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  • FIRST POST
    • northbob
    • By northbob 21st Sep 16, 12:51 PM
    • 18Posts
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    northbob
    UK gilts or US treasuries?
    • #1
    • 21st Sep 16, 12:51 PM
    UK gilts or US treasuries? 21st Sep 16 at 12:51 PM
    I hold index trackers for global equities, Vanguard Lifestyle 100 60%, and 10% each in global small cap, high dividend yield, and emerging markets. OK until now but I want reduce equity exposure to around 60% with the rest in bonds, a small amount of cash and/or gold not too much.

    I know bonds are unlikely return as much as equities but in an equity downturn bonds should fall less and can be sold to rebalance buying more equities at the lower price. I explain this in case anyone wonders why I would want to hold bonds.

    For lowest risk I think only top quality Government bonds not corporate.

    Is there a good reason to buy only UK gilts, or is it worth also holding US treasuries? If US treasuries is it necessary to hold the GBP fund or is it OK to hold the USD version as my long term living costs will not be in GBP anyway and I already hold all my equity holdings in GBP funds so I already have GBP currency exposure (which am happy with and I want to continue holding my investments in the UK).

    So UK gilts or US treasuries, or both, or if US treasuries in my situation should I still get the GBP version? I favour half in short 1-3 years and half in medium 5-8 years for stability and lower risk.

    Thank you for reading.
Page 2
    • EdGasket
    • By EdGasket 22nd Sep 16, 10:04 PM
    • 2,950 Posts
    • 1,177 Thanks
    EdGasket
    You reckon? The Bank of England is hinting at a reduction to 0.1%. The expected US rise has been postponed.
    Originally posted by coyrls
    If it did happen which I don't think it will, then 0.25 -> 0.1 is not going to produce much gain for bonds. The FED indicated a further rate rise by the year end i.e. in a few months like I said.
    Last edited by EdGasket; 22-09-2016 at 10:08 PM.
    • Thrugelmir
    • By Thrugelmir 22nd Sep 16, 10:12 PM
    • 49,973 Posts
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    Thrugelmir
    When the next economic crisis hits and equities enter a bear market where will the money move to if not bonds?
    Originally posted by northbob
    Different asset classes have become highly correlated. There's next to nowhere to hide. Other than to be highly selective in a choice of particular investments.
    “A man is rich who lives upon what he has. A man is poor who lives upon what is coming. A prudent man lives within his income, and saves against ‘a rainy day’.”
    • northbob
    • By northbob 23rd Sep 16, 8:25 AM
    • 18 Posts
    • 1 Thanks
    northbob
    Quite a few replies are advising not to hold bonds, better to hold cash, on the basis that bonds values must fall.

    coyrls made the valid point that this is like market timing.

    I am more cautious of holding bonds now, but taking up the point coyrls made, if an investor stands on the side lines waiting because equity markets are overvalued (as they could be now) they often give up years of gains as stocks often continue to climb despite valuations.

    Why is the same not true with bonds? If I am holding 40% in cash could this not mean losing additional return bonds could offer over cash for years to come for however long rates remain low?

    If rates can only go one way (up) and it must happen soon, and everyone know it, wouldn't bond funds have this priced in already?
    Last edited by northbob; 23-09-2016 at 9:58 AM.
    • grey gym sock
    • By grey gym sock 23rd Sep 16, 9:57 AM
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    grey gym sock
    all this fear of bonds is way OTT, IMHO. talk of losing 50% is ridiculous (when the idea is to buy government bonds).

    the fact is that nobody knows whether interest rates are going up or down next. they can go either way.

    and while interest rate rises can cause bond prices to fall (and interest rate cuts can cause bond prices to rise), it's a bit more complicated than that. the price of (say) a bond that will be repaid in 10 years' time is determined by what "the market" expects interest rates to be over the next 10 years. how does that change when (for instance) the BoE raises bank base rate by 1%? it depends; but typically, by less than 1% per year over the full 10 years, because the markets were probably expecting a rate rise at some point, and this just makes it a bit sooner than they were assuming. also, they may decide that an early interest rate rise will nip inflation in the bud, and hence allow rates to be lower after a few years - which could even result in the 10-year bond's price rising after an interest rate rise - not in most cases, but it could happen.

