Bond fund, just testing my logic

chucknorris

I want to test my logic, please let me know it my logic is faulted, I currently have some investment in the GHYS bond fund:

https://www.ishares.com/uk/individual/en/products/253488/ishares-global-high-yield-corp-bond-gbp-hedged-ucits-etf

If (when) interest rates rise am I correct in thinking that because the average weighted maturity date is only 4 years, any correction in value would be temporary, because as individual bonds mature from the fund, and subsequent reinvestment is made into other bonds that would be valued on the basis of the recent higher interest rate environment, any initial downward correction due to interest rate rises would then be mitigated?

MarkCarnage

I would suggest that your logic is broadly in the right place but two caveats....

Firstly, the downward pressure might continue if rate rises continued, particularly unanticipated ones. 

Secondly, rising rates are likely to lead to more defaults in HY space which would impact on fund value too. 

MX5huggy

My thoughts are. What interest rate are you saying will rise because this a global fund then. While what you say may or may not be correct for individual bonds if you look at the chart for that fund then you will see that it has very little correlation to interest rates and much more to global equity. The effect of interest rates rises expected will already be priced in. 

chucknorris

MX5huggy said:

My thoughts are. What interest rate are you saying will rise because this a global fund then. While what you say may or may not be correct for individual bonds if you look at the chart for that fund then you will see that it has very little correlation to interest rates and much more to global equity. The effect of interest rates rises expected will already be priced in. 

But interest rates have not really moved since the fund was formed, hence no correlation and also I think inflation is going to be an international problem (particularly in the higher geographical weightings of the fund). But really I am just canvassing opinions to see what posters come back with, all comments and opinions are welcome. There is always something that could be have been overlooked, and no harm in asking. As I approach retirement I am trying to increase diversity in my portfolio, hence the recent venture into bond funds.

MarkCarnage

if you look at the chart for that fund then you will see that it has very little correlation to interest rates and much more to global equity.

There probably hasn't been enough rate changes to take any meaningful view on correlation to rates. The correlation to global equity reflects that HY bonds are arguably closer to equity in risk characteristics than say investment grade, and have probably been bid up for their relatively high yield in recent years. They'll correlate to equities on the downside too, with interest rate rises being one of the drivers of that. 

Thrugelmir

Bond prices aren't solely dependent on official news from Central Banks.  

Linton

chucknorris said:

I want to test my logic, please let me know it my logic is faulted, I currently have some investment in the GHYS bond fund:

https://www.ishares.com/uk/individual/en/products/253488/ishares-global-high-yield-corp-bond-gbp-hedged-ucits-etf

If (when) interest rates rise am I correct in thinking that because the average weighted maturity date is only 4 years, any correction in value would be temporary, because as individual bonds mature from the fund, and subsequent reinvestment is made into other bonds that would be valued on the basis of the recent higher interest rate environment, any initial downward correction due to interest rate rises would then be mitigated?

These are high yield/higher risk corporate bonds so will not be as affected by bond rate changes as safe gilt funds.*  The downside is that they are fairly highly currelated with equity in that if the economy tanks corporate bonds will be seen as riskier (the issuers would be more likely to go bust) and so these bond prices will fall.  The higher interest rates would be poor compensation.  Look at the fund's performance over the Covid mini crash. 

So in my view high yield corporate bonds on their own are not a satisfactory replacement for gilts in an equity/bond portfolio.  I am happy to use them to provide part of my income needs but that is to meet a very different objective. What is your objective for wanting to investing in that fund?

* For evidence, use trustnet charting to plot the performance of your fund without reinvestment of interest.  You will see that the value has slightly fallen since the fund was started about 8 years ago whereas a gilt fund will have risen in value.

chucknorris

Linton said:

chucknorris said:

I want to test my logic, please let me know it my logic is faulted, I currently have some investment in the GHYS bond fund:

https://www.ishares.com/uk/individual/en/products/253488/ishares-global-high-yield-corp-bond-gbp-hedged-ucits-etf

If (when) interest rates rise am I correct in thinking that because the average weighted maturity date is only 4 years, any correction in value would be temporary, because as individual bonds mature from the fund, and subsequent reinvestment is made into other bonds that would be valued on the basis of the recent higher interest rate environment, any initial downward correction due to interest rate rises would then be mitigated?

These are high yield/higher risk corporate bonds so will not be as affected by bond rate changes as safe gilt funds.  The downside is that they are fairly highly currelated with equity in that if the economy tanks corporate bonds will be seen as riskier (the issuers would be more likely to go bust) and so these bond prices will fall.  The higher interest rates would be poor compensation.  Look at the fund's performance over the Covid mini crash. 

So in my view high yield corporate bonds on their own are not a satisfactory replacement for gilts in an equity/bond portfolio.  I am happy to use them to provide part of my income needs but that is to meet a very different objective. What is your objective for wanting to investing in that fund?

Yeah I am aware that the bond fund is higher risk than lower yield bonds, but I did note and was aware that when prices crashed (Covid) that bond fund did not fall as much. 

Linton

chucknorris said:

Linton said:

chucknorris said:

I want to test my logic, please let me know it my logic is faulted, I currently have some investment in the GHYS bond fund:

https://www.ishares.com/uk/individual/en/products/253488/ishares-global-high-yield-corp-bond-gbp-hedged-ucits-etf

If (when) interest rates rise am I correct in thinking that because the average weighted maturity date is only 4 years, any correction in value would be temporary, because as individual bonds mature from the fund, and subsequent reinvestment is made into other bonds that would be valued on the basis of the recent higher interest rate environment, any initial downward correction due to interest rate rises would then be mitigated?

These are high yield/higher risk corporate bonds so will not be as affected by bond rate changes as safe gilt funds.  The downside is that they are fairly highly currelated with equity in that if the economy tanks corporate bonds will be seen as riskier (the issuers would be more likely to go bust) and so these bond prices will fall.  The higher interest rates would be poor compensation.  Look at the fund's performance over the Covid mini crash. 

So in my view high yield corporate bonds on their own are not a satisfactory replacement for gilts in an equity/bond portfolio.  I am happy to use them to provide part of my income needs but that is to meet a very different objective. What is your objective for wanting to investing in that fund?

Yeah I am aware that the bond fund is higher risk than lower yield bonds, but I did note and was aware that when prices crashed (Covid) that bond fund did not fall as much. 

Try plotting the FTSE World Index against the high yield corp bond fund from the end of 2019.  To me the falls look almost identical.

Alexland

It does feel like bond investors are going to be slowly boiled like a frog to inflation and interest rates given just enough hope along the way that they don't see the full danger of their circumstances until it is too late. That's not to say equity investors will not carry substantial volatility and moments of disappointment as everyone now piles in but at least they are likely to have a positive long term result.

Linton

Alexland said:

It does feel like bond investors are going to be slowly boiled like a frog to inflation and interest rates given just enough hope along the way that they don't see the full danger of their circumstances until it is too late. That's not to say equity investors will not carry substantial volatility and moments of disappointment as everyone now piles in but at least they are likely to have a positive long term result.

I do not think it is quite as bad as that.  A long term VLS60 investor who doesnt examine their returns too carefully should not notice much particularly if they did not notice that safe bonds were increasing in value unsustainably.   It is only a real concern to those of us who question whether our investment allocation is best suited to our needs and perhaps have a shorter term horizon.