Bonds - still so confusing...

username12345678 · 8 October 2017 at 9:38PM

One rule of thumb I came across suggested that for every 1% rise in interest rates you could expect a circa 10% fall in bonds.

Obviously a very blunt RoT (if in any way accurate) and dependent on the composition of your bond fund.

A_T · 8 October 2017 at 9:42PM

Alexland wrote: »

It would still be less currency sensitive - circa 50%. Or you could zoom in to the FTSE 250 & 350 depending on how the rest of your portfolio looks.

Another option I missed out would of course be the pet rock gold which has no intrinsic earning power, offers long term below inflation returns but is the last resort if traders loose confidence in both shares and bonds.

Also there are plenty of GBP hedged ETFs that track the US and World indexes.

chiang_mai · 9 October 2017 at 12:54AM

It's generally thought that bonds will fall 5% on average for every 1% rise in interest rates but that is very much a generalization. The stronger the credit quality and the shorter the durations, the lower the risk and the potential fall, the obverse applies also. An example, assuming equal credit classes: the bond that contains a portfolio of holdings with an effective duration of say 12.0 and comprises a majority of holdings with maturity dates greater than ten years, that will fare much worse when interest rates rise than a portfolio containing a high percentage (+40%) of maturity dates less than ten years and an effective duration of 4.5.

bigadaj · 9 October 2017 at 10:42AM

I reckon bonds, including bond funds, are fairly straightforward until a decade ago.

The subsequent economic necromancy and alchemy imagined up by central bankers, in the form of zero or even negative interest rate and the even more esoteric concept of quantitative easing, has made things more than a bit complicated.

How this turns out in the end is anyone's guess as for once there genuinely isn't a historical precedent to us for comparison or guidance.

Eco_Miser · 9 October 2017 at 11:35AM

dunstonh wrote: »

I thought monevator was passive biased? If so, they shouldnt be making management decisions like that as that makes it active.

I don't think Monevator is as passive biased as many think. The primary author 'The Investor' actively plays the market, although recommending index funds for others.
In any case, it's only a bias towards passives, not a ban on active allocation decisions.

chiang_mai · 9 October 2017 at 11:40AM

I think bond funds still are fairly straightforward although I see more and more of late where there's no detailed description of large parts of the contents of the fund which leads me to think it's probably junk bonds. The big question for me is whether equities will crash before interest rates rise to a meaningful degree which will make decent quality bonds very useful in any portfolio.

aroominyork · 9 October 2017 at 4:52PM

For my active equity funds I know why I have chosen them and am comfortable I would not berate myself if they fell badly. I cannot say the same of my active bond funds so perhaps I should move my full bond allocation into one or more passive funds. Can anyone please explain - or direct me to previous threads about - the options in passive bond funds?

ColdIron · 9 October 2017 at 5:14PM

A cautionary note about corporate bond indexes to consider by Jim Leaviss from M&G's Bond Vigilantes

Let me start by restating our opposition to index investing when it comes to corporate bonds (we would say that, wouldn’t we). An equity index is an index of success – as the company prospers and its market capitalisation rises, its weighting in the index increases. Bond indices are buckets of failure. The more a company borrows, the greater its weighting in the bond index. If you follow a bond index, and a company within it doubles its leverage, making its failure more likely, you will have to increase your exposure to that company.

I tend to agree and think that this is an area in which an active manager can make a positive contribution. The case is less compelling for sovereign debt

aroominyork · 9 October 2017 at 5:21PM

ColdIron wrote: »

A cautionary note about corporate bond indexes to consider by Jim Leaviss from M&G's Bond Vigilantes

Let me start by restating our opposition to index investing when it comes to corporate bonds (we would say that, wouldn’t we). An equity index is an index of success – as the company prospers and its market capitalisation rises, its weighting in the index increases. Bond indices are buckets of failure. The more a company borrows, the greater its weighting in the bond index. If you follow a bond index, and a company within it doubles its leverage, making its failure more likely, you will have to increase your exposure to that company.

I tend to agree and think that this is an area in which an active manager can make a positive contribution. The case is less compelling for sovereign debt

Why isn’t there a “throws hands up in the air” emoji?!

So I am not confident I can defend my choice of active bond funds but index funds risk tracking failure. So where from here? Balance my equities with more p2p and fewer bonds?

I’d also appreciate a view on whether it is logical/common practice to have a bond fund allocation which is partly high risk/yield and partly cautious/strategic in the way I described in my opening post. (The moderately cautious portfolio of the IFA I recently escaped from had all its bonds in high yield funds.)

dunstonh · 9 October 2017 at 5:39PM

(The moderately cautious portfolio of the IFA I recently escaped from had all its bonds in high yield funds.)

At this point in the cycle, HYBs are generally considered more favourable.

Bonds - still so confusing...

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free