    for a rough idea of how much a bond fund could fall/rise after a 1% change in interest rate expectations (not the same as a change in the current bank base rate), look up the "average duration" of the fund.

    for instance, vanguard global bond index fund apparently has an average duration of 6.8 years; that implies that if interest rate expectations rise by 1%, the fund might fall by (very roughly) 6.8% . and if interest rate expectations rise by twice as much (2%), the fund might fall about twice as much, too (even more approximately).

    if that's too big a potential fall, then try vanguard global short-term bond index fund, which has an average duration of 2.8 years; which implies that after a 1% interest rate rise, it might fall about 2.8% . and so on.

    now, what's the biggest plausible rise in interest rates we might see over the next few years? a few percent? so what's the biggest potential loss from a bond fund? and how does that compare to shares, which (i would always assume) have a risk of falling about 50% in the worst case?

    to clarify: i am not very negative about shares. i just think there is always a possibility of big falls in shares. bonds can fall, but not nearly as far as shares can.

    however, the point (which has already been made) that, if you're going to go for short-term bonds, then you might well get a higher return using cash instead, is valid.

    if you do want a bond fund, then - assuming you will remain based in the UK - either a sterling-only fund, or a global fund which is hedged to sterling, makes sense - otherwise the fund will be much more volatile due to exchange rate fluctuations. the vanguard bond funds are fine for this.
    • northbob
    • By northbob 23rd Sep 16, 10:47 AM
    • 18 Posts
    • 1 Thanks
    northbob
    Thank you for this grey gym sock.

    Many posts have warned against bonds and advise cash. But 40% cash seems too cautious. My cash allocation would be £300K.

    I am now thinking:
    10% Vanguard Global Short Term Bond Index, Ave Maturity 2.8 years
    5% iShares Global Government Bond ETF SGLO Ave Maturity 10 years - long dated but Govt. Credit AA, and if all the allocations are longterm hold and rebalance, is there not a case for buying when everyone else is fearful?
    5% Gold ETF - to hold something less correlated with equities
    20% cash - what is the best home for the cash allocation in a SIPP and ISA?

    Any comments/observations welcome.

    Thank you to everyone for taking the time to reply.
    Last edited by northbob; 23-09-2016 at 10:55 AM.
    • AlanP
    • By AlanP 23rd Sep 16, 12:06 PM
    • 541 Posts
    • 326 Thanks
    AlanP
    Cash in a SIPP or ISA is not going to earn much at all in current market conditions.

    Once the IFISA is fully available putting some of the cash into P2P via that could be an option for you to consider as the rates on P2P are typically higher to compensate for the higher risk.
    • EdGasket
    • By EdGasket 23rd Sep 16, 12:51 PM
    • 2,950 Posts
    • 1,177 Thanks
    EdGasket
    Quite a few replies are advising not to hold bonds, better to hold cash, on the basis that bonds values must fall.

    coyrls made the valid point that this is like market timing.

    Why is the same not true with bonds?
    Originally posted by northbob
    Because bonds behave differently to equities. Read a few books and take a look at what happened to bonds in the 1970's.

    Old grey gym " talk of losing 50% is ridiculous"; not at all, War loan and Consols lost much more than that at one time, take a look.
    Last edited by EdGasket; 23-09-2016 at 1:48 PM.
    • Malthusian
    • By Malthusian 23rd Sep 16, 4:47 PM
    • 961 Posts
    • 1,281 Thanks
    Malthusian
    I am more cautious of holding bonds now, but taking up the point coyrls made, if an investor stands on the side lines waiting because equity markets are overvalued (as they could be now) they often give up years of gains as stocks often continue to climb despite valuations.

