Global or UK bond index - which and why?

aroominyork

For a long term core bond holding, what factors influence the choice between a hedged global fund and a gilt fund? One key difference - though it doesn't seem to affect performance much - is that a global fund includes high quality corporate bonds while there is no equivalent aggregate (govt + corporate) fund for the UK.

dunstonh

For a long term core bond holding, what factors influence the choice between a hedged global fund and a gilt fund?

Personal choice.

UK gilts suffered really badly in 2022 and until recently in 2023.   Global government bonds didn't suffer anywhere near as much.     I was reading recently that there were fears that global government bonds could actually follow the UK rather than the UK being an outlier.    However, I have also read that many feel that the drop in UK was too great and there will be a bounce to some extent.    So, take your pick!

One key difference - though it doesn't affect performance much - is that a global fund includes high quality corporate bonds while there is no equivalent aggregate (govt + corporate) fund for the UK.

That would depend on whether you are looking at global bond funds that include both or global bond funds that are government only or investment grade only.   The choice is far more limited though than for UK only funds.

GeoffTF

dunstonh said:

UK gilts suffered really badly in 2022 and until recently in 2023.   Global government bonds didn't suffer anywhere near as much.

A lot of the difference was due to the longer duration of UK gilt trackers. VGOV had a duration of about 12 years before the recent fall IIRC, whereas VAGP (global aggregate bond tracker) had a substantially shorter duration. It is still true that VAGP has a shorter duration than VGOV. The shorter duration is more appropriate for me. I already have direct holdings of gilts, where I choose the maturity date.

aroominyork

It surprises me there is not much difference between five year performance of a global aggregate fund like VAGP and a global government fund like IGLH, both hedged. Corporate bonds in an index fund are approx 50% A and 50% BBB, while government bonds hover around AA. Yet the funds perform similarly. 

GeoffTF

aroominyork said:

It surprises me there is not much difference between five year performance of a global aggregate fund like VAGP and a global government fund like IGLH, both hedged. Corporate bonds in an index fund are approx 50% A and 50% BBB, while government bonds hover around AA. Yet the funds perform similarly. 

The corporate bonds are only about a third of the fund and are investment quality. The average quality of VAGP is AA-, which is the same as that for UK government debt.

dealyboy

The Daily Telegraph Saturday Money today front page article ... Prepare for the 'year of the bond' ... on msn.com ...
2024 will be ‘year of the bond’: here’s how to profit (msn.com)

masonic

Credit spreads haven't been that high recently. There is potential for them to widen if the economic situation deteriorates. Bond investors are now well versed in what happens if interest rates on bonds go up, this would be a different flavour of the same principle and could put pressure on higher risk credit returns.

aroominyork

masonic said:

Credit spreads haven't been that high recently. There is potential for them to widen if the economic situation deteriorates. Bond investors are now well versed in what happens if interest rates on bonds go up, this would be a different flavour of the same principle and could put pressure on higher risk credit returns.

I'm trying to interpret this. Are you saying that higher risk bonds are not currently paying much more than lower risk ones (narrow spreads). So if a recession leads to riskier bonds having to pay higher yields, the price of higher risk credit currently on the market will fall? 

masonic

aroominyork said:

masonic said:

Credit spreads haven't been that high recently. There is potential for them to widen if the economic situation deteriorates. Bond investors are now well versed in what happens if interest rates on bonds go up, this would be a different flavour of the same principle and could put pressure on higher risk credit returns.

I'm trying to interpret this. Are you saying that higher risk bonds are not currently paying much more than lower risk ones (narrow spreads). So if a recession leads to riskier bonds having to pay higher yields, the price of higher risk credit currently on the market will fall? 

Bingo        

aroominyork

Is there a chart or other quantifiable data that demonstrates credit spreads now and historically?

Hoenir

aroominyork said:

Is there a chart or other quantifiable data that demonstrates credit spreads now and historically?

Any particular type of credit? There's numerous streams.