Is now a good time to buy more Bonds?

Hoenir

Prism said:

Linton said:

Albermarle said:

Linton said:

michaels said:

artyboy said:

I asked a similar question a while ago, because if there was any objective data to suggest that bonds had been oversold then it might have been worth hanging on to them (given they were initially bought at the high point) in the hope of a bit of a bounce.

Unfortunately these discussions tend to gravitate back to 'bonds do what bonds do' and 'if you want want bonds do, then hold bonds' type comments rather than any meaningful analysis of whether there's any short term upside potential following last years bloodbath. 

It may be there's no easy answer to that, but I think it's a fair question to ask regardless.

Not sure I agree with the other replies - they make sense if you buy bonds and hold to maturity but bond funds are effectively just another asset class to equities with different characteristics.  Historically they have been a useful hedge against equity volatility because:
(a) whilst on average they have yielded less than equities they have also been less volatile
(b) returns have tended to be inversely correlated with equity returns

The reason there is little discussion of changing equity/bond weightings is that this would be an example of trying to time the market - basically betting that your guess on where prices are going next is better than the market consensus ()which is what is priced in).  Unless you have inside information then this is effectively gambling and historically those who gamble in this way on average end up worse off than those who maintain a fixed strategy.

Yes but the danger is that people may believe that bond funds have the same relationship to individual bonds that equity funds have with their underlying shares.  ie an easy way to get diversification by holding a variety of shares. 

Because of the fundamental importance of the fixed maturity date individual bonds behave very differently to bond funds and so could reasonably be considered a different type of asset.  Do not expect one to give you all the benefits of the other and make your choice of which to buy on your reasons for holding bonds at all..

Can you not though buy bond funds that concentrate on short, medium and long term maturity dates, rather than a complete mix of all of them ?

Yes you can buy restricted duration gilt funds though the choice is pretty limited and is mainly short dated.  I cant find any purely medium or long dated gilt ETFs though I cannot think of an objective that wuld require them rather than a general gilt fund.  Clearly a purely long dated gilt fund could be very volatile since minor changes in interest rates would be cumulated over decades.

There is only one medium durtion gilt fund that I know of - its and ETF (GBPG). Its fixed to 5 year duration, however when you look under the covers you find that it is simply 50% 1-3 year gilts and 50% 7-10 year gilts. I assume they must sell them when they get to 6 years, which seems a bit wasteful on trading fees.

Medium duration in Gilt parlance is 5-15 years. 

The reason for the holding of short dated Gilts is that early this year the yield curve was significantly inverted. Short dated Gilts returning more than medium dated Gilts. No fund manager is going to shoot themselves in the foot and miss a gift horse. 

As when the short dated mature or the yield curve normalises . The fund manager has the flexibility to act accordingly. 

In "normal" times the longer the duration of the Gilt the greater the premium. As the uncertainty is the future rate of inflation. Short dated Gilts on the other hand respond to the actual or forecast move in interest rates very quickly. 

mr._prude

I have two pensions with Aviva, can I buy direct bonds via these pensions?

Pension A (inactive) has 25% of pot invested in two bond funds

- Aviva Pen Managed High Income S2

- Liontrust Sustainable Future Corporate Bond S2

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

 Pension B (active) has 50% of payments buying 1 bond fund on a monthly basis since Apr 22

 - Aviva Pension BlackRock Over 5 Year Index-Linked Gilt Index Tracker FP

 Hoping it might help offset performance of pension A bonds, plan on stop buying it, as it starts to improve.

Thinking of gradually reducing my bond funds down to about 10% as I will not be buying an annuity but plan to keep invested and use drawdown (in 20 odd years time).

Pat38493

Albermarle said:

dealyboy said:

Mail on Sunday today (12th Nov) ... Rosie Murray-West Wealth & Personal Finance ... "Three tricky years ... but now may be the time to invest in a bond bonanza".

You may be able to read this interesting article via msn and thisismoney ... https://www.msn.com/en-gb/money/other/now-may-be-the-time-to-invest-in-a-bond-bonanza/ar-AA1jLYuP?ocid=finance-verthp-feeds

In the last couple of days I received an e mail from Fidelity, and one from HL with info on the same subject.
The HL one was rather fluffy and would only say that it probably would not be a very bad time to buy gilts. However  the one from Fidelity contained a strong buy recommendation for gilts from their main Investment Director Tom Stevenson, who normally seems to talk sense. Some quotes.
' Not trying to time the market is an article of faith but there are moments when the odds seem stacked in your favour.' ' It feels like for govt bonds we have reached that point' ' The dual case for government bonds - income and capital gain- is the most compelling right now ' ' If ever there was a moment to time the market it is now' 

Strong stuff from a normally cautious guy.