    Why is the same not true with bonds?
    Originally posted by northbob
    The capital value of an equity is expected to increase over the years (as the global economy expands and prices rise). The capital value of a bond is expected to eventually be redeemed at par.
    • grey gym sock
    • By grey gym sock 23rd Sep 16, 5:46 PM
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    grey gym sock
    I am now thinking:
    10% Vanguard Global Short Term Bond Index, Ave Maturity 2.8 years
    5% iShares Global Government Bond ETF SGLO Ave Maturity 10 years - long dated but Govt. Credit AA, and if all the allocations are longterm hold and rebalance, is there not a case for buying when everyone else is fearful?
    Originally posted by northbob
    SGLO doesn't hedge against currency fluctuations, so i'd avoid using it. its price will go up and down due to shifting exchange rates, more than in response to changes in interest rate expectations. which doesn't make much sense, when bonds are supposed to be the more stable part of a portfolio.

    nothing wrong with holding a mixture of a short-term and a longer-term bond fund. but make them both funds which are hedged to sterling.

    look at it this way: suppose you hold 5% in a 10-year bond fund, and interest rates rise unexpectedly fast. in the worst case, perhaps it would fall 10% or 15% ... well, that would be a fall of 0.5% or 0.75% in the value of your whole portfolio. compare that to shares: if you hold 60% in shares, and they fall 50% in the worst case, that's a 30% fall in your portfolio. and yet people are scared of bonds: why?

    you could perfectly sensibly put more in longer-term bonds if you wanted to: e.g. 20% in a short-term bond fund, and 20% in a 10-year bond fund. if the latter fell 15%, that would still only be a 3% fall in your whole portfolio.

    and, as you say, all these fearful people may be wrong. many of them have been saying the same thing for a few years, and they've been wrong so far. however, they may be right eventually.

    5% Gold ETF - to hold something less correlated with equities
    a little gold is OK if you like that sort of thing. it isn't to my to taste, but each to their own. note that the price of gold is very volatile, so it doesn't give you stability. it does give you something with little correlation to equities.

    20% cash - what is the best home for the cash allocation in a SIPP and ISA?
    tricky, especially in a SIPP.

    for an ISA, you could transfer it to a cash ISA which offers the new flexible withdrawals feature, and then withdraw the cash and put it in higher-paying current accounts, which might pay more even after paying tax on the interest. thanks to the flexible withdrawals feature, you are able to replace this cash in the ISA later on. however, there are limits to the amounts of cash you can get especially good rates on. or just transfer to a cash ISA, and leave it these: cash ISAs will at least pay a bit more than S&S ISAs on cash.
    • grey gym sock
    • By grey gym sock 23rd Sep 16, 6:02 PM
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    grey gym sock
    Old grey gym " talk of losing 50% is ridiculous"; not at all, War loan and Consols lost much more than that at one time, take a look.
    Originally posted by EdGasket
    those were undated gilts - which have the maximum possible sensitivity to changes in interest rates. and there are no longer any undated gilts in existence.

    nobody has suggested buying anything longer-term than a bond fund holding an average of 10-year gilts. and most have suggested keeping at least some of a bond allocation shorter-term than 10 years. with this kind of approach, there is no way that there could be 50% losses.

    you seem determined to cherry-pick the worst possible outcome for bonds.

    you talked about a £100 bond paying 0.5% interest, and how it would fall to £50 if rates rose to 1% . this applies to an undated bond (which doesn't exist, and nobody has suggested buying if it does exist), and even then it would only fall 50% if interest rate expectation for the very long term rose from 0.5% to 1%, not just if bank base rate rose from 0.5% to 1% - which is very different.

    but then you dismissed the significance of rates falling from 0.25% to 0.1% . well, by your logic, a £100 bond paying 0.25% should rise to £250 in that event: a gain of 150%!

