Is now a good time to buy bonds?

dllive

Hi guys,

I have some cash in my S&S ISA. Is now a good time to buy bonds? For example, Im looking at what Vanguard offer, something like: https://www.vanguardinvestor.co.uk/investments/vanguard-usd-corporate-bond-ucits-etf-usd-distributing?intcmpgn=fixedincomeusa_usdcorporatebonducitsetf_fund_link

If you click on the Distributions tab, it says "Yield As at close 30 April 2020 3.35%". That seems pretty good to me!? Does the yield go up/down monthly? 

Thanks

masonic

The yield is based on what was paid out in the previous year relative to the current price. The yield over the next 12 months is unlikely to be as high.

port_of_spain

Bonds are not all the same. You shouldn't just pick the bond fund with the highest yield, like a savings account. It may (as masonic says) pay less income over the next year; but also, the capital value can go up and down, sometimes by large amounts (depending on the type of bond fund).

You've picked a corporate bond fund, which has a higher yield than a government bond fund. That higher yield comes with a risk of losses from defaults and downgrades; risks which are greater in a recession.

You've also picked a fund of bonds issued in US dollars, and which doesn't hedge currency. So its capital value (and the income) will fluctuate as the GBP:USD exchange rate fluctuates.

ColdIron

What do you want your bonds to achieve? There is a spectrum of bond types just like equities. Some bonds protect you from volatility, some provide yield. They rarely do both

dunstonh

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

Albermarle

dunstonh said:

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

There was quite a bit of noise on this forum before the Virus crisis, that bonds were overvalued and they would follow equities down in the next crash. However that did not happen in the end , despite the dangers with bonds that you highlight.
Regarding the future an interesting conclusion to an article by Nils Pratley in the Guardian this week .

But that is also why the bond market’s current willingness to lend at 0% for three years is so alarming. The rush for safety is signalling that the crisis could get worse, and that remedies could take years to be effective.

The stock market on the other hand, is singing a far more cheerful tune, it should be noted. It’s almost perky and still seems to believe in something vaguely resembling a V-shaped recovery. But they can’t both be right.

masonic

Albermarle said:

dunstonh said:

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

There was quite a bit of noise on this forum before the Virus crisis, that bonds were overvalued and they would follow equities down in the next crash. However that did not happen in the end , despite the dangers with bonds that you highlight.

If you look at the performance data for the bond fund linked in the OP, you'll see it did follow equities down in the crash, dropping 13%, and then recovered in line with equities.

Albermarle

masonic said:

Albermarle said:

dunstonh said:

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

There was quite a bit of noise on this forum before the Virus crisis, that bonds were overvalued and they would follow equities down in the next crash. However that did not happen in the end , despite the dangers with bonds that you highlight.

If you look at the performance data for the bond fund linked in the OP, you'll see it did follow equities down in the crash, dropping 13%, and then recovered in line with equities.

OK fair enough , but I do not think was the case in general ?

masonic

Albermarle said:

masonic said:

Albermarle said:

dunstonh said:

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

There was quite a bit of noise on this forum before the Virus crisis, that bonds were overvalued and they would follow equities down in the next crash. However that did not happen in the end , despite the dangers with bonds that you highlight.

If you look at the performance data for the bond fund linked in the OP, you'll see it did follow equities down in the crash, dropping 13%, and then recovered in line with equities.

OK fair enough , but I do not think was the case in general ?

Government bonds held up well (the perceived risk there is rising interest rates rather than falling stockmarkets), whereas corporate bonds did not. High yield corporate bonds got absolutely hammered. Quite a few bond funds that were considered to be fairly defensive got caught out and several fared worse than the one linked above. A reminder that not all bonds are equal.

EdGasketTheSecond

With interest rates at zero, now would seem like the worst time to be buying bonds. How are you going to make any capital gain? Most likely the capital value of bonds will fall if/when interest rates get back off zero. There might be some small gain to be had if interest rates actually do go negative but its a big 'if'.

The income on gilts doesn't compensate you for value lost to inflation. The income on corporate bonds might so long as there are not too many defaults  in bond repayments in whatever fund you are thinking of. That is a risk you take for higher income.

aroominyork

dunstonh said:

When you look at the fluid asset allocation models available, they have been reducing bond allocations over the last few years and the recent models have culled them heavily.    Credit risk is high and return potential is low with haircuts and defaults expected.

What are the fluid allocation models using to temper equities? I assume not gold - I don't even bother to open the threads about gold.