purposes.

Such is the certainty of bonds being zero sum that the treasury don't even bother with taxing capital gains on Gilts, as broadly that would otherwise just be wasted time/effort/cost.

Gents

Apologies for my ignorance and perhaps asking open-ended questions, but I am trying to obtain some sort of handle on the wealth preservation aspects of ETF bond funds - VAGS and the like - were there an equities crash. In essence, I am looking to spread my portfolio from 100% equity (essentially global tracker funds) into less "risky" - for want of better words - areas. Reading around suggests traditional bonds/gilts would offer the wealth preservation I desire, but at present, I don't feel confident enough to delve into this area let alone make a suitable choice of bond. ETF bond funds may be a solution. I realize they may not offer the same level of security as bonds, but perhaps may present a viable alternative to preserving wealth were there an equities crash.

Thoughts most welcome

Oggy wrote:Gents

Apologies for my ignorance and perhaps asking open-ended questions, but I am trying to obtain some sort of handle on the wealth preservation aspects of ETF bond funds - VAGS and the like - were there an equities crash. In essence, I am looking to spread my portfolio from 100% equity (essentially global tracker funds) into less "risky" - for want of better words - areas. Reading around suggests traditional bonds/gilts would offer the wealth preservation I desire, but at present, I don't feel confident enough to delve into this area let alone make a suitable choice of bond. ETF bond funds may be a solution. I realize they may not offer the same level of security as bonds, but perhaps may present a viable alternative to preserving wealth were there an equities crash.

Thoughts most welcome

No easy answer, traditionally bonds offer a degree of protection but that was not evident in 2022/2023 because bonds were "expensive" ( their yields were abnormally low, some were even negative...

Bonds resell at lower lower prices when interest rates rise but of course become better value as prices fall... bond that mature the furthest into the future will have more volatile prices, if you want stability then government bonds, UK Gits if you are in the UK of shorter duration provide the most stability during volatile times for equities, iShares IGLS.L ETF is my choice in this space, 0-5 year Gilts.

On the other hand I hold UBTL.L long dated US Government Inflation Protected bonds, this has the volatility of equities but could provide protection and profits in some circumstances compared to equities, ( its denominated in US $ for further volatility)

Useful articles on Monevator about bonds.

Thanks for the reply. Phrasing my question differently perhaps, what is the difference in terms of protection from an equity crash between a bond fund such as VAGS and a more traditional bond or gilt?

Oggy wrote:Thanks for the reply. Phrasing my question differently perhaps, what is the difference in terms of protection from an equity crash between a bond fund such as VAGS and a more traditional bond or gilt?

Here is an old Monevator article that is a good introduction:

https://monevator.com/bond-asset-classes/

The only point I would make is that investment grade corporate bonds are not hard hit in a crisis, but junk bonds certainly are. Let us compare VAGP and VGOV. VAGP has a shorter duration and will be less sensitive to interest rate hikes, but will profit less from interest rate falls. VGOV will usually rise more in an equity crash, but is riskier otherwise, because of the longer duration, and the possibility of trouble in the UK debt market. VGOV is cheaper.

Geoff - Not sure that answers the question - assuming the question can be answered with any degree of confidence. I am vaguely aware of the different types of bond and the different risk. What I am uncertain of is how a bond FUND compares with bonds as regards wealth preservation/protection.

Oggy wrote:Geoff - Not sure that answers the question - assuming the question can be answered with any degree of confidence. I am vaguely aware of the different types of bond and the different risk. What I am uncertain of is how a bond FUND compares with bonds as regards wealth preservation/protection.

Pretty much the same. Retail investors cannot easily run their own hedged global bond fund though. If you buy gilts directly, you can pick which one you want, and you do not pay the costs of the fund. You can also buy UK corporate bonds, but there is not a big selection.

Thanks Geoff. At present I lack the confidence to buy bonds directly. Were I to do so, I think I'd go for @10 yr gilts from AJ Bell and hold in my SIPP. They seem to have a half decent selection. Not sure of the mechanism involved, how you get the capital back etc etc, but I do need to read up.

Oggy wrote:Geoff - Not sure that answers the question - assuming the question can be answered with any degree of confidence. I am vaguely aware of the different types of bond and the different risk. What I am uncertain of is how a bond FUND compares with bonds as regards wealth preservation/protection.

I don't really pretend to know much about the volatility of bonds but can give you a layman's example which might answer your question.

My investment portfolio has been around 90% equities but it holds a few bond funds. Years ago a holding in Henderson Diversified Income was purchased. This fund has been run by highly educated and experienced fund managers who ought to know what would happen if interest rates were predicted to rise. On the face of it, a fund containing holdings in fixed interest bonds much recommended by financial advisors who should know how to preserve wealth.

If you look at its price graph on google finance over five years, you might conclude that holders have had a white knuckle ride as it plummeted in price, recovered a bit and plummeted again. Would you be happy to hold a bond fund like that?

To be fair the fund has paid out a steady dividend, which is what I bought it for in my SIPP. But what do you think of it as a wealth preserver?

Its performance has disappointed and probably for that reason it is now being subsumed into Henderson High Income Fund which, I believe has some holdings in higher yield equities and has not been quite as volatile.

I also hold Ruffer (RICA) and like other, so called, wealth preserver funds, their bond holdings have been severely hit in recent times.

The best way I have found of growing assets over forty years is to hold a well diversified portfolio. My choice has been to keep bonds as a small part of that portfolio. (But have bought a few recently as there is a good chance that prices will rise as central banks start reducing interest rates).

Hope the examples are helpful. Experience suggests one needs to be careful buying bond funds.

regards

Howard

Howard wrote:

Oggy wrote:Geoff - Not sure that answers the question - assuming the question can be answered with any degree of confidence. I am vaguely aware of the different types of bond and the different risk. What I am uncertain of is how a bond FUND compares with bonds as regards wealth preservation/protection.

I don't really pretend to know much about the volatility of bonds but can give you a layman's example which might answer your question.

My investment portfolio has been around 90% equities but it holds a few bond funds. Years ago a holding in Henderson Diversified Income was purchased. This fund has been run by highly educated and experienced fund managers who ought to know what would happen if interest rates were predicted to rise. On the face of it, a fund containing holdings in fixed interest bonds much recommended by financial advisors who should know how to preserve wealth.

If you look at its price graph on google finance over five years, you might conclude that holders have had a white knuckle ride as it plummeted in price, recovered a bit and plummeted again. Would you be happy to hold a bond fund like that?

To be fair the fund has paid out a steady dividend, which is what I bought it for in my SIPP. But what do you think of it as a wealth preserver?

Its performance has disappointed and probably for that reason it is now being subsumed into Henderson High Income Fund which, I believe has some holdings in higher yield equities and has not been quite as volatile.

I also hold Ruffer (RICA) and like other, so called, wealth preserver funds, their bond holdings have been severely hit in recent times.

The best way I have found of growing assets over forty years is to hold a well diversified portfolio. My choice has been to keep bonds as a small part of that portfolio. (But have bought a few recently as there is a good chance that prices will rise as central banks start reducing interest rates).

Hope the examples are helpful. Experience suggests one needs to be careful buying bond funds.

regards

Howard

Just as you need to be careful buying equities.

Dod

Dod101 wrote:This fund has been run by highly educated and experienced fund managers who ought to know what would happen if interest rates were predicted to rise.

The problem is that they were not. The central banks got it wrong, The market got it wrong. Retail investors had an advantage there. They could use bank term accounts (protected by the FSCS) that offered higher returns than gilts of the same maturity. Funds could not do that. Financial advisers would not do it because it was too much work. As it happened, equities did not crash, but no one knew that in advance.

GeoffF100 wrote:

Dod101 wrote:This fund has been run by highly educated and experienced fund managers who ought to know what would happen if interest rates were predicted to rise.

The problem is that they were not. The central banks got it wrong, The market got it wrong. Retail investors had an advantage there. They could use bank term accounts (protected by the FSCS) that offered higher returns than gilts of the same maturity. Funds could not do that. Financial advisers would not do it because it was too much work. As it happened, equities did not crash, but no one knew that in advance.

I cannot find when I wrote that or in what context. Can you help me please?

Dod

Phrasing my question differently perhaps, what is the difference in terms of protection from an equity crash between a bond fund such as VAGS and a more traditional bond or gilt?