    such dramatic falls or rises are not going to happen with a 10-year bond fund. when undated gilts did fall a long way, that was over a period of decades, as interest rate expectations gradually rose by a huge amount. with a 10-year fund, the only issue is the changes in expectations that happen over the next 10 years (approximately), since after 10 years, the fund will have reinvested the proceeds of maturing bonds into new bonds, which will be paying higher rates, if interest rates have indeed risen. (which they may not have done, anyway.)
    • coyrls
    • By coyrls 23rd Sep 16, 6:03 PM
    • 532 Posts
    • 459 Thanks
    coyrls
    20% cash - what is the best home for the cash allocation in a SIPP and ISA?
    Originally posted by northbob
    Exactly, for a SIPP you're likely to be stuck unless you are on a (generally expensive) patform that allows you to hold cash in a deposit account. So, you're back to bonds. If you want to minimise risk then SPDR® Barclays 1-5 Year Gilt ETF would do it. For ISAs, once the money is out of an ISA wrapper, putting it back in will count towards your annual allowance which may or may not be a problem for you.
    Last edited by coyrls; 23-09-2016 at 6:10 PM. Reason: typo
    • northbob
    • By northbob 23rd Sep 16, 8:29 PM
    • 18 Posts
    • 1 Thanks
    northbob
    Grey gym sock thank you for that advice about the funds.

    Coryls thank you for your input and the short duration bond fund suggestion.

    Mathusian thank you for the bond question explanation.

    EdGasket thank you for your points explaining reasons for caution.
    • EdGasket
    • By EdGasket 23rd Sep 16, 8:31 PM
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    EdGasket
    Well enjoy your bonds. I'm only in equities, gold, and cash, no bonds.
    • northbob
    • By northbob 24th Sep 16, 8:45 AM
    • 18 Posts
    • 1 Thanks
    northbob
    EdGasket

    I am still considering all the options, risks and implications. Any bond allocation will now be small. I also feel a small allocation to gold has a place. Cash holding with any yield in SIPP and ISA looks tricky.

    Thanks again.
    • EdGasket
    • By EdGasket 24th Sep 16, 10:10 AM
    • 2,950 Posts
    • 1,177 Thanks
    EdGasket
    northbob; have a look at iShares ERNS fund (an ETF) which is in ultra short-dated corporate bonds. The ultra short date reduces the interest rate risk and hopefully also the risk of default on redemption. Yield is still under 1% I think but worth considering for SIPP and ISA cash. It has a very low management charge too.
    • northbob
    • By northbob 25th Sep 16, 10:05 AM
    • 18 Posts
    • 1 Thanks
    northbob
    EdGasket. Great suggestion. Thank you.
    • grey gym sock
    • By grey gym sock 25th Sep 16, 6:49 PM
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    grey gym sock
    ERNS could be a decent substitute for cash.

    or consider IS15 (another ETF), which gets you a little more yield, in exchange for holding slightly longer duration bonds (longer, but still only about 2.5 years average maturity).
    • northbob
    • By northbob 25th Sep 16, 9:49 PM
    • 18 Posts
    • 1 Thanks
    northbob
    grey gym sock, thank you for that suggestion, I will look at that one too.

    The shared knowledge that has come back from my original question has been amazing. Thank you.
    • EdGasket
    • By EdGasket 26th Sep 16, 9:39 AM
    • 2,950 Posts
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    EdGasket
    The yield to maturity on IS15 is only 1.45% and the TER to take off that is 0.2% meaning the likely return at the moment is 1.25%. However you can see from the graph that, like all bonds, it has had a good run and may well be at its peak, hence a risk of capital decline. Is that risk worth it for 1.25% ?

    https://www.ishares.com/uk/individual/en/products/251840/IS15

    I'm not saying its any better or worse than ERNS, just that the returns on either are so small vs possible capital loss that there is little to choose between them and just plain cash earning nothing at the moment. e.g. a fall back in price of IS15 from its current price to £100 (approx inception price) would result in a loss equivalent to at least 5 year's worth of interest!
    Last edited by EdGasket; 26-09-2016 at 11:50 AM.
    • northbob
    • By northbob 27th Sep 16, 4:31 PM
    • 18 Posts
    • 1 Thanks
    northbob
    Thanks for that point.
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