Have short duration bonds had their day in the sun?

aroominyork

Short duration has been a good place to be during the last year (although, of course, no bonds was better). It is where most of my bond holdings were when interest rates are ultra low since the only way was up and it seemed a matter of when and not if - I did not buy the 'new normal' thesis that rates would stay low. They still have a place for people wanting low bond volatility, but for most portfolios it seems like mid-duration is now a better risk/reward option. What do others think?

Linton

I don’t see bonds of any duration as having “days in the sun”. They do exactly what they say they will do. If that is what you want then buy them, otherwise don’t.  If your requirements are short duration buy short duration bonds.

For that reason I would not recommend bond funds with a broad spread of maturity dates to anyone. Compared with individual bonds, such bond funds in my view add risk without sufficient compensating reward.

Two exceptions, there may be others..
- Novice or passive investors for whom there is no obvious alternative way of diversifying from 100% equity.
- specialist active funds where bonds off different types and durations are used tactically.

aroominyork

I would agree with the first para in normal market conditions, but were recent years - albeit a decade of them - normal? Wasn't there always a likelihood of gains being unwound? That danger has now passed/materialised and although other dangers lie in wait their shape is less clear. Sure, you choose investments to meet your needs, but if those needs are good risk-adjusted gains over the medium term, it seems that mid-duration is again a sensible place to be. 

Linton

aroominyork said:

I would agree with the first para in normal market conditions, but were recent years - albeit a decade of them - normal? Wasn't there always a likelihood of gains being unwound? That danger has now passed/materialised and although other dangers lie in wait their shape is less clear. Sure, you choose investments to meet your needs, but if those needs are good risk-adjusted gains over the medium term, it seems that mid-duration is again a sensible place to be. 

1) The risk that matters is not when you buy but rather when you sell.  This risk can be completely mitigated by ensuring that the bonds mature close to the time when you plan to sell.  You cannot do this with a bond fund unless you just buy bonds with a  short duration.

2) The whole point of using bonds as opposed to equity is risk reduction when times are not normal. Though are times ever normal?  Perhaps not except abnormally.

3) As a principle I advocate keeping the relationship between objectives and investments simple.  If you want an investment for risk mitigation aiming for higher performance could be a distraction.  If you want high performance leave the risk mitigation to those investments designed to provide it.

4) Investing for the medium term is more difficult than for the short or long term and, I would say, only appropriate if you have medium term liabilities. Under those circumstances it may be possible to plan specifically for those liabilities, moving into cash well in advance. You can then keep to 100% equity for longer.

Personally I rely on Wealth Preservation funds to do the complex management of bonds that is required.  Buying individual bonds could be an option but I have not fully investigated what that would involve.  However one thing it certainly would involve is significantly more management effort.

adindas

I just checked a while ago Short Term Government Bond Yield on 47 economies standardised by CEIC.

Sri Lanka (% pa)     33.01%

Ukraine (% pa)     15.22%

Colombia (% pa)     11.97%

Armenia (% pa)     11.62%

Image if these bonds are in your bond fund. But well you get a very high return.

adindas

Linton said:

I don’t see bonds of any duration as having “days in the sun”. They do exactly what they say they will do. If that is what you want then buy them, otherwise don’t.  If your requirements are short duration buy short duration bonds.

For that reason I would not recommend bond funds with a broad spread of maturity dates to anyone. Compared with individual bonds, such bond funds in my view add risk without sufficient compensating reward.

Two exceptions, there may be others..
- Novice or passive investors for whom there is no obvious alternative way of diversifying from 100% equity.
- specialist active funds where bonds off different types and durations are used tactically.

I have been saying this for sometimes now. Also I have provided evidence from statistics and quotation, opinion from proven billionaires investors about diversification including diversification using bonds. I am not going to put that again in here as I know some people do not like it.

If your time horizon is long and your aim is to grow your wealth rather than wealth perseveration than DYOR what bonds are doing in your portfolio. In the meanwhile, for short term, people could easy get access in savings / RSA, risk free 7%, 6.5%, 5.25%.

People who hold bonds or part of bond funds since a long time have got their finger burnt. You have seen a few people on this MSE complaining about their poor bond performance. I remember one person wanted to sue their financial adviser for advising bond to him/her.

By the end of the day it is your own money you are investing, your decision. Sensible people if they can not make decision they will trust more on billionaire proven investors strategy who have a proven track record in making money in the market rather than random people on the internet who might have different goal, time horizon, risk tolerance with you. In the past when you said like this said in this forum you will get a lot of dislike from people here on MSEs get cheering up from the same group of people. I am expecting a lot of dislike again making this comment . .

Linton

Linton said:

I don’t see bonds of any duration as having “days in the sun”. They do exactly what they say they will do. If that is what you want then buy them, otherwise don’t.  If your requirements are short duration buy short duration bonds.

For that reason I would not recommend bond funds with a broad spread of maturity dates to anyone. Compared with individual bonds, such bond funds in my view add risk without sufficient compensating reward.

Two exceptions, there may be others..
- Novice or passive investors for whom there is no obvious alternative way of diversifying from 100% equity.
- specialist active funds where bonds off different types and durations are used tactically.

I have been saying this for sometimes now. Also I have provided evidence from statistics and quotation, opinion from proven billionaires investors about diversification including diversification using bonds.

If your time horizon is long and your aim is to grow your wealth rather than wealth perseveration than DYOR what bonds are doing in your portfolio. For short term, you could get reasonable number of 7%, 6.5%, 5.25% people could easy get access in savings / RSA, risk free.