If you hold a gilt maturing in 10 years its price will move around with interest rate changes (and inflation if it’s a linker). But the closer it gets to maturity the less the price will gyrate because everyone knows that on the maturing date the holder will be paid £100 (or the inflation adjusted value) for their bond, so who would pay £105 for it one month before maturity giving them a guaranteed loss of 5%/month?
By contrast, if you hold a bond fund with a maturity of 10 years, every time a bond in the fund matures the fund replaces it with a new 10 year bond, so the average date of the maturity of all the fund’s bonds always remains close to 10 years. Thus the price of the fund can gyrate as the single bond maturing in 10 years would, but the gyration never reduces because the fund is always 10 years from maturity (it never matures).
A single bond is a promise to pay you so much each half year, and return so much at maturity. It’s perfectly predictable if you hold the bond to maturity. Is that the equity crash protection you want?
A government bond fund will change its value with interest rate changes according to the rule of thumb: 1% change in interest rates changes the value of the fund by 1 times the fund’s ‘maturity’ value usually expressed as duration. A 10 year duration fund with drop in price by 20% if interest rates rise 2%. Is that the crash protection you want?

I wonder what 2024 will mean for retail bond holders, this year there's been considerable innovation for retail investors, so I wonder what will catch on and if any of them will be a storming success?

I hope fractional corporate bonds take off, WiseAlpha, easier access to ORB, PrimaryBid, and UK Treasury Bonds for average retail investors, Freetrade. For a start.

All this innovation must be on the radar of the regular stockbrokers we all love and loathe. So lets hope they join the bandwagon and come up with some interesting products.

The pundits have it that bonds will provide equity type returns next year, with the addition of the coupon, when equities might have a dull year. For once it would be lovely to be able to participate without out having a multi million account and across a spectrum of instruments.

This time next year Rodders.

I'll be keeping an eye on that Freetrade UK Treasury concept, not buying in, but following it with interest.

Food for thought gents and my thanks. There does seem to be some conflicting opinions - which I suppose should be expected - on the risk level of bond funds vs single bonds. Further reading tonight means I am leaning towards single bonds/gilts, as I think on balance they provide better protection from an equities crash. I need to bone up on further bonds I guess...

Should I decide for single bonds, has anyone here bought them from HL or AJ Bell. Their gilts selection perhaps?

Dod101 wrote:

GeoffF100 wrote:The problem is that they were not. The central banks got it wrong, The market got it wrong. Retail investors had an advantage there. They could use bank term accounts (protected by the FSCS) that offered higher returns than gilts of the same maturity. Funds could not do that. Financial advisers would not do it because it was too much work. As it happened, equities did not crash, but no one knew that in advance.

I cannot find when I wrote that or in what context. Can you help me please?

Dod

Sorry, I misedited. It was Howard.

JohnW wrote:A 10 year duration fund with drop in price by 20% if interest rates rise 2%. Is that the crash protection you want?

Conversely, if interest rates fall by 2%, a 10 year duration fund rises by 20%. The crash protection comes from a "flight to safety" during an equity crash. That effect is usually larger for longer dated government bonds. Longer duration bonds also usually pay more. That is mostly true now from 6 years onward:

http://www.worldgovernmentbonds.com/cou ... d-kingdom/

Nonetheless, it is sensible to pick a duration that matches your timescales. As already noted bond funds gradually move their average maturity date forwards, which may not be what you want.

Oggy wrote:Thanks Geoff. At present I lack the confidence to buy bonds directly. Were I to do so, I think I'd go for @10 yr gilts from AJ Bell and hold in my SIPP. They seem to have a half decent selection. Not sure of the mechanism involved, how you get the capital back etc etc, but I do need to read up.

There's two ways to get the capital back. One is you just wait for the gilt to mature and the other is to sell it in the market before it matures.

If you buy, e.g., a 10 year gilt and wait for it to mature then the money will just appear in your account when it does, in 10 years time, and you'll know from the moment you bought it exactly how much that will be, either in nominal terms for conventional gilts or in real (RPI adjusted) terms for index linked gilts.

If, OTOH, you sell it in the market before it matures then you'll get whatever the market is offering, with no guarantees that it won't be less than what you bought it for, maybe a lot less.

There's plenty written on the Gilts and Bonds board, take a look through the list of topics there.

Gilts held to maturity became popular around here in the months following the Truss-Kwarteng debacle, as net of tax shorter term low coupon gilts were offering better returns than equivalent period savings accounts, and indeed I swapped a lot of my savings accounts into such gilts, both conventional and index linked. However, the situation now looks like it's reversed and when the first of those matures next month I'll very likely be putting the money back into normal savings accounts again.