Please help me understand why bonds might be better- or worse- than cash.

Another_Saver

Ray_Singh-Blue said:

Thankyou for the replies.

I understand that cash is likely to lose some purchasing power over time. That's OK by me. Because as I see it, the point of safe cash in the mix is to counterbalance the risky equities, and make the whole portfolio less risky. I don't see the point of cash as being to preserve purchasing power in its own right. But, taken together with stocks, I hope purchasing power of the 50:50 portfolio will grow. And so far that's what has happened.

For now I am planning to stick with cash as the "safe" half of my portfolio. However, in the long term I would like bonds in the mix. If you have given up on bonds "for now" - maybe because you expect interest rates to rise, or maybe because yields are very low- then what needs to change for you to start buying them again?

I am thinking, higher yield available on bond fund than on cash, that would probably be enough to sway me. Specifically, when the yield on a global weighted bond index, is higher than I can get is a cash ISA or with NS&I. Does this sound like a reasonable starter for 6?

I was looking at using IBTG, an iShares ETF that hedges very short term US treasuries, before Covid brought down yields everywhere. US bonds have been yielding a fair bit highe than UK/global bonds for a while now. Like you I'm playing the interest rates waiting game.

Ray_Singh-Blue

Just revisiting this old thread. My view is that the bond crash we were anticipating eventually happened over 2020-2022. The chart above compares it with the worst slumps in the stock market over the last 100 years.

I'm getting back in to bonds now, prefering VGOV to CSH2 for new investments and with an eventual target of 25% cash 25% bonds.

Altior

Of course, if the treasuries in the chart were to recover to peak price, that would be a circa 70% gain. Now the conditions for that to happen appear quite a long way off. However I've thought there was a strong case for moving into the treasury/gilt asset class in the hope of capital gains for a while.

For me, US equities appear to be in the space where treasuries/gilts were a few years ago. Bar the covid blip, seemingly an inexorable march to new highs. Of course that is at least in part due to vast money printing, and the perceived safe haven of usd. Just like gvnt bonds, it has to turn eventually, but pretty much nobody knows when, and what will be the trigger. The AI bubble popping, perhaps.. I've been trying to diversify away from US equities for a good while.  

Ray_Singh-Blue

It's tricky isn't it? I sat out of bonds from 2014 thinking the downturn was coming. In the end it turns out that was 6 years too early.

I certainly wouldn't like to call it with equities, and plan to remain at least 50% in whatever the market does.

The value of bonds I think tends to revert to a mean, whereas the value of the world's businesses might be expected to continue ever upwards. Maybe stepwise, due to productivity gains driven by things like you mention. I think history suggests if you miss a step there's little chance of climbing back on at the same point.

masonic

Exactly, bonds have a known intrinsic value that it tends towards as it nears to maturity, whereas the value of a company has no such constraints. That said, it's hard enough predicting what will happen inside a bond fund. There is still a lot to be said for individual bond holdings.

Altior

As the graph shows however, there will be a correction in US equities. I'm not pulling the oar out completely, as nobody knows when it will come and what's the trigger. I feel like there is a strong argument to swing the balance into bond funds at respective valuations, esp gvnt, and pivot the other way when the time comes. I am also doing that with ITs that are sensitive to the risk free rate, hoping for cap gain but bonus being strong yield in the meantime. Of course, there is more risk attached to that play. 

Ray_Singh-Blue

I suppose this is probably similar to the approach I have in mind too. 50% equities is the "floor" for me, I won't go lower that that. But if (and when) there is a spectacular dip in the value of equities I will probably sell bonds and load up, perhaps as high as 100% if they have dropped enough.

coastline

The UK 10 year bond yield stood at 4.75%-4.5% last year when the markets anticipated peak rates and a pause in inflation. From that point until early 2024 the markets anticipated several rate cuts and the yield fell to 3.5%. Since then yields are back to 4.25% as fewer rate cuts are expected. 

UK 10 Year Gilt Bond Yield - Quote - Chart - Historical Data - News (tradingeconomics.com)

Looking at VGOV the price stood at 1580 with 10 year yield at 4.5%. Picked up to 1760 as 10 year yield stood at 3.5%. Now back to 1670 as fewer cuts are expected. That's around a 10% range for the full move in VGOV price in a year. Recent move is around 5%. ? Much appears to be priced in unless rates are to be cut aggressively again.

 Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

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Equities have struggled with higher rates and 6% has been a major problem in the 120 year history. Valuations would need to fall especially in the US market currently P/E of 20 . That could mean falls in prices which would effect the rest of the world.

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Image — Postimages (postimg.cc)

1970's P/E's were in single figures with higher rates..

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