Tempting recommendations but when I see these type of recommendations, I often wonder if this means - yesterday would have been a great time to invest in this.  Today not so much because everyone has just been told to rush in.

Hoenir

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Linton

Hoenir said:

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Whether bonds will recover rather depends on what you mean by “recover.”. If you mean will the price of  Individual £100 bonds return to say £180 which some did before the crash.  The answer must be only if interest rates collapse back to close to zero, which would imply some sort of failure in global economic policy.

Whether bond funds will recover is a very different question. The answer must be yes, eventually, but only if interest is being reinvested. In this case of course there is no limit to the fund price.

JohnWinder

Yes, that addresses the interest rate risk of bonds. It doesn’t consider the credit risk; with corporate bond funds one needs to think about credit risk, more so than with Treasury bonds. Bond funds have two principal risks, and sometimes inflation risk as well.

Hoenir

Linton said:

Hoenir said:

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Whether bonds will recover rather depends on what you mean by “recover.”. If you mean will the price of  Individual £100 bonds return to say £180 which some did before the crash.  The answer must be only if interest rates collapse back to close to zero, which would imply some sort of failure in global economic policy.

Whether bond funds will recover is a very different question. The answer must be yes, eventually, but only if interest is being reinvested. In this case of course there is no limit to the fund price.

There's a broad lack of understanding as to how the mechanics of bonds work even at the basic level. Often talked about in mystic terms. Whereas it's actually very straightforward once the principles are grasped. How bonds have to be priced is a key component. 

Citing your example investors will pay significantly over par nominal value for a bond if the coupon is high enough. As an investor though you should have factored in the fact that interest rates could rise. What's constantly under review is the yield to maturity.  The combination of interest and capital return. 

Bonds will recover. As prices will naturally gravitate back towards nominal par value as the maturity date of the bond approaches. That's basic maths. Nothing to do with interest being reinvested. Which if it is will actually enhance returns and generate the often overlooked impact of compounding. 

Linton

Hoenir said:

Linton said:

Hoenir said:

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Whether bonds will recover rather depends on what you mean by “recover.”. If you mean will the price of  Individual £100 bonds return to say £180 which some did before the crash.  The answer must be only if interest rates collapse back to close to zero, which would imply some sort of failure in global economic policy.

Whether bond funds will recover is a very different question. The answer must be yes, eventually, but only if interest is being reinvested. In this case of course there is no limit to the fund price.

There's a broad lack of understanding as to how the mechanics of bonds work even at the basic level. Often talked about in mystic terms. Whereas it's actually very straightforward once the principles are grasped. How bonds have to be priced is a key component. 

Citing your example investors will pay significantly over par nominal value for a bond if the coupon is high enough. As an investor though you should have factored in the fact that interest rates could rise. What's constantly under review is the yield to maturity.  The combination of interest and capital return. 

Bonds will recover. As prices will naturally gravitate back towards nominal par value as the maturity date of the bond approaches. That's basic maths. Nothing to do with interest being reinvested. Which if it is will actually enhance returns and generate the often overlooked impact of compounding. 

Lets talk about Gilts. Corporate bonds are quite different because risk muddies the waters.  Yes, investors will pay above par if the bond coupon is above current interest rates and below par if the coupon is less.. But it could take significant time to recover from the fall in gilt prices.

To demonstrate the point  I will choose one extreme example - TG61 returns 0.5% and matures in 2061.  At the end of 2021 it was worth about £95. It is now worth £30. 

We can get a handle on the approx time for the investment to return to £95:
1) Assume interest rates stay at the current values on average
2) So a bond bought today priced at par will stay at par for the rest of its duration
3) Assume 1 TG61 bond was bought just before interest rates rose significantly.  Since then it will have accrued about 50pX2 years interest giving a total value now of about £31.
4) Looking at the price of current gilts it would appear that long term bonds at par have a coupon of about 4.5% 
5) So we can equate the returns of TG61 with a lump sum of £31 invested at 4.5%
6) That returns the value of the investment to £95 in 26 years so no gains after more than a quarter of a century.

So yes it recovers but I dont think an investor should wait.  Much better to rebalance now.

On an 8 year gilt with a coupon of 0.25% bought at par now worth £75 the recovery time  is about 7.5 years just to get back to where it started.

If you think my calculation is way out can you provide a better calculation showing a significantly shorter time to recover?

coastline

Hoenir said:

Linton said:

Hoenir said:

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Whether bonds will recover rather depends on what you mean by “recover.”. If you mean will the price of  Individual £100 bonds return to say £180 which some did before the crash.  The answer must be only if interest rates collapse back to close to zero, which would imply some sort of failure in global economic policy.

