Have short duration bonds had their day in the sun?

coastline

Maybe more rises ? Well 0.5% next time which wasn't expected.?

The Fed will have a political problem while headline CPI is moderating, says Cerity's Jim Lebenthal - YouTube

Rates above inflation is the aim ?

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Shaded areas are recessions after rate rises..

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First 18 minutes ...then from 39 minutes.  All opinions but a decent summary.

Bonds Do Well When The Economy Doesn’t | Alfonso Peccatiello - YouTube

masonic

aroominyork said:

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?

The yield curve is still somewhat inverted, and what I would refer to as medium duration (2-10 years) don't look particularly attractive at the moment, although clearly some substantial improvement in the last month.

In my view a material fall in inflation needs to be in the bag before anything but short duration bonds become an interesting proposition. At that point, there should be a return to inverse correlation with equities, which would allow a higher % equities portfolio to be held for equivalent risk.

aroominyork

Thanks masonic. A few questions…

-          Are these for nominal gilts, and would they reflect YTM calcs we were discussing a few months back?

-          If so, it says ultra-short YTM is about 4%, reducing for maturities up to 4-5 years, then increasing up to 15 years maturity and then falling for longer dated maturities – correct?

-          Re. waiting for inflation to be in the bag, when it looks stable around 2% would you expect the longer the maturity = the higher the yield?

-          Doesn’t the graph suggest that for a fund held as part of a long-term portfolio (ie not holding individual gilts to maturity) that a sweet spot is between 5 and 15 years, with the longer dated maturities in that range suiting investors who are happy with greater sensitivity? Does that look unattractive to you because the rate sensitivity to get 5% (ie because inflation is not yet in the bag) still looks too uncertain?

masonic

aroominyork said:

Thanks masonic. A few questions…

-          Are these for nominal gilts, and would they reflect YTM calcs we were discussing a few months back?

-          If so, it says ultra-short YTM is about 4%, reducing for maturities up to 4-5 years, then increasing up to 15 years maturity and then falling for longer dated maturities – correct?

-          Re. waiting for inflation to be in the bag, when it looks stable around 2% would you expect the longer the maturity = the higher the yield?

-          Doesn’t the graph suggest that for a fund held as part of a long-term portfolio (ie not holding individual gilts to maturity) that a sweet spot is between 5 and 15 years, with the longer dated maturities in that range suiting investors who are happy with greater sensitivity? Does that look unattractive to you because the rate sensitivity to get 5% (ie because inflation is not yet in the bag) still looks too uncertain?

Yes, it's the first chart from the oft-cited BoE Yield Curve webpage: https://www.bankofengland.co.uk/statistics/yield-curves

The problem with buying gilts in a high inflation environment is that they look unattractive as a risk free asset class, so when equities take a knock, we aren't seeing bonds correlating negatively. That makes them less useful as a diversifier. The case for long dated gilts is generally that they pay a higher income and they rise in value when equities are falling. Currently neither is true. That's what makes long dated gilts look unattractive to me. Historically, gilts have tended to yield inflation+1%, so the second and third charts on the linked webpage are more relevant to thoughts about how much interest rate risk remains (though all based on the market's pricing of inflation).

If you buy a fund, such as one that held medium duration gilts, then at some point either you need to sell out of the fund, or the fund manager needs to sell those bonds that no longer fit the remit of the fund. This could have a very significant impact on returns.