Global or UK bond index - which and why?

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.
«1345

Comments

  • dunstonh
    dunstonh Posts: 115,646
    Name Dropper First Anniversary Combo Breaker First Post
    Forumite
    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.

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • GeoffTF
    GeoffTF Posts: 1,332
    First Anniversary First Post Photogenic Name Dropper
    Forumite
    edited 15 December 2023 at 3:41PM
    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
    aroominyork Posts: 2,762
    Name Dropper First Post First Anniversary
    Forumite
    edited 16 December 2023 at 12:25PM
    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
    GeoffTF Posts: 1,332
    First Anniversary First Post Photogenic Name Dropper
    Forumite
    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
    dealyboy Posts: 1,681
    First Post Photogenic Name Dropper First Anniversary
    Forumite
    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
    masonic Posts: 22,836
    Photogenic Name Dropper First Post First Anniversary
    Forumite
    edited 16 December 2023 at 2:50PM
    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.
  • 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
    masonic Posts: 22,836
    Photogenic Name Dropper First Post First Anniversary
    Forumite
    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
    aroominyork Posts: 2,762
    Name Dropper First Post First Anniversary
    Forumite
    Is there a chart or other quantifiable data that demonstrates credit spreads now and historically?
  • Hoenir
    Hoenir Posts: 1,182
    First Post Name Dropper
    Forumite
    Is there a chart or other quantifiable data that demonstrates credit spreads now and historically?
    Any particular type of credit? There's numerous streams. 
Meet your Ambassadors

Categories

  • All Categories
  • 341.5K Banking & Borrowing
  • 249.6K Reduce Debt & Boost Income
  • 449K Spending & Discounts
  • 233.6K Work, Benefits & Business
  • 605.7K Mortgages, Homes & Bills
  • 172.3K Life & Family
  • 246.7K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards