Bonds – what are you doing?

masonic

I've been reducing bond exposure (both unwrapped and ISA, pension is 100% equities. I'm now just exposed through WP trusts). Effectively I've pulled forward about 8% returns in the last quarter of 2021 and have eked out some more by buying back when they fell 10% due to lucky market timing* and particularly the start of the Ukraine war. Not the sort of behaviour I would usually practise or condone, but when I bought I intended to hold for much longer on both occasions, the short term uplift was just too unsustainable to continue to hold. "Reinvesting" into cash plus a tilt back into equities. I'll take a guaranteed nominal 1.5% over what shorter duration index linked bonds might deliver in the short term. I'll also be deferring use of my 2022/3 ISA allowance, which I had intended to add next week. All in all, about 17% cash currently and 5% gold so I don't completely miss out on volatility

* Should add I've had shocking luck throughout 2021 on the timing of purchases and investment switches

GeoffTF

Prism said:

The only one of my bond funds that has provided any sort of return recently is Lyxor Core Global Inflation-Linked 1-10Y Bond ETF - GISG. My other bond fund, a short term one, is down.

A tiny market cap and a wide spread, but one to watch.

Alexland

None of our main accounts have bonds and it's been like that for a couple of years since we started talking about the 'return free risk' they were offering. I've been watching the improving yield on bonds but with a perspective that they might within a few years become a buying opportunity again but at current valuations I would rather take a rough ride with equities even with their likely diminished medium term returns.

aroominyork

Alexland said:

...at current valuations I would rather take a rough ride with equities even with their likely diminished medium term returns.

If the equity market stagnates, does history suggest prices will rise with inflation?

GeoffTF

aroominyork said:

Alexland said:

...at current valuations I would rather take a rough ride with equities even with their likely diminished medium term returns.

If the equity market stagnates, does history suggest prices will rise with inflation?

Inflation generally leads to interest rate rises to control it. Nominal bonds and equities get hammered as a result. In the long term, equities tend to recover. In the present market, equities are gravity defying. No matter how bad the news, they go up. That will go into reverse, but we do not know when.

masonic

aroominyork said:

Alexland said:

...at current valuations I would rather take a rough ride with equities even with their likely diminished medium term returns.

If the equity market stagnates, does history suggest prices will rise with inflation?

I suppose the late 80s-early 90s is the closest comparable time, despite a sharp rise, followed by a crash, then stagnation, a short rally, another downturn and a recovery, there was a positive real return over the 5 years inflation was between 4-8%. Though interest rates and debt:GDP would have been a little different back then.

coastline

aroominyork said:

Alexland said:

...at current valuations I would rather take a rough ride with equities even with their likely diminished medium term returns.

If the equity market stagnates, does history suggest prices will rise with inflation?

The sharper rises in inflation have led to stock market falls. So far in 2022 most of it has be absorbed by the markets but who knows next week ?

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Rates-Forward-Returns-042021.png (859×501) (realinvestmentadvice.com)

Inverted yield curves are also on the agenda. The grey shaded areas are recessions.

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Rate hikes and those grey shaded areas.

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So the FEDs dot plot is 3.5% by 2023 but the market thinks a bit less. That's just for this cycle or inflation is down somewhere near 3% by then. So timing the market anybody will need to be on the ball . 
Fed holds a lot of stuff that will mature shortly. Only what I read and no expert as ever.

Fed Liquidity Drain Is Coming - RIA (realinvestmentadvice.com)

GeoffTF

The 1970s are probably the best comparison:

https://monevator.com/the-uks-worst-stock-market-crash-1972-1974/

The UK stock market fell to about a quarter of its value and took nine years to recover in real terms.

masonic

GeoffTF said:

The 1970s are probably the best comparison:

https://monevator.com/the-uks-worst-stock-market-crash-1972-1974/

The UK stock market fell to about a quarter of its value and took nine years to recover in real terms.

Well, on that optimistic note, perhaps we were a little unfair to our good friend Type45 when he proclaimed "the stock market will be 80% (or a huge amount) down from it's recent highs at some point in 2022". The similarities are striking, although several of the contributing factors are sufficiently different this time around. Such events are always a possibility, I suppose, which is why some of us hold defensive assets.

Alexland

GeoffTF said:

The UK stock market fell to about a quarter of its value and took nine years to recover in real terms.

Just imagine how powerful the dividend reinvestment and regular contributions would be buying more shares at such low prices...