Bond funds query

Aged

I have two bond funds in my portfolio that I have held since 2016 (M&G Strategic Corporate Bond and M&G Optimal Income). They seemed to jog along nicely until the beginning of this year, then the value started falling and they are now valued at around/just below what I paid for them. I just don't know whether I should sell up or hold onto them. Given the situation with other funds I've held, my instinct is to sell now to prevent my original investment from being devalued, but I'll admit to not really understanding how bonds work when they stop doing what they're supposed to do in the well-balanced portfolio. Can anyone help explain what's going on with bonds right now?

Albermarle

Time to reconfigure bond holdings? — MoneySavingExpert Forum

Aged

Albermarle said:

Time to reconfigure bond holdings? — MoneySavingExpert Forum

Thanks. Saw that thread but didn't really follow what was being said. Isn't it about bonds rather than bond funds? Will try reading it through again. 

Albermarle

Aged said:

Albermarle said:

Time to reconfigure bond holdings? — MoneySavingExpert Forum

Thanks. Saw that thread but didn't really follow what was being said. Isn't it about bonds rather than bond funds? Will try reading it through again. 

A bond fund contains many different bonds, so is affected in a similar way.
The bond and gilts markets are not so easy to understand and I am for sure no expert.
They benefitted in recent years from very low interest rates and low inflation. Plus central banks around the world were big buyers since the Financial crash in 2008.  So bond funds grew quite significantly over the last few years, more than would be traditionally expected. So now central banks have largely stopped buying them, interest rates are up and inflation is up. So a perfect storm for bonds. It was largely predicted by those in the know as bonds are more predictable than stocks and shares, but has been worse than expected.

masonic

In short, prices are going down and yields are going up. Long term returns have shifted from capital to interest.

Aged

masonic said:

In short, prices are going down and yields are going up. Long term returns have shifted from capital to interest.

I'm sorry, I don't understand this statement.

masonic

Aged said:

masonic said:

In short, prices are going down and yields are going up. Long term returns have shifted from capital to interest.

I'm sorry, I don't understand this statement.

In the early 2000s, you might have paid £100 for a bond paying 4% per year interest. Then the global financial crisis struck and interest rates were slashed to historic lows. Your 4% bond has suddently become very valuable. Someone might be willing to pay £200 for it, as they'd still be able to generate a 2% per year income from the interest it pays. Now interest rates are rising back to more normal levels, so nobody is willing to pay £200 for this bond any more. Someone who bought it for £200 might have to sell it for much closer to the original £100. All the while, it has paid a fixed return, but an early holder would have been able to benefit from a capital gain, and a recent purchaser wishing to sell would have to suffer a capital loss. Someone who has just held it over the entire period has received a steady stream of income. Eventually the bond will mature and repay the £100 face value. If you just plan to keep holding bond investments, the fluctuations in price aren't much of an issue, but it would have been possible to sell out at the first sign of a high inflation period to avoid this period of rising interest rates, then buy those bond investments back at a cheaper price around now.

Beddie

Bond funds are usually in a portfolio as the "lower risk" element. That's presumably why you had them in the first place. That is still the case to a degree, as if the stock market dropped 20% on Monday bonds (probably) wouldn't.

So, on that basis, do you still want them in your fund? They will not give much in the way of returns, due to the interest rate increases we are seeing, but have already fallen a long way as you can see. 

It goes back to appetite for risk and if you have a long time horizon. If so, perhaps sell and buy into equities, but no one knows for sure the best course of action. I'm in a similar position and I've looked at wealth preservation funds as an alternative to bond funds - they also hold bonds but seem to try and get the most out of them, which isn't much! 

Funds like these:

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/c/cg-absolute-return-income
https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/lf-ruffer-total-return-class-c-accumulation

aroominyork

Beddie said:

They will not give much in the way of returns, due to the interest rate increases we are seeing, but have already fallen a long way as you can see. 

That is incorrect. Individual bonds are now returning over 4% which is very high by comparison with recent years, although unfortunately below inflation. Bond funds, whIch predominantly hold lower coupon older bonds, will pay less income... hence my thread which Albermarle linked to above.
(Aged: bonds are complex to understand. It will take time and effort to work them out. But you are not alone: a fund which tracks the world's bond market, eg Vanguard Global Bond Index fund, has fallen 6% over the last five years after having been 10% up at the beginning of 2022.)

Aged

(Aged: bonds are complex to understand. It will take time and effort to work them out.)

Thanks, I'm working on it! It's not good to be invested in something that you don't understand 

Beddie

aroominyork said:

Beddie said:

They will not give much in the way of returns, due to the interest rate increases we are seeing, but have already fallen a long way as you can see. 

That is incorrect. Individual bonds are now returning over 4% which is very high by comparison with recent years, although unfortunately below inflation. Bond funds, whIch predominantly hold lower coupon older bonds, will pay less income... hence my thread which Albermarle linked to above.
(Aged: bonds are complex to understand. It will take time and effort to work them out. But you are not alone: a fund which tracks the world's bond market, eg Vanguard Global Bond Index fund, has fallen 6% over the last five years after having been 10% up at the beginning of 2022.)

I was referring to bond funds in the current climate, which is what the OP asked about. He mentioned nothing about individual bonds.