Global or UK bond index - which and why?

masonic

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

zagfles said:

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?

A few years ago interest rates were at historic lows and there was a belief that it was the new normal, so investors were willing to pay well above face value for the income stream. After a decade of low rates, expectations were worn down. I don't think either Boris or Rishi can be crowned as the greatest influencer of credit markets. Surely that prize must go to the one in the middle, who will be the tricky answer to a question in a pub quiz in a few years time.

zagfles said:

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?

There are certainly a lot of institutions that buy blindly, but the volatility shows that enough bonds are freely traded for the market to operate efficiently. Given the Liability Driven Investments scandal, it seems some of these supposed forced buyers were up to naughtier antics in the background, so perhaps the view that they were all loaded up with gilts was a little naive.

zagfles

masonic said:

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

Nah, don't buy that. The data doesn't suggest that at all, for instance since two weeks ago, an 18 year IL gilt has gone up around 8.5% whereas a 50 year one has gone up 25% !!

If it were about creditworthyness, are investors seriously thinking that the chances of reneging on debt has changed a bit in the next 18 years, but has changed far far more for the 30 years after that? Based on the activities of a govt that has less than a year to a general election which it looks like they'll lose? Really? 

Besides, stuff like talk of breaking of international law also happened in 2020, see https://www.instituteforgovernment.org.uk/comment/internal-market-bill-breaks-international-law yet that had zero effect on gilts which remained at stupidly high prices until early 2022.

A few years ago interest rates were at historic lows and there was a belief that it was the new normal, so investors were willing to pay well above face value for the income stream. After a decade of low rates, expectations were worn down. I don't think either Boris or Rishi can be crowned as the greatest influencer of credit markets. Surely that prize must go to the one in the middle, who will be the tricky answer to a question in a pub quiz in a few years time.

Even the Truss farce had zero long term impact, just look at any 3 year graph of gilt prices, and all there is is a sharp narrow dip and recovery around late Sept/early Oct 2022 which made no difference to the long term trend. So it seems the markets were temporarily spooked but soon recovered.

zagfles said:

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?

There are certainly a lot of institutions that buy blindly, but the volatility shows that enough bonds are freely traded for the market to operate efficiently. Given the Liability Driven Investments scandal, it seems some of these supposed forced buyers were up to naughtier antics in the background, so perhaps the view that they were all loaded up with gilts was a little naive.

Well someone was! It's almost as if the market just looks the current YTM and compares that with prevailing interest rates. That would be a bit like shares being valued on purely what the current dividend is without considering the company's future prospects.

I'm sure I'm missing something.

masonic

zagfles said:

masonic said:

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

Nah, don't buy that. The data doesn't suggest that at all, for instance since two weeks ago, an 18 year IL gilt has gone up around 8.5% whereas a 50 year one has gone up 25% !!

Increases in rate have a magnified effect on bond prices as you move down the yield curve. That difference doesn't look out of sorts. Just look what happened to long duration vs short duration gilts when interest rates started rising. This is why money market funds came to the fore in the past year, as they were negligibly affected by shifts in yield.

zagfles said:

If it were about creditworthyness, are investors seriously thinking that the chances of reneging on debt has changed a bit in the next 18 years, but has changed far far more for the 30 years after that? Based on the activities of a govt that has less than a year to a general election which it looks like they'll lose? Really? 

Besides, stuff like talk of breaking of international law also happened in 2020, see https://www.instituteforgovernment.org.uk/comment/internal-market-bill-breaks-international-law yet that had zero effect on gilts which remained at stupidly high prices until early 2022.

You need to factor in both interest rates and creditworthiness. When interest rates and spreads were at historic lows, the impact was small because even the less creditworthy economies were paying ridiculously low rates on their borrowings, so the risk premium demanded was small in absolute terms. You are correct about the talk of breaking international law being quite long lived and this has probably been carried as a risk premium for as long, but recent actions have demonstrated that it won't happen, which is a change. As always, all news contributes to price discovery in an efficient market, so there will be many factors contributing to the overall yield demanded by the market.

zagfles said:

A few years ago interest rates were at historic lows and there was a belief that it was the new normal, so investors were willing to pay well above face value for the income stream. After a decade of low rates, expectations were worn down. I don't think either Boris or Rishi can be crowned as the greatest influencer of credit markets. Surely that prize must go to the one in the middle, who will be the tricky answer to a question in a pub quiz in a few years time.

