Making money on bonds

sh856531

Hi Guys,

I've noticed a few investment funds posting quite high returns recently - I'm guessing due to the recent dash to government debt as a short term safe investment.

I was wondering though - how do funds investing in soveriegn bonds (say) make decent returns (say over 10%)? As I understand it, government IOUs tend to offer returns of like 1.5% - 3% - so how do these funds make up the difference?

I'm guessing its because these bonds also have a "price" at which they trade at and because demand has shot up - so has the "price" (sorry, not sure if price is the right term)

Am I on the right track? e.g. the return is still quite low, but because the price has gone up a lot, these funds are posting big gains?

Or is there some other way that these funds make money?

Many thanks to anyone who can advise

Best Regards

S

KieranB

Now is not the right time to right time to invest in these kind of funds IMO.

The price of existing bonds RISE when BoE interest rates fall. This is because they will have higher returns than other deposits, gilts and other interest bearing investments.

Because of the above, funds and pooled investments also rise in price, even if the actual income distributed were to fall.

Now that the base rate is 0.5%, i would suggest leaving these funds and going into cash for 6 months or so before back into equities and perhaps property.

Another reason that you will find high returns in you buy a bond direct yourself is because you may be investing in a very high risk company. In the current economic downturn i would suggest against that too.

purch

I was wondering though - how do funds investing in soveriegn bonds (say) make decent returns (say over 10%)?

The return is different from the Yield.

Gilts and other Bonds are traded instruments and their price fluctuates in response to market conditions.

Gilts and other Government Bonds have increased in Price greatly over the last 6 months (reducing their effective overall yield) on a flight to perceived quality.

The Funds holding these instruments have been able to show high overall returns as the price of the Bonds they hold rise in the market, and the Yields on the Bonds remain the same.

sh856531

Thats what I thought - many thanks

S