Is now a good time to buy bonds?

Thrugelmir

aroominyork 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.

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.

Holding gold against inflation risk along with US indexed TIPs is the main play of defensive portfolios. Equities are broader than just trading companies alone. 

dunstonh

aroominyork 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.

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.

Index linked gilts, global bonds and corp bonds (high yield in particular) along with property have taken a hit on allocations.   Gilts allocations have increased a little and cash has increased a lot (relative to normal).

Albermarle

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

All probably true, but it seems the appetite for government debt is still strong regardless.

masonic

Institutional investors and fund managers currently have little choice other than to buy government debt. Consumers have other options available to them. The recent projections for government bond returns I've seen are below the top savings account rates.

aroominyork

dunstonh said:

aroominyork 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.

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.

Index linked gilts, global bonds and corp bonds (high yield in particular) along with property have taken a hit on allocations.   Gilts allocations have increased a little and cash has increased a lot (relative to normal).

Thanks dunston. I am the kind of DIY investor who sticks to three categories: equities, fixed interest and cash. Of these I find fixed interest by far the most complicated to understand vis a vis the macro environment. Is the answer at times like this to stick to a well managed and cautious strategic bond fund like Ariel Bezalel's Jupiter? (That said, I'd appreciate if you could also comment on short duration since I hold RL Short Duration Credit for cash I am unlikely, but not uncertain, to need to access so want to invest with low risk.)

MaxiRobriguez

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.
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.

The noise on the forum was that bonds are *more likely* to follow equities down over the long run. I think this still holds true, probably more now than previously, and the risk is greater the longer you're holding the bonds for. 

I think in this instance you have to ignore their correlation to stock market. Bonds at next-to-zero or negative yields aren't profitable by themsevles, so you're relying on further reduction of interest rates in order to sell them for capital gain - but that still requires buyers, which may evaporate if holding cash is more profitable for example.

As with any investment, nothing guaranteed, but the risk/reward of bonds look poor value to me. 

Thrugelmir

MaxiRobriguez 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.
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.

 so you're relying on further reduction of interest rates in order to sell them for capital gain

As the old high interest bonds gradually mature there's a new generation of low yield bonds. The good years are well past. Suspect many bond holding investors are going to receive disappointing returns in the years to come. 

dllive

Hi guys

Im reigniting this thread.

The reason I asked my initial question was becuase I (foolishly!) find myself in a position where my portfolio is 100% invested in shares and funds. Ive started moving into passive index trackers, but I keep hearing about keeping a good perecentage in bonds. (my investment horizon is 20 years). So it seems sensible I start buying bonds(?).

Ive started with https://www.vanguardinvestor.co.uk/investments/vanguard-global-bond-index-fund-gbp-hedged-acc beuase the fund invests in thousands of international government and corporate bonds.

What are some rules of investing in bonds? For example, when interest rates go up bond yields go down? When equities go down bonds go up?

I know theres no firm answers anyone can give, obviously, but Id like to get an understanding of whether now is a good time to buy bonds; or drip feed regular amounts into bonds, or wait to see how the next 6 months pan out.

Thanks

dunstonh

The reason I asked my initial question was becuase I (foolishly!) find myself in a position where my portfolio is 100% invested in shares and funds. Ive started moving into passive index trackers, but I keep hearing about keeping a good perecentage in bonds. (my investment horizon is 20 years). So it seems sensible I start buying bonds(?).

Bonds are largely out of favour as a risk reducer at the moment.      The main risk reducers are gilts and cash at the moment (as the least worst options).

What are some rules of investing in bonds? For example, when interest rates go up bond yields go down? When equities go down bonds go up?

Bonds came in a number of forms.    Gilts, index linked gilts, investment grade bonds, high yield bonds, global bonds (and more).
At the moment, with fluid models, investment grade bonds, global bonds and high yield bonds are out of favour.  However, if you are a fully passive investor then you would still buy each of those.  Alternatively, If you are passive in the underlying assets but prefer to adjust your weightings over the economic cycle then you would really only hold gilts and cash to reduce risk.  (noting that high yield bonds are not risk reducers).

Linton

masonic said:

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.

In the Covid mini-crash my high yield bond funds fell much the same as equity.  Their recovery was  similar to that of non-tech global equity and much better than the FTSE100.  However despite the volatility in capital value they have continued to pay out at much the same level in £ terms.

Using corporate bonds as a substitute for safe government bonds in say a 60/40 portfolio is not sensible - they behave very differently.  Using them for income alongside dividends seems worthwhile.