UK gilts or US treasuries?

EdGasket

I don't think the OP understands bonds. They are not 'safe' and very sensitive to interest rates. As interest rates are only likely to go up from here you would do well do steer clear of fixed-rate bonds which will lose capital value as interest rates rise. You could easily lose 50% of your capital in bonds!

e.g why would anyone pay £100 for a bond paying 0.5% if interest rates in the cash market returned 1%? Answer they wouldn't, they would likely pay something nearer to £50 for a 0.5% bond in that case. At the moment bonds are priced such that they return next to nothing because cash returns are next to nothing, pension funds are required to hold a certain amount of bonds whatever, and the government through QE is forcing the price of bonds up artificially. Bond prices will crash sometime soon.

northbob

EdGasket wrote: »

I don't think the OP understands bonds. They are not 'safe' and very sensitive to interest rates. As interest rates are only likely to go up from here you would do well do steer clear of fixed-rate bonds which will lose capital value as interest rates rise. You could easily lose 50% of your capital in bonds!

e.g why would anyone pay £100 for a bond paying 0.5% if interest rates in the cash market returned 1%? Answer they wouldn't, they would likely pay something nearer to £50 for a 0.5% bond in that case. At the moment bonds are priced such that they return next to nothing because cash returns are next to nothing, pension funds are required to hold a certain amount of bonds whatever, and the government through QE is forcing the price of bonds up artificially. Bond prices will crash sometime soon.

Thank you.

northbob

So lots of caution about holding any bonds. So I am looking at having 40% of my pension and savings in cash. Thank you all for the comments and thoughts.

Some questions in response to the replies so far:

I accept bonds are not totally safe, but is it not true that all balanced portfolio advice (Hale, Bogle, Browne, Swedroe etc) includes them because:

1. less volatile than equities
2. diversification as less correlated with equities
3. biggest losses not as great as biggest equity losses

But despite this bonds are best excluded from balanced portfolios now?

If balanced portfolios are to have no bonds where is the diversification to come from?

When the next economic crisis hits and equities enter a bear market where will the money move to if not bonds?

If bonds that crash before or with equities where will the money moving out of bonds move to? Only cash?

EdGasket

northbob wrote: »

But despite this bonds are best excluded from balanced portfolios now?

If balanced portfolios are to have no bonds where is the diversification to come from?

When the next economic crisis hits and equities enter a bear market where will the money move to if not bonds?

If bonds that crash before or with equities where will the money moving out of bonds move to? Only cash?

I would say they are best excluded from balanced portfolios now. The investment managers may not be able to do that if their fund states it is 40% or whatever in bonds and that is their mandate. They could move to short-date bonds to mitigate any falls.

Next economic crisis - if that turned out to be high inflation then cash and bonds would be hit but probably not equities. Money might move to hard assets such as property, gold, oil, resources.

There is also index-linked gilts to consider; a better bet than fixed-rate right now in my opinion but still overpriced and subject to interest rate hikes.

coyrls

I’m not disputing claims that bonds represent “bad value” now; however for balance I would point out that bonds have had a phenomenal run over the last few years during which the vast majority of commentators were claiming that bonds represent “bad value”. It’s quite surprising that many people who would condemn trying to time equity markets are quite happy to advocate timing bond markets. If, as you suggest, you stick to relatively short term bonds, you will address interest rate sensitivity, all be it at the potential cost of immediate returns. You might also looks at a conservatively managed active bond fund such as Moneybuilder Income.

northbob

coyrls

That is a very good point. If I had posted that I was starting a balanced portfolio for the long term, at current values it could also be said equities are over valued so dont hold any. So not holding any bonds because of current values is like timing the market. Which is not a good idea as it is not possible.

I see a case for not putting as much in bonds as I had considered but for a smaller allocation does anyone have any thoughts about the 3 funds I shortlisted in the earlier post?

EdGasket

Ref previous two posts; the thing is that interest rates can't go any lower and the US economy is heating up so rates there WILL go up in the next few months. It is not a case of trying to 'time' the bond market; the bond market moves inversely to interest rates and as interest rates are as low as they are gonna go and the FED has already signalled rate rises, we are at the top of the bond cycle.

Northbob - if you must have gilts then get a short-dated fund but as everyone is trying to tell you, you might just as well have cash right now because your bonds aren't going to return you anything.

coyrls

EdGasket wrote: »

Ref previous two posts; the thing is that interest rates can't go any lower

You reckon? The Bank of England is hinting at a reduction to 0.1%. The expected US rise has been postponed.

coyrls

northbob wrote: »

does anyone have any thoughts about the 3 funds I shortlisted in the earlier post?

I hold Vanguard Global Short Term Bond Index. One point to note for your circumstances is that it's hedged to sterling, which for most UK investors is a good thing but it won't give you the US $ link that you were asking about. As you point out, the YTD return has been 2%, not the 0.5% being quoted in other posts. As it is a short-term bond fund, it has low sensitivity to interest rate changes.

EdGasket

coyrls wrote: »

You reckon? The Bank of England is hinting at a reduction to 0.1%. The expected US rise has been postponed.

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.