Even the Truss farce had zero long term impact, just look at any 3 year graph of gilt prices, and all there is is a sharp narrow dip and recovery around late Sept/early Oct 2022 which made no difference to the long term trend. So it seems the markets were temporarily spooked but soon recovered.

The Bank of England had to step in and pledge to buy up to £65bn of gilts at the long end of the curve to prevent the market collapsing and pension funds failing. That's quite an achievement, and one unrivalled by any of her peers. Alongside this action, replacing her and Kwasi and tearing up her plans were what was required to restore the market. When looking at the 50 year gilt yield chart, you can see her impact quite clearly. Of course, she'll now say that we ended up in the same place subsequently anyway, but if they hadn't put a stop to her work it would have got a lot worse.

zagfles said:

zagfles said:

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?

There are certainly a lot of institutions that buy blindly, but the volatility shows that enough bonds are freely traded for the market to operate efficiently. Given the Liability Driven Investments scandal, it seems some of these supposed forced buyers were up to naughtier antics in the background, so perhaps the view that they were all loaded up with gilts was a little naive.

Well someone was! It's almost as if the market just looks the current YTM and compares that with prevailing interest rates. That would be a bit like shares being valued on purely what the current dividend is without considering the company's future prospects.

I'm sure I'm missing something.

What the market tends to do is look at the yield on offer and decide whether it adequately compensates them. If it doesn't then they will not invest, providing they have a more attractive alternative. Unlike shares, bonds don't have anything to offer beyond their income streams. There is no scenario where they mature above par or pay out special coupons if the country issuing them does well, but in theory they could pay out less in extremis. So it should come as no surprise that they are valued on the basis of their income stream and the creditworthiness of the issuer, as judged by the market.

zagfles

masonic said:

zagfles said:

masonic said:

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

Nah, don't buy that. The data doesn't suggest that at all, for instance since two weeks ago, an 18 year IL gilt has gone up around 8.5% whereas a 50 year one has gone up 25% !!

Increases in rate have a magnified effect on bond prices as you move down the yield curve. That difference doesn't look out of sorts. Just look what happened to long duration vs short duration gilts when interest rates started rising. This is why money market funds came to the fore in the past year, as they were negligibly affected by shifts in yield.

zagfles said:

If it were about creditworthyness, are investors seriously thinking that the chances of reneging on debt has changed a bit in the next 18 years, but has changed far far more for the 30 years after that? Based on the activities of a govt that has less than a year to a general election which it looks like they'll lose? Really? 

Besides, stuff like talk of breaking of international law also happened in 2020, see https://www.instituteforgovernment.org.uk/comment/internal-market-bill-breaks-international-law yet that had zero effect on gilts which remained at stupidly high prices until early 2022.

You need to factor in both interest rates and creditworthiness. When interest rates and spreads were at historic lows, the impact was small because even the less creditworthy economies were paying ridiculously low rates on their borrowings, so the risk premium demanded was small in absolute terms. You are correct about the talk of breaking international law being quite long lived and this has probably been carried as a risk premium for as long, but recent actions have demonstrated that it won't happen, which is a change. As always, all news contributes to price discovery in an efficient market, so there will be many factors contributing to the overall yield demanded by the market.

Nope - still don't buy that any short term news about govt actions can affect the likelyhood of default in 2050 onwards. It makes no sense. Stuff about international law is a red herring, it had no effect in 2020.

The Bank of England had to step in and pledge to buy up to £65bn of gilts at the long end of the curve to prevent the market collapsing and pension funds failing. That's quite an achievement, and one unrivalled by any of her peers. Alongside this action, replacing her and Kwasi and tearing up her plans were what was required to restore the market. When looking at the 50 year gilt yield chart, you can see her impact quite clearly. Of course, she'll now say that we ended up in the same place subsequently anyway, but if they hadn't put a stop to her work it would have got a lot worse.

