Bond funds query

aroominyork

Beddie said:

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. 

Well, global bond funds are yielding more than they were a year ago, and UK gilt funds much more than they were a month ago. 

Jacklob

If you were due to invest a lump sum now would it be wise to invest in a bond fund whilst unit prices are low or does it not work like “equity funds” where you have the potential of a recovery at some point.

Aged

Jacklob said:

... does it not work like “equity funds” where you have the potential of a recovery at some point.

That is the billion dollar question!

masonic

Jacklob said:

If you were due to invest a lump sum now would it be wise to invest in a bond fund whilst unit prices are low or does it not work like “equity funds” where you have the potential of a recovery at some point.

Bonds repay a fixed amount upon maturity, whereas the value of a company's equity can grow over time. A bond fund will fall in value as interest rates increase and rise in value as interest rates decrease. There is no "growth" to drive a recovery, just a sequence of fixed interest payments that has a value determined by interest rate policy and investor demand. If investors were willing to lock in a 2% safe income, then bonds currently paying 4% YTM would rise in value. It doesn't seem likely this is going to happen any time soon, but who knows, if we enter into a deep recession and house price crash, interest rates might need to be slashed to stimulate the economy and housing market.

Jacklob

On that basis nobody should be now investing in bond funds and those who are already in should get out? I have just had a pension transferred and have already invested in the equity funds recommended in my portfolio via and IFA and have held back on investing in the two bond funds recommended, Legal and general sterling corporate bond fund and the vanguard corporate bond index fund. Accounting for £130,000. Now I don’t know what to do??? The IFA has made his recommendation and therefore is sticking to it, I am not so sure.

masonic

Jacklob said:

On that basis nobody should be now investing in bond funds and those who are already in should get out? I have just had a pension transferred and have already invested in the equity funds recommended in my portfolio via and IFA and have held back on investing in the two bond funds recommended, Legal and general sterling corporate bond fund and the vanguard corporate bond index fund. Accounting for £130,000. Now I don’t know what to do??? The IFA has made his recommendation and therefore is sticking to it, I am not so sure.

I don't understand why you would come to that conclusion. If something is hugely overpriced, then it comes down in price substantially, then that is usually the point where investors would get interested. It's obviously not been a good period for those who bought them when they were hugely overpriced, but that ship has sailed. Bonds don't need to go back to being hugely overpriced for them to be a worthwhile investment. They are typically bought for their income stream, which is now higher than it used to be.

Jacklob

Thanks, I think I,ve read too much about a potential “bond market collapse”, that I lost my nerve.  I think I will wait another month then drip feed in over the next 6 months.  Thanks again.

aroominyork

Aged said:

Jacklob said:

... does it not work like “equity funds” where you have the potential of a recovery at some point.

That is the billion dollar question!

The answer is probably No, I'm afraid. Bonds are not like equities where you expect a general downturn to recover. Bonds performed well because interest rates were ultra-low, so funds holding bonds which were issued pre-GFC with higher coupons became more valuable. What has happened this year is an unwinding of that dynamic and, although it feels far from it this last month, a return to more 'normal' interest rate levels. So looking to recover recent losses is either futile or would involve a high risk strategy. We all have to plan our investments based on 'starting from now'.
PS And as I wrote in the other thread, you can buy individual gilts which mature in the next few years and pay c.4.5% yield to maturity (which is the equivalent of a saving accounts APR). You might find savings accounts you prefer, but for money held in SIPPs and S&S ISAs those are worth considering instead of a bond fund.

wmb194

It depends on the bonds. Lower rated corporate bonds e.g., lower grade investment bonds - 'BBB' credit rating - and high yield/junk bonds - 'BB' and below - have higher yields and tend to trade more like equities so can sell-off hard in a nervous market and can rally strongly if the worries turn out to be overblown. Geographies matter, too. Emerging market bonds, corporate and government, will usually trade at higher yields and with more volatility than developed market bonds.

aroominyork

wmb194 said:

It depends on the bonds. Lower rated corporate bonds e.g., lower grade investment bonds - 'BBB' credit rating - and high yield/junk bonds - 'BB' and below - have higher yields and tend to trade more like equities so can sell-off hard in a nervous market and can rally strongly if the worries turn out to be overblown. Geographies matter, too. Emerging market bonds, corporate and government, will usually trade at higher yields and with more volatility than developed market bonds.

That's a point worth making. OP began the thread about (mostly) corporate bonds and, because of the implications on gilts of the govt's recent actions, the discussion veered off in that direction.