Bond fund, just testing my logic

Alexland

Linton said:

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.

VLS60 investors are primarily invested in equities so I agree they should be OK and there might even be some 'rebalancing alpha' from the fixed allocation but their return after charges seems likely to just about keep pace with inflation rather than generate any real return. There really doesn't seem to be any good answers for money that might be required in the short term other than perhaps cash if interest rates get a bit better and assuming the money will be spent quickly enough that inflation will be less of a concern.

jamesd

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?

If by mitigate you mean drop and then stay down, yes. It doesn't imply a rise because that would require lower interest rates again.

High yield bonds behave more like equities so that'd provide more of a bond interest rate disconnect than the maturity.

Thrugelmir

Alexland said:

Linton said:

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.

VLS60 investors are primarily invested in equities 

Historically bonds provided a positive return in times of equity downturns for 60/40 portfolios. If bonds produce a negative return in the near future. Then equities (or more importantly the real world economy) is going to have to perform extremely well to achieve the heavylifting that's now required to counterbalance. 

Gary1984

I think the broad hypothesis is correct. If you have a bond that pays £100 GBP in 4 years time if you hold to maturity then you get your £100 back, no matter what interest rates do. You're only affected if you sell. Of course the fund is constantly trading bonds to maintain the 4 year duration but as it does so those new bonds will have higher rates of return than those sold.  So you should get the same principle of a reduction to market values now but increased returns over the next 4 years so that means it should balance out over time.

Thrugelmir

Gary1984 said:

 If you have a bond that pays £100 GBP in 4 years time if you hold to maturity then you get your £100 back, 

If you've paid £110 for the £100 of nominal stock. Then while the current yield may look attractive , the sting in the tale is a £10 capital loss when the bond is redeemed. 

Gary1984

Sure but you you know that when you buy the bond. The cashflows to you don't change when interest rates change, assuming you hold to maturity.

Thrugelmir

Gary1984 said:

Sure but you you know that when you buy the bond. The cashflows to you don't change when interest rates change, assuming you hold to maturity.

Most people buy bonds indirectly , i.e. through funds. As a consequence they would have to delve deeper to understand what the underlying position was. Easy to be seduced by the tasty looking headline current yield rather than than the more subdued yield to maturity. 

MarkCarnage

Yes the redemption yield will make more sobering reading.