People who hold bonds or part of bond funds since a long time have got their finger burnt. You have seen a few people on this MSE complaining about their poor bond performance, A few were even want to sue their financial adviser for advising bond, bind might not be suitable

By the end of the day it is your own money you are investing, your decision. Sensible people if they can not make decision they will trust more on billionaire proven investors strategy who have a proven track record in making money in the market rather than random people on the internet jut because they are very vocal. In the past when you said like this said in this forum you will get a lot of dislike from people here on MSE. I am waiting a lot of dislike making this comment again. .

People who held bonds directly should not have got their fingers burnt.  When they bought them they knew with 100% certtainty how much interest would be paid and the lump sum they would get returned at maturity.  What happened to prices in the meantime should have been irrelevent as they would not be planning to sell.

I disagree with you on 3 particular counts..

1) It is not practical for many people with large investments to make great use of savings accounts. In any case savings accounts are generally for a maximum of 5 years.  Bond investments can be fixed for decades.  The situations are different.

2) Chasing maximum returns is not necessarily the best choice for many people if it leads to them panicking in crashes or just having a disturbed night's sleep.

3) What billionaire investors do is totally irrelevent to small private investors.  Billionaire investors would tend to be active shareholders able to influence or control the way in which the companies they invest in are managed. That is how they become billionaires. 

Once they become billionaires perhaps their concern could be more wealth preservation than excess growth.

aroominyork

Linton said:

aroominyork said:

I would agree with the first para in normal market conditions, but were recent years - albeit a decade of them - normal? Wasn't there always a likelihood of gains being unwound? That danger has now passed/materialised and although other dangers lie in wait their shape is less clear. Sure, you choose investments to meet your needs, but if those needs are good risk-adjusted gains over the medium term, it seems that mid-duration is again a sensible place to be. 

1) The risk that matters is not when you buy but rather when you sell.  This risk can be completely mitigated by ensuring that the bonds mature close to the time when you plan to sell.  You cannot do this with a bond fund unless you just buy bonds with a  short duration.

2) The whole point of using bonds as opposed to equity is risk reduction when times are not normal. Though are times ever normal?  Perhaps not except abnormally.

3) As a principle I advocate keeping the relationship between objectives and investments simple.  If you want an investment for risk mitigation aiming for higher performance could be a distraction.  If you want high performance leave the risk mitigation to those investments designed to provide it.

4) Investing for the medium term is more difficult than for the short or long term and, I would say, only appropriate if you have medium term liabilities. Under those circumstances it may be possible to plan specifically for those liabilities, moving into cash well in advance. You can then keep to 100% equity for longer.

Personally I rely on Wealth Preservation funds to do the complex management of bonds that is required.  Buying individual bonds could be an option but I have not fully investigated what that would involve.  However one thing it certainly would involve is significantly more management effort.

I see bonds as multiple sub-asset classes that can work together to get decent returns while minimising the risk of selling an asset at a loss. When I rebalance at the turn of the tax year I expect to divide my bonds into three groups: a corporate bond fund (replacing a short dated one), bonds held within wealth preservation funds, shortish dated individual gilts. What is the objective? To have a portfolio, with retirement not too many years away, where I get decent returns and minimise the chance of selling an asset on a downturn.

Adyinvestment

I have been looking at bonds for a little while now and have come to the conclusion (possibly wrongly) that individual bonds/gilts are the way to go.

Adding a bond fund to add stability to my portfolio doesn't make sense to me when the funds can drop as they have recently, at least with individual bonds/gilts held to maturity you know exactly what you are getting.

aroominyork

Adyinvestment said:

I have been looking at bonds for a little while now and have come to the conclusion (possibly wrongly) that individual bonds/gilts are the way to go.

Adding a bond fund to add stability to my portfolio doesn't make sense to me when the funds can drop as they have recently, at least with individual bonds/gilts held to maturity you know exactly what you are getting.

Nothing wrong with that. I started DIY investing about five years ago so I and many others are used to capital growth in bond funds (until last year). We need to be weaned off this and to see bonds primarily as risk mitigators and income generators.

cwep2

I think there is risk in both directions for medium term bonds.

The consensus a few months ago was that central banks needed to hike quite a lot to bring down inflation but late in 2023 we would start to see them cutting rates again. Whether the high rates would trigger a recession or not was less clear and clearly country specific. But for the US much stronger employment numbers at the start of Feb saw those expectations change with the market pricing higher rates and staying high for longer (no cuts in 2023). Europe and the UK followed that direction, notably the UK 10yr Gilt yield moved from around 3.0% to over 3.8% now which is a big move in a month. 

If inflation stays higher for longer than people expect and the 'real economy' (jobs, consumer spending) stays strong in spite of higher rates, or if central banks abandon their 2% inflation targets and change them to 3% then there is risk that yields go higher from here in the medium term and bond funds will fall in value again. If we see data starting to weaken, job losses and lower house prices then yields could go back down and medium term bonds will perform well as people price in rate cuts again.

Short term bonds (<2yr) are just an alternative to fixed cash savings really, ideally you hold to maturity, you know exactly what the payout/interest rate will be. I've bought a few individual (govt) bonds recently because yields were better than I was able to get elsewhere. Medium term bond funds (2-10yr average duration) you are taking risk on the direction of interest rates, but the closer you come to retirement/spending the money the more it makes sense to lock in cash at predictable outcomes.