Look at the trend line ignoring the temporary spike. It made no difference to the mid-term trend whatsoever! Just a temporary blip. That was the point. Excuse the pun.

What the market tends to do is look at the yield on offer and decide whether it adequately compensates them. If it doesn't then they will not invest, providing they have a more attractive alternative. Unlike shares, bonds don't have anything to offer beyond their income streams. There is no scenario where they mature above par or pay out special coupons if the country issuing them does well, but in theory they could pay out less in extremis. So it should come as no surprise that they are valued on the basis of their income stream and the creditworthiness of the issuer, as judged by the market.

Well clearly but the point is the future income stream should be measured relative to expected alternatives.

For instance, if current market conditions pointed to a prediction of interest rates being higher for the next 10 years but back to normal after that, then it would make sense for both 10 year gilts and 50 year gilts to fall in the same proportion, because there is nothing now which says the income stream of the 50 year gilt, in year 10 onwards, will be any different relative to expected rates. So the income stream for both is only expected to be different relative to to prevailing rates for the next 10 years.

But the market seems to be reacting in a way that says changes now will cause interest rates to be different to previously expected long into the future, decades, even half a century. Or if you really think the chance of default is an issue, then the chance of default is also higher many decades into the future. 

But personally, I doubt any recent events have seriously increased the chance of govt default in 30-50 years time. Events pre 2022, maybe, eg the 2007 financial crisis, COVID etc, but they're known about and wouldn't cause a swing now.

masonic

zagfles said:

masonic said:

zagfles said:

masonic said:

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

Nah, don't buy that. The data doesn't suggest that at all, for instance since two weeks ago, an 18 year IL gilt has gone up around 8.5% whereas a 50 year one has gone up 25% !!

Increases in rate have a magnified effect on bond prices as you move down the yield curve. That difference doesn't look out of sorts. Just look what happened to long duration vs short duration gilts when interest rates started rising. This is why money market funds came to the fore in the past year, as they were negligibly affected by shifts in yield.

zagfles said:

If it were about creditworthyness, are investors seriously thinking that the chances of reneging on debt has changed a bit in the next 18 years, but has changed far far more for the 30 years after that? Based on the activities of a govt that has less than a year to a general election which it looks like they'll lose? Really? 

Besides, stuff like talk of breaking of international law also happened in 2020, see https://www.instituteforgovernment.org.uk/comment/internal-market-bill-breaks-international-law yet that had zero effect on gilts which remained at stupidly high prices until early 2022.

You need to factor in both interest rates and creditworthiness. When interest rates and spreads were at historic lows, the impact was small because even the less creditworthy economies were paying ridiculously low rates on their borrowings, so the risk premium demanded was small in absolute terms. You are correct about the talk of breaking international law being quite long lived and this has probably been carried as a risk premium for as long, but recent actions have demonstrated that it won't happen, which is a change. As always, all news contributes to price discovery in an efficient market, so there will be many factors contributing to the overall yield demanded by the market.

Nope - still don't buy that any short term news about govt actions can affect the likelyhood of default in 2050 onwards. It makes no sense. Stuff about international law is a red herring, it had no effect in 2020.

That is not what I am suggesting. The way things like this play out is not that some decision is made in 2023 and everything carries on as normal until 2050 whereupon an entirely new generation of parliament suddenly points to what was going on in 2023 and comes up with a brilliant idea to cancel its debt. Formal default is such a minor tail-risk it probably isn't weighted very heavily at all. More likely the risk of greater concern is worsening international relations, which would weigh on the economy and lead to inflation and currency devaluation. This would reduce returns in real terms without changing the GBP cashflows. A borrower that behaves in an irresponsible manner when it comes to the law is a bigger risk than one which always takes a more responsible and cooperative stance within its community. 

