Global or UK bond index - which and why?

aroominyork

Corporate. Especially around the lower end of investment grade.

masonic

aroominyork said:

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

There's a nice series of charts here: https://www.longtermtrends.net/bond-yield-credit-spreads/

The effect is generally magnified as you descend into the lower ratings.

zagfles

What surprises me is how incredibly volatile long dated gilts are - up over 20% in the last 2 weeks! Do current transient economic events really affect the prospects for returns (or relative returns) over the next 50 years?

On UK vs global - I use unhedged global bonds, my logic being that I travel a lot and if the pound strengthens it'll be cheaper to travel and if it weakens it'll be more expensive, so really unhedged gives me a hedge against that! Plus if the pound weakens a lot it's likely to be partly due to high inflation (and vv).

masonic

zagfles said:

What surprises me is how incredibly volatile long dated gilts are - up over 20% in the last 2 weeks! Do current transient economic events really affect the prospects for returns (or relative returns) over the next 50 years?

That sort of swing corresponds to roughly a 1% drop in yield, so it's not that dramatic. To some extent this is an unwinding of the pressures that drove yields so high that emergency intervention was required last year. Yields north of 5% on long term debt was looking a bit excessive.

zagfles said:

On UK vs global - I use unhedged global bonds, my logic being that I travel a lot and if the pound strengthens it'll be cheaper to travel and if it weakens it'll be more expensive, so really unhedged gives me a hedge against that! Plus if the pound weakens a lot it's likely to be partly due to high inflation (and vv).

I also favour unhedged for the same local currency concentration risk reason. Much of my spending is on items valued on a global marketplace, such as energy, imported food and other goods/services.

zagfles

masonic said:

zagfles said:

What surprises me is how incredibly volatile long dated gilts are - up over 20% in the last 2 weeks! Do current transient economic events really affect the prospects for returns (or relative returns) over the next 50 years?

That sort of swing corresponds to roughly a 1% drop in yield, so it's not that dramatic. To some extent this is an unwinding of the pressures that drove yields so high that emergency intervention was required last year. Yields north of 5% on long term debt was looking a bit excessive.

But it's 1% drop for the next 50 years! Have things changed that much in the last 2 weeks to make prospective yields in 2050, 2060 or even 2070 look high? 

Mind you I'll never understand why they were priced around 400 in 2021. It's almost like the market is thinking what's happening currently at this moment in time will likely continue for decades, or is an indication of the long term future, eg in 2021 interest rates below inflation will continue for ever, or now because interest rates haven't risen at the latest BoE meeting, that means interest rates will be lower than expected in 30-50 years time!

aroominyork

Following zagfles' train of thought, when interest rates were ultra-low, long dated gilts had very low yields. For people who thought that at some stage interest rates would revert to a higher level, was there a way to short long dated gilts?

masonic

zagfles said:

masonic said:

zagfles said:

What surprises me is how incredibly volatile long dated gilts are - up over 20% in the last 2 weeks! Do current transient economic events really affect the prospects for returns (or relative returns) over the next 50 years?

That sort of swing corresponds to roughly a 1% drop in yield, so it's not that dramatic. To some extent this is an unwinding of the pressures that drove yields so high that emergency intervention was required last year. Yields north of 5% on long term debt was looking a bit excessive.

But it's 1% drop for the next 50 years! Have things changed that much in the last 2 weeks to make prospective yields in 2050, 2060 or even 2070 look high? 

Mind you I'll never understand why they were priced around 400 in 2021. It's almost like the market is thinking what's happening currently at this moment in time will likely continue for decades, or is an indication of the long term future, eg in 2021 interest rates below inflation will continue for ever, or now because interest rates haven't risen at the latest BoE meeting, that means interest rates will be lower than expected in 30-50 years time!

It's more that investors wanted greater compensation for the additional risks, so the markets effectively downgraded the UK's credit rating and are now coming around to the idea that it may act responsibly and in its own long-term self-interests after all.

masonic

aroominyork said:

Following zagfles' train of thought, when interest rates were ultra-low, long dated gilts had very low yields. For people who thought that at some stage interest rates would revert to a higher level, was there a way to short long dated gilts?

You can short 10 year gilts with 1GIS, which could have generated a 1 year return in excess of 30% between 2021-2022. I imagine there are also CFDs and spread bets available.

Bostonerimus1

Global bond funds are more diverse than UK Gilt funds so you might thing that's an advantage as you will be insulated from a UK Government tanking the Gilt markets.

zagfles

masonic said:

zagfles said:

masonic said:

zagfles said:

What surprises me is how incredibly volatile long dated gilts are - up over 20% in the last 2 weeks! Do current transient economic events really affect the prospects for returns (or relative returns) over the next 50 years?

That sort of swing corresponds to roughly a 1% drop in yield, so it's not that dramatic. To some extent this is an unwinding of the pressures that drove yields so high that emergency intervention was required last year. Yields north of 5% on long term debt was looking a bit excessive.

But it's 1% drop for the next 50 years! Have things changed that much in the last 2 weeks to make prospective yields in 2050, 2060 or even 2070 look high? 

Mind you I'll never understand why they were priced around 400 in 2021. It's almost like the market is thinking what's happening currently at this moment in time will likely continue for decades, or is an indication of the long term future, eg in 2021 interest rates below inflation will continue for ever, or now because interest rates haven't risen at the latest BoE meeting, that means interest rates will be lower than expected in 30-50 years time!

It's more that investors wanted greater compensation for the additional risks, so the markets effectively downgraded the UK's credit rating and are now coming around to the idea that it may act responsibly and in its own long-term self-interests after all.

So in the last 2 weeks the UK's credit rating has increased significantly?

But still doesn't explain why prices were so high a few years ago, did the markets really trust Boris much more than Rishi? Even with 100% AAA+ creditworthyness, paying 4x the face value?

Wonder how much trading in gilts is forced eg by a mandated investment strategy for some products eg annuities, pension funds, insurance policies etc, rather than by rational investors who look at the value of what they're buying? But then surely there'll be enough rational investors to take advantage of any perceived price/value differential?