Bond Volatility

Redlander

All the advice I read states that including a proportion of bonds in your portfolio will confer stability. However recently values of bonds have plummeted and it looks to me as if the fall in value of my Aviva pension is attributable mostly to the bonds. 

When interest rates first started going up I naively thought "goody goody my savings will be worth more", but then I found my investments were plunging.

Is this behaviour very uncommon, and is it possible to predict how quickly the value of bonds might recover? For instance is it sufficient that interest rates remain stable for a significant period, or would interest rates actually have to come down again?

dunstonh

All the advice I read states that including a proportion of bonds in your portfolio will confer stability.

In 95% of periods that is correct.

When interest rates first started going up I naively thought "goody goody my savings will be worth more", but then I found my investments were plunging.

Fixed interest securities unit pricing, excluding income, goes down when interest rates rise or when inflation rises.  The yields go up.  (simplified intentionally)

Is this behaviour very uncommon

Yes.   It is has been 30 years since the last time.  it was one of those 5% periods.   Two black swan events happened this year.  In effect (again simplified) gilts unwound all of the credit crunch quantitive easing measures in the space of 12 months.    That was going to happen at some point but the hope was it would happen over decades.  It didnt turn out like that.

    and is it possible to predict how quickly the value of bonds might recover?

They probably won't, excluding income.  However, with income, yields are now higher and maybe 5-10 years (but that is without knowing what economic events are going to occur in future)

For instance is it sufficient that interest rates remain stable for a significant period, or would interest rates actually have to come down again?

You would need inflation and interest rates to go back down to post credit crunch levels and governments going back to printing money.

Linton

The large fall in bond prices is very uncommon. 

It arises as interest rates had been falling for about 40 years until very recently, particularly during the 2008 crash. During that period the price of bonds was increasing beyond par as older higher return bonds continually became more desirable than later lower return ones.

That situation was clearly unsustainable as interest rates could not go negative and has now unwound  significantly with interest rates at a similar level to pre-2008.

The price of bonds will probably never recover in the way equities behave unless interest rates collapse again. On the other hand you do have the benefit of interest rates now being higher which over time will compensate you for your recent losses.

Plus those bonds currently priced below par (£100) will rise to £100 at maturity.

Redlander

Thanks for those replies. Should the current situation affect the proportion of bonds I have in my portfolio? Specifically I 'v been thinking of changing a lot of my investments to Vanguard Life Strategy 60 (i.e. 60% equities, 40% bonds). Ought I to re-think that?

eskbanker

Redlander said:

Thanks for those replies. Should the current situation affect the proportion of bonds I have in my portfolio? Specifically I 'v been thinking of changing a lot of my investments to Vanguard Life Strategy 60 (i.e. 60% equities, 40% bonds). Ought I to re-think that?

Changing them from what, and with what objectives in mind?

Linton

Redlander said:

Thanks for those replies. Should the current situation affect the proportion of bonds I have in my portfolio? Specifically I 'v been thinking of changing a lot of my investments to Vanguard Life Strategy 60 (i.e. 60% equities, 40% bonds). Ought I to re-think that?

Bond funds will continue to perform the same role as they did previously albeit at a lower starting price. Hopefully the fall in price should encourage investors to think through their reasons for buying bonds in the first place.

P933alilli

I had considered pausing paying into my VLS60 fund and start buying into Vanguard's Global all cap. I watched this video which gives some explanation into whats happening to bonds in the current high interest environment. Rightly or wrongly i have continued with VLS60 but i know that many wont touch bonds with a barge pole! 

https://www.youtube.com/watch?v=ewddZpfbKrA

GazzaBloom

Linton said:

Redlander said:

Thanks for those replies. Should the current situation affect the proportion of bonds I have in my portfolio? Specifically I 'v been thinking of changing a lot of my investments to Vanguard Life Strategy 60 (i.e. 60% equities, 40% bonds). Ought I to re-think that?

Bond funds will continue to perform the same role as they did previously albeit at a lower starting price. Hopefully the fall in price should encourage investors to think through their reasons for buying bonds in the first place.

Don't many people hold bonds for the negative correlation with stocks to counter stock volatility? How would you expect this year's black swan once in a lifetime event to change that view?

I don't hold any bonds, I'm 100% stock index funds but as I get nearer retirement the plan is to build some cash (I have purposely left it to close to retirement to start to accumulate 2-3 years worth of retirement expenditure in cash to avoid erosion to inflation - and this year's 10-11% inflation has validated that decision, as my pay rises have (so far) kept up with inflation increasing my ability to build the cash pile)

I also planned to add some bonds index funds, after that by either selling off some stocks or pile in with further contributions, the purpose of which would be to dampen portfolio volatility, but does this year change that? It's certainly made me think. I'm used to stock volatility and recognise that deep crashes can happen but also stocks can have fast-ish recovery, much faster than bonds will likely recover after this year.

Albermarle

Worth noting that most UK based bond funds have staged a mini recovery over the last month, to varying degrees.
Due to some lowering of expectations about how high interest rates will go over the next few months,
However as said above it will be a long road to a full recovery.

adindas

Redlander said:

All the advice I read states that including a proportion of bonds in your portfolio will confer stability. However recently values of bonds have plummeted and it looks to me as if the fall in value of my Aviva pension is attributable mostly to the bonds. 

When interest rates first started going up I naively thought "goody goody my savings will be worth more", but then I found my investments were plunging.

Is this behaviour very uncommon, and is it possible to predict how quickly the value of bonds might recover? For instance is it sufficient that interest rates remain stable for a significant period, or would interest rates actually have to come down again?

In the past when Vanguard multi assets funds were first introduced these bond product were very popular. It seems some people were just following the crowd. Some are even having 60% or even 80% bond percentage in their portfolio while their main intention is to create wealth rather than the preserve wealth. Those who rely on Bond to create wealth, good luck with your Bond hopefully it would turn to become the "James Bond".

Bond should be functioning to cushion volatility in exchange of expected lower return. But when they do not do what they supposed to do, the opinion change significantly starting the beginning this year.

It has always been a bad idea to just follow the crowd especially following random people on the internet. A more sensible approach is to follow what smart money are doing, learn and follow the proven investors, strategists, analysts.Do your own research and see what these sort of people have been saying and doing about investing in Bonds. Also observe how the bond have been performing in the last few decades in comparison to equity.

I personally never have interest in Bond right from the beginning, my regular saving account, high interest saving account are functioning like bonds. But DYOR. People might be better doing what they believe, and to avoid to just following the crowd.

dunstonh

 but i know that many wont touch bonds with a barge pole! 

Which is daft now as they have gone back to 1990s levels and are looking much more attractive.