Bonds?

k6chris

Dumb question(s) time.....if the valuation of bonds is inversely propotional to their yield, then the implication is that as yields rise with the rising of bank base rates, the value of bonds is likely to fall?? If this is the case then with US and UK banks considering base rate rises, why would anyone want to be invested in bonds now??

enthusiasticsaver

Firstly because there is no guarantee rates will rise. There have been whisperings to that effect for the last six to eight years and there is only one direction that interest rates have gone. Also surely if values are linked to yields the price may fall but dividends will rise and then be reinvested in cheaper bonds. Simplistic I know but as I don't have a crystal ball that is the way I look on it. 40% of our portfolio is in bonds to lessen volatility of overall portfolio which is why we invest in them.

AlanP_2

There have been numerous discussions on this and no "one size fits all" answer. chucknorris started a thread which had quite a lot of discussion recently.

Coniderations include:

Yes (some) Bonds will fall in capital value as interest rates rise but will they fall as much as Equities might or do they still provide a "safer" alternative?

What are the alternatives as most people would consider 100% equities to be a high risk strategy?

The preceeding point is subject to - individual risk attitude, other investments / sources of income, age and where you are in life's journey (working, earning and accumulating with a 30-60 year horizon, or Aged 80, retired and looking for income and "pot preservation" rather than as much growth as can be squeezed out of it).

The majority of people (MSE posters are a small minority) probabaly don't even think about their asset allocation and whether they are exposed to falls in bond values.

Final point, the amount personal investors put into bonds is a drop in the ocean compared to the massive sums deployed by insurance companies, pension funds etc. If all the pension funds in the UK moved out of bonds and bought equities I doubt there would be enough to go round as the value of global bond market is substantially larger than the value of global equity markets.

ColdIron

Risk and volatility management, diversification and of course income.
There is a wide spectrum within fixed income investing from gilts, through corporate bonds to high yield and EM debt. What effect do you think the BoE raising rates by 0.25% will have on, say, Japanese sovereign debt?

coyrls

k6chris wrote: »

Dumb question(s) time.....if the valuation of bonds is inversely propotional to their yield, then the implication is that as yields rise with the rising of bank base rates, the value of bonds is likely to fall?? If this is the case then with US and UK banks considering base rate rises, why would anyone want to be invested in bonds now??

[FONT=&quot]This has been said for the last 5 years; meanwhile the BBgBarc Sterling Agg Corp TR GBP index has an annualised return of 6.21% over 5 years. Trying to dip in and out of bonds depending on your view of the future is no different from trying to dip in and out of equities based on your view of the future.[/FONT]

chiang_mai

How do you define "bond"? Fixed rate, high credit, government, corporate, EM, HY, etc. etc.

Tom99

I agree with your conclusion and am considering selling the bonds I have.

However if the 'market' is expecting interest rates to rise then that future rise should already be factored in to todays prices.

Linton

Although the capital value will fall, the yield to maturity (ie taking into account both the redemption of the bond at a capital loss and the interest gained in the meantime) is positive for even the most expensive UK government bonds. For example if you were to buy a 4% bond maturing in 2060 currently priced at £1.68 for a £1 bond and hold until maturity your return would average at around 1.7%/year. The actual interest would be about 2.4%/year on current price but then you have the capital loss in 2060.

Bond funds are a lot more difficult to analyse as they usually hold a wide range of bonds of different maturity dates. However if you have a fixed deadline it may be worthwhile investing in bonds with a maturity near that date.

bigadaj

ColdIron wrote: »

What effect do you think the BoE raising rates by 0.25% will have on, say, Japanese sovereign debt?

Don't know but you could pay some economists a lot of money to com e up with the wrong answer.

ChesterDog

Tom99 wrote: »

I agree with your conclusion and am considering selling the bonds I have.

However if the 'market' is expecting interest rates to rise then that future rise should already be factored in to todays prices.

Not really.

Much of the bond market could be said to have been skewed away from efficient pricing by QE and by the fact that many pension funds are obliged to invest in a high proportion of bonds.