Bond Maturity Dates ?

Neversurrender

Hi,
I am 64 years old, had to retire early.
I have an AJ Bell Sipp Portfolio.

The Portfolio is a little light on Bond Funds, so I am looking at increasing the bond allocation by investing in a bond fund.  I want something like a Vanguard tracker which is passive.
I already have VLS 80

Due to my age. I wish to dip onto the portfolio to draw down cash as needed in approx 10 to 15 years time, which may even be the whole bond fund sold.

My Questions:

I look at some of these Bond Funds and see some bonds in each find have maturity dates of 20 or 30 years time, but I wish to start selling off bits of those funds in anything up to 10-15 years time,  and possibly will have sold off all that bond fund in 15 years time, so if I have bonds maturing in 30 years what happens?

 I can't get my head around how this works.

Also I believe a good way to judge bonds is by the yield, but can't see that information when I look at a Vanguard bond fund, am I right in thinking 3% yield means 3% interest for example?

I keep reading it's good to have bonds in a portfolio, but all I see when I look at performance graphs is a downhill slide, so my worry is in my spend in 15 years time idea is it a good bet?

At the moment I have cash in my AJ Bell Sipp which is at least making about 3.7% interest, I feel this might be comparable with the return I would get from the average Bond fund, at least for now, and maybe I should look at investing in a bond fund when interest rates drop?

I would appreciate very much your feedback, I do realise my nativity in these matters is quite evident here.

Linton

Neversurrender said:

Hi,
I am 64 years old, had to retire early.
I have an AJ Bell Sipp Portfolio.

The Portfolio is a little light on Bond Funds, so I am looking at increasing the bond allocation by investing in a bond fund.  I want something like a Vanguard tracker which is passive.
I already have VLS 80

Due to my age. I wish to dip onto the portfolio to draw down cash as needed in approx 10 to 15 years time, which may even be the whole bond fund sold.

My Questions:

I look at some of these Bond Funds and see some bonds in each find have maturity dates of 20 or 30 years time, but I wish to start selling off bits of those funds in anything up to 10-15 years time,  and possibly will have sold off all that bond fund in 15 years time, so if I have bonds maturing in 30 years what happens?

 I can't get my head around how this works.

Also I believe a good way to judge bonds is by the yield, but can't see that information when I look at a Vanguard bond fund, am I right in thinking 3% yield means 3% interest for example?

I keep reading it's good to have bonds in a portfolio, but all I see when I look at performance graphs is a downhill slide, so my worry is in my spend in 15 years time idea is it a good bet?

At the moment I have cash in my AJ Bell Sipp which is at least making about 3.7% interest, I feel this might be comparable with the return I would get from the average Bond fund, at least for now, and maybe I should look at investing in a bond fund when interest rates drop?

I would appreciate very much your feedback, I do realise my nativity in these matters is quite evident here.

1) Bond funds are continually buying new bonds as old ones mature.  The bonds they buy will be of the appropriate time to maturity to maintain the required profile of the fud as a whole.  To what extent they need to explicitly sell old bonds to buy new ones I dont know. The  overall effect is that your bond fund will look much the same in 15 years time as it does now.

So you may wish to reduce the time to maturity as you approach the 15 years when you want to take the money.

2) There are three "yields" that are significant...

 -  "Coupon"  which is the % on the label.  All gilts and most other bonds have a nominal value of £100 which is returned at maturity.  The coupon is the interest rate against this £100 and is fixed in £ terms throughout the life of the bond.  So a 5% bond will always return £5 per year no matter what you paid fior the bond

 - "Running yield" which is interest expressed as a % of the current price.  If the bond price increases its running yield will decrease.

 - YTM (Yield to Maturity) - this is the %interest equivalent to a fixed rate compounded savings account starting with the price at which you bought.  So similar in principle to an AER except it is for the remaining duration of the bond rather than per year.    The YTM will approach the coupon as the bond nears maturity. YTMs are useful for comparing one bond with anothe one with different maturities, coupons and current prices.

3) Assuming you are  withdrawing the interest rather than re-investing it, then since each constituent of the fund is returning an amount fixed in £ terms you would expect the same to apply roughly to the bond fund as a whole.  However as interest rates change new bonds may have different coupons to the old maturing bonds.  So you would expect the interest in £ terms of the bond fund to change slowly over time.  However the Running Yield may do anything as the price of bonds is less stable than the interest.

Albermarle

I keep reading it's good to have bonds in a portfolio, but all I see when I look at performance graphs is a downhill slide, so my worry is in my spend in 15 years time idea is it a good bet?

You will see a negative performance over the last couple of years or so. In the years before that bonds did much better than historically.

It is all linked to interest rates. Following the financial crash of 2008, interest rates went down to almost zero, and stayed there for a long time. This made bonds/gilts attractive.

Then in the last couple of years interest rates have been rising, and the bond/gilt market unwound. producing a once in a lifetime big drop ( maybe two or three lifetimes) .

This drama is effectively over, and things are expected to be more normal going forward, and in fact bond prices have perked up in the last 3 months.

JohnWinder

I wish to dip onto the portfolio to draw down cash as needed in approx 10 to 15 years time, which may even be the whole bond fund sold.’

Proceed with extreme caution. Actually, don’t make any sudden moves until you get a better handle on bond funds, lest you be badly let down and do something silly (and unnecessary).
A bond