All any lender can do is judge a borrower on the basis of recent conduct. The law-breaking stuff didn't have 'no effect' in 2020, as I explained, the effect it would have had was just less pronounced due to the economic conditions of that time. If you don't accept the mathematical relationship between relative and absolute changes in yield, or the way in which changes in yield are magnified as you move down the yield curve, then I can understand why you don't buy this.

It's your prerogative to disbelieve any specific reason why a price has moved, after all nobody can profess to know the contents of the minds of those market participants that traded the gilts, but if you wish to maintain the position that price movements in long-dated gilts are devoid of explanation, then perhaps we should leave it there.

zagfles said:

masonic said:

The Bank of England had to step in and pledge to buy up to £65bn of gilts at the long end of the curve to prevent the market collapsing and pension funds failing. That's quite an achievement, and one unrivalled by any of her peers. Alongside this action, replacing her and Kwasi and tearing up her plans were what was required to restore the market. When looking at the 50 year gilt yield chart, you can see her impact quite clearly. Of course, she'll now say that we ended up in the same place subsequently anyway, but if they hadn't put a stop to her work it would have got a lot worse.

Look at the trend line ignoring the temporary spike. It made no difference to the mid-term trend whatsoever! Just a temporary blip. That was the point. Excuse the pun.

On this separate point, the reason it made no difference to the mid-term trend is because the policies were quickly countered and reversed after being announced, so were not enacted. The yield spiked when the policies were threatened and went back down when the risk had passed. It was a larger and more rapid shift than the drop of the past couple of weeks, with a widely accepted cause. This exemplifies the fact that prices can move up and down based on short term events, which is why long duration debt prices can be volatile. This should hopefully be understood by anyone investing in a long-dated bond fund as price moves inversely to yield to a significantly greater extent.

aroominyork

Bostonerimus1 said:

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.

...which takes me back to my original question and dunstonh's reply https://forums.moneysavingexpert.com/discussion/comment/80467073#Comment_8046707.

I'm minded to split between a hedged corporate bond fund, a hedged global aggregate index fund and a gilt index fund (if I can find a reasonable time to sell Capital Gearing Trust which probably no longer meets my needs).

Hoenir

Bostonerimus1 said:

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.

Any views on the US Debt markets?  UK's problems are insignificant in comparison. 

zagfles

masonic said:

zagfles said:

masonic said:

zagfles said:

masonic said:

zagfles said:

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?

That is what the data suggest. Of course there has been no official rerating recently, but the market can demand a rate for holding a country's debt independently of the ratings agencies, which is why we have been treated as if we were an emerging market economy until recently. If you want to link it to current affairs, perhaps it is linked to the ongoing rumblings around reneging on international treaties, as, a country willing to break international law will surely carry a greater risk of reneging on its debts. In the end the legislation turned out not to be as threatened, and it will be kicked around until after the next GE, whereupon it will likely go away. It probably isn't just one thing, but a few underlying factors driving price that just needed a catalyst to trigger a correction.

Nah, don't buy that. The data doesn't suggest that at all, for instance since two weeks ago, an 18 year IL gilt has gone up around 8.5% whereas a 50 year one has gone up 25% !!

Increases in rate have a magnified effect on bond prices as you move down the yield curve. That difference doesn't look out of sorts. Just look what happened to long duration vs short duration gilts when interest rates started rising. This is why money market funds came to the fore in the past year, as they were negligibly affected by shifts in yield.

zagfles said:

If it were about creditworthyness, are investors seriously thinking that the chances of reneging on debt has changed a bit in the next 18 years, but has changed far far more for the 30 years after that? Based on the activities of a govt that has less than a year to a general election which it looks like they'll lose? Really? 

Besides, stuff like talk of breaking of international law also happened in 2020, see https://www.instituteforgovernment.org.uk/comment/internal-market-bill-breaks-international-law yet that had zero effect on gilts which remained at stupidly high prices until early 2022.

