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Is now a good time to keep the Bonds you’ve got?


I have around 24% of my current portfolio (across Pension and ISA) in Bond funds - around £250K predominately in a specific employer Fidelity Sustainability UK Bond pension fund they “built” for my employer and Fidelity Sustainability Moneybuilder Income funds. I have suffered the bond malaise over past 20months and watched both drop around 20% in total. Both funds magically became “sustainable” overnight. I did this to basically folllow the 80/20 rule. I’ve been invested in both for around 8 years. Have not invested in MoneyBuilder for 3 years but I am still contributing around £2K a month in the Pension fund.
Comments
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If interest rates don’t change your bond funds will recover. That’s because having dropped in price the fund’s yield has increased; anything with a higher yield will grow more quickly than anything with a lower yield. That gets to the speed of recovery. As to the actual recovery, remember that bonds are a promise to repay your capital at a predetermined price (the face value of nominal bonds); the face value of your bonds at the time of maturity didn’t change during the recent bond wipe-out, only their market price. Cash in your fund now and crystallise the losses of the wipe-out; hold on and the fund will recover (assuming the first five words above).
If interest rates fall, the fund price will rise. If interest rates rise, the fund price will fall and where I started will start over again.
The answer do you sell or hold on depends on where you think interest rates are going (a waste of time), or what you think your portfolio mix should be now.
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If bonds were the right thing for you to hold 2-3 years ago they are even more right now with the increased interest rates. You need to look forward rather than worrying about recovering what has been lost.
Although @JohnWinder is correct that %yields are much higher now which will help, unless you buy more bonds this is of course the yield based on a much lower capital value so the increase in £ terms is much less.0 -
Indeed, and you will be buying more bonds with higher yields than bought some time ago because the fund managers will be replacing maturing old lower yielding bonds with new higher yielding bonds. What’s not to like? At the end of step changes in interest rates bond funds take about 1 duration to get back to where they would otherwise have been in value; from then on it’s cream (if interest rates have risen) or poison (if interest rates have fallen). If you can’t find the fund duration, it’s the weighted average maturity of the bonds minus a bit.1
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It's should be easy enough to look at the fund to work out the duration of the bonds but my guess is below 10 years given the 20% drop.
The reason to stick with bonds instead of cash is that bonds typically outperform cash over longer timeframes. The fact that you had recent paper losses doesn't change the reason why bonds make sense in a diversified portfolio.
This US article describes it in some detail:
https://investor.vanguard.com/investor-resources-education/article/are-bonds-a-good-investment-right-now
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Thank you for the feedback so far, super useful education for me. My nervousness is more that the substantial investment in these funds was made before the bond crash, mostly 2015-2021 - and not much after in comparison - does all of the above still hold and I’m reliant on the fund managers “managing” that over past period till now? As @JohnWinder says swapping lower yields out for higher yields etc?0
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JohnWinder said:Indeed, and you will be buying more bonds with higher yields than bought some time ago because the fund managers will be replacing maturing old lower yielding bonds with new higher yielding bonds. What’s not to like? At the end of step changes in interest rates bond funds take about 1 duration to get back to where they would otherwise have been in value; from then on it’s cream (if interest rates have risen) or poison (if interest rates have fallen). If you can’t find the fund duration, it’s the weighted average maturity of the bonds minus a bit.
So new bonds replacing old wont of itself help. The OP would be better advised to rebalance to the desired bond% now.0 -
‘new bonds will have exactly the same total return as old bonds with the same maturity date now have. ’
Agree.
‘So new bonds replacing old wont of itself help.’Disagree. We’ve already established that the old bonds in the fund are now (after the wipe-out) yielding more than before ‘which will help’ as you said in the second para of your first post. Plus, as the new bonds now have the same yield as the old post wipe-out bonds, as you just said, both sets of bonds, old and new, are now ‘winners’. What am I missing?
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JohnWinder said:‘new bonds will have exactly the same total return as old bonds with the same maturity date now have. ’
Agree.
‘So new bonds replacing old wont of itself help.’Disagree. We’ve already established that the old bonds in the fund are now (after the wipe-out) yielding more than before ‘which will help’ as you said in the second para of your first post. Plus, as the new bonds now have the same yield as the old post wipe-out bonds, as you just said, both sets of bonds, old and new, are now ‘winners’. What am I missing?
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theblueflash said:The question is, and I’ve tried to read up on this, do I keep my money invested and hope for recovery at some point, given I don’t really know the duration of the bonds/gilts in these funds, or is there no-way they can “recover” unless some kind of economic shift in interest rates / markets dictate?
Worth remembering that interest rate changes take around 18 months to feed through to the real economy. On a broad level equities are far from being out of the woods. Companies , like mortgage borrowers, face the challenge of refinancing borrowings at far higher cost. Increased interest costs are a straight hit to the bottom line of company profitability. Constraining investment in projects that require up front capital outlay.
If you are not concerned with the potential volatility. Maintaining an 80/20 stance across your portfolio. Might well be a good course of action for the time being. Going to take time for the fog of uncertainty to lift.0 -
Linton said:JohnWinder said:‘new bonds will have exactly the same total return as old bonds with the same maturity date now have. ’
Agree.
‘So new bonds replacing old wont of itself help.’Disagree. We’ve already established that the old bonds in the fund are now (after the wipe-out) yielding more than before ‘which will help’ as you said in the second para of your first post. Plus, as the new bonds now have the same yield as the old post wipe-out bonds, as you just said, both sets of bonds, old and new, are now ‘winners’. What am I missing?
If interest rates fall it will be the inverse of what has just happened. Yes the trading value of 'legacy' bonds already in the fund will recover, but the fund will also now contain recently purchased bonds, and their theoretical market value will increase if interest rates drop. It would be similar as shorting these funds if you knew or predicted that they would be rapidly beaten up, the long term known hard maths is largely irrelevant, just playing the short term swing.
The 'bet' element of it, of course, is that interest rates will fall again, but not for a reasonable period of time, allowing the fund to 'stock up/rotate' into more favourable gilts. We won't see near zero rates again, so I don't anticipate that it will be quite so rapid or dramatic.
A linker fund I have been betting on for a good while is RLP Short (5 Years) Index Linked. Better people than me might be able to explain why the value does not appear to have especially suffered like other linker gilt funds (other than it is a short fund, ergo lower risk), but it can be seen from the holdings that it is already rotating into linkers with a stronger rate (and yes, the fund is still down significantly compared to the risk free rate). [This is not the only gvnt bond fund I am buying]
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