Gov Bonds vs. Cash Within a Portfolio

username12345678

I'd be interested in hearing opinions on the relative merits of holding government bonds against cash in a portfolio.

A number of years ago this probably wouldn't have been a discussion point as generally the bond return would have been acceptable measured against inflation. QE has of course tipped fixed income on its head (although there are arguments about the long-term trajectory prior to 2008) with government bonds arguably coming under 'return free risk' rather than the other way around.

To put this question in to personal context my cash/bond/absolute return/wealth preservation funds are going to be around the 40-50% ratio with cash potentially amounting to between 10 and 20% of the total.

I will be rebalancing but i'm undecided as to whether an arbitrary calendar date or percentage equity drawdown trigger (entering on a sliding scale) will be the way to go.

What I don't want to happen though is to load up with high-grade gov bonds and find my safety net is is more holes than material.

IanSt

username12345678 wrote: »

I'd be interested in hearing opinions on the relative merits of holding government bonds against cash in a portfolio.

Personally I don't hold any bonds as I am inclined to believe that as QE has significantly artificially boosted the attractiveness of bonds then they are headed for a bumpy ride as QE reverses.

If I had to have government bonds then I'd choose those with short durations, but given their low return I currently prefer to keep cash outside of the SIPP in multiple higher interest savings accounts where I can at least get a couple of percent by moving our money around searching out the best accounts.

My preferences may change as the outlook changes, but currently I'm happier with my equities/cash split than any other, and it's what makes you happy and allows you to sleep at night that is the important factor in any decision you make.

Malthusian

In current economic conditions, government bonds are for institutional investors who don't have access to loss-leading cash accounts or the FSCS.

Anyone who has so much invested in the loss-leading cash accounts that they can't invest any more without going over the FSCS limits, and thus has to consider gilts, is either holding an excessively cautious proportion of their portfolio in risk-free assets (read: being excessively reckless about inflation risk) or has so much money that they should be considered an institution.

username12345678

Malthusian wrote: »

In current economic conditions, government bonds are for institutional investors who don't have access to loss-leading cash accounts or the FSCS.

Anyone who has so much invested in the loss-leading cash accounts that they can't invest any more without going over the FSCS limits, and thus has to consider gilts, is either holding an excessively cautious proportion of their portfolio in risk-free assets (read: being excessively reckless about inflation risk) or has so much money that they should be considered an institution.

I was thinking of the mix within a SIPP rather than outside.

There are of course the money market funds returning around 0.40% (RL's STMM and Cash Plus for example) accepting the slight risks with their composition.

I do hold the limit in Santander's 1.5% and i'm hoping they will start to increase their rate again. The tax man is less than generous with the PSA when holding outside of a SIPP/ISA.

Morphoton

If you hold gilts to maturity there is no risk with regard to return / income (assuming no Government default). The big unknowns are inflation and what cash will return.
The prices are very high as to get 1% pa you have to purchase a gilt maturing in 2024.
Prices and Yields:
https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3

AlanP_2

username12345678 wrote: »

I was thinking of the mix within a SIPP rather than outside.

That is the "problem" investment - what to use instead of Bonds inside a pension?

EdGasketTheSecond

AlanP wrote: »

That is the "problem" investment - what to use instead of Bonds inside a pension?

Possibly short and ultra-short corporate bond ETFs. As they are short, there is less risk of a capital fall than with longer dated bonds plus as the short-dated bonds mature, they'll get replaced with better priced bonds as interest rates rise. Still might not return much over cash though and there is some risk.