You need to factor in both interest rates and creditworthiness. When interest rates and spreads were at historic lows, the impact was small because even the less creditworthy economies were paying ridiculously low rates on their borrowings, so the risk premium demanded was small in absolute terms. You are correct about the talk of breaking international law being quite long lived and this has probably been carried as a risk premium for as long, but recent actions have demonstrated that it won't happen, which is a change. As always, all news contributes to price discovery in an efficient market, so there will be many factors contributing to the overall yield demanded by the market.

Nope - still don't buy that any short term news about govt actions can affect the likelyhood of default in 2050 onwards. It makes no sense. Stuff about international law is a red herring, it had no effect in 2020.

That is not what I am suggesting. The way things like this play out is not that some decision is made in 2023 and everything carries on as normal until 2050 whereupon an entirely new generation of parliament suddenly points to what was going on in 2023 and comes up with a brilliant idea to cancel its debt. Formal default is such a minor tail-risk it probably isn't weighted very heavily at all. More likely the risk of greater concern is worsening international relations, which would weigh on the economy and lead to inflation and currency devaluation. This would reduce returns in real terms without changing the GBP cashflows.

So Brexit had no or minimal effect (prices still sky high well into 2021) yet stuff happening since has? Really?

Look at the trend line ignoring the temporary spike. It made no difference to the mid-term trend whatsoever! Just a temporary blip. That was the point. Excuse the pun.

On this separate point, the reason it made no difference to the mid-term trend is because the policies were quickly countered and reversed after being announced, so were not enacted. The yield spiked when the policies were threatened and went back down when the risk had passed. It was a larger and more rapid shift than the drop of the past couple of weeks, with a widely accepted cause. This exemplifies the fact that prices can move up and down based on short term events, which is why long duration debt prices can be volatile. This should hopefully be understood by anyone investing in a long-dated bond fund as price moves inversely to yield to a significantly greater extent.

Of course - that spike (or dip if you use price not yields) had a very obvious reason but didn't cause any long term impact, so it's nothing to do with what's happening now.  That was my point.

But the current big rise in prices (or dip in yields) doesn't have such an obvious explaination. I notice that the relative impact on long dated compared to short dated was similar then as now....

Really though I'm still no closer to understanding the volatility of long dated gilts. Unless the market is really full of speculators using simple spot YTM to decide value. Or they think things happening today will affect interest rates in 40 years. Maybe they will. 

Or maybe I should have a bit of cash ready for the next market panic where I can buy long dated gilts for half price

Apologies to OP for derailing the thread.

masonic

zagfles said:

So Brexit had no or minimal effect (prices still sky high well into 2021) yet stuff happening since has? Really?

No, the 50 year gilt yield nearly doubled in the wake of the Brexit vote, along with currency and stock market turbulence. It was more pronounced than the 20% reduction in gilt yield you brought up or the 40% Trussonomics spike. It remained elevated until towards the end of the decade when the 'deal' was negotiated. Then Covid happened and sent it tumbling further. Ultimately though, it was the GFC in 2008 that had the biggest impact this century, sending yields to fractions of what was normal through subsequent long term interest rate policy. That has been dwarfing everything else until recently.

On your other point, spot YTM is the best metric to use when weighing up the purchase of individual bonds, as that is the return you will get, but it needs to be considered in the context of what that return is worth intrinsically (i.e. what will the currency you receive be worth) and compared to alternatives.

zagfles

masonic said:

zagfles said:

So Brexit had no or minimal effect (prices still sky high well into 2021) yet stuff happening since has? Really?

No, the 50 year gilt yield nearly doubled in the wake of the Brexit vote, along with currency and stock market turbulence. It was more pronounced than the 20% reduction in gilt yield you brought up or the 40% Trussonomics spike.

Which one in particular? I've just looked at a couple of long dated gilts both normal and IL and there is no spike in yields anywhere near that sort of magnitude around the Brexit vote time ie 23/6/2016. Unless this was in a very small window eg an inter-day panic and immediate recovery which doesn't even show up on a 10 year graph. 

In fact in the summer after the Brexit vote the yields went down and never seemed to reach the levels in May 2016 until 2022!