Whether bond funds will recover is a very different question. The answer must be yes, eventually, but only if interest is being reinvested. In this case of course there is no limit to the fund price.

There's a broad lack of understanding as to how the mechanics of bonds work even at the basic level. Often talked about in mystic terms. Whereas it's actually very straightforward once the principles are grasped. How bonds have to be priced is a key component. 

Citing your example investors will pay significantly over par nominal value for a bond if the coupon is high enough. As an investor though you should have factored in the fact that interest rates could rise. What's constantly under review is the yield to maturity.  The combination of interest and capital return. 

Bonds will recover. As prices will naturally gravitate back towards nominal par value as the maturity date of the bond approaches. That's basic maths. Nothing to do with interest being reinvested. Which if it is will actually enhance returns and generate the often overlooked impact of compounding. 

Your average investor isn't factoring in movements in gilts/bonds or even equities ( can fall 50%) for that matter . They are buying a product that they're comfortable with. Eg 60/40 etc . Many employee pension schemes are set to default around this ratio 50/50 ? Fund managers didn't adjust portfolios during and after the pandemic . Well some might but not many even then it would have been tinkering.
I'm not an expert in this field but I did ask the question a while ago . Those who were unfortunate to buy gilt funds in portfolios near the top in 2020 are now looking at poor returns. Let's take VGOV a distribution ETF . Price stood at 2600 and now 1600. Basically needs to recover 60% to get back to 2600. It'll take many years.
 
Chart here shows the damage in last 5 years.. Yield is stated above chart at 3.2% not the yield to redemption which is 4.7% according to the Vanguard link below.

 Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

A breakdown of last years income and again highlights 3.2% as trailing dividend.

 VGOV Dividends - Vanguard ETFs (dividenddata.co.uk)

From here it shows YTM yield to maturity as 4.7% . Now this is where I'm confused as 4.7% minus 3.2% is 1.5% . It's going to take years for VGOV as a distribution fund to go back to 2600 from 1600.

U.K. Gilt UCITS ETF | Vanguard UK Professional

Linton

coastline said:

Hoenir said:

Linton said:

Hoenir said:

mr._prude said:

 These have dropped significantly over the last few years, wondering will they ever recover or should I just gradually start to rebalance them back in to equity?

They will recover.  

Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time

Whether bonds will recover rather depends on what you mean by “recover.”. If you mean will the price of  Individual £100 bonds return to say £180 which some did before the crash.  The answer must be only if interest rates collapse back to close to zero, which would imply some sort of failure in global economic policy.

Whether bond funds will recover is a very different question. The answer must be yes, eventually, but only if interest is being reinvested. In this case of course there is no limit to the fund price.

There's a broad lack of understanding as to how the mechanics of bonds work even at the basic level. Often talked about in mystic terms. Whereas it's actually very straightforward once the principles are grasped. How bonds have to be priced is a key component. 

Citing your example investors will pay significantly over par nominal value for a bond if the coupon is high enough. As an investor though you should have factored in the fact that interest rates could rise. What's constantly under review is the yield to maturity.  The combination of interest and capital return. 

Bonds will recover. As prices will naturally gravitate back towards nominal par value as the maturity date of the bond approaches. That's basic maths. Nothing to do with interest being reinvested. Which if it is will actually enhance returns and generate the often overlooked impact of compounding. 

Your average investor isn't factoring in movements in gilts/bonds or even equities ( can fall 50%) for that matter . They are buying a product that they're comfortable with. Eg 60/40 etc . Many employee pension schemes are set to default around this ratio 50/50 ? Fund managers didn't adjust portfolios during and after the pandemic . Well some might but not many even then it would have been tinkering.
I'm not an expert in this field but I did ask the question a while ago . Those who were unfortunate to buy gilt funds in portfolios near the top in 2020 are now looking at poor returns. Let's take VGOV a distribution ETF . Price stood at 2600 and now 1600. Basically needs to recover 60% to get back to 2600. It'll take many years.
 
Chart here shows the damage in last 5 years.. Yield is stated above chart at 3.2% not the yield to redemption which is 4.7% according to the Vanguard link below.

 Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

A breakdown of last years income and again highlights 3.2% as trailing dividend.

 VGOV Dividends - Vanguard ETFs (dividenddata.co.uk)

From here it shows YTM yield to maturity as 4.7% . Now this is where I'm confused as 4.7% minus 3.2% is 1.5% . It's going to take years for VGOV as a distribution fund to go back to 2600 from 1600.

U.K. Gilt UCITS ETF | Vanguard UK Professional

If interest rates are constant after a fall then a distribution Gilt fund will never return to a previous high.  Gilt fund interest must be reinvested to achieve a sustainable increasing capital value.

The difference between the Yield and the Yield to Maturity repreresents the capital loss/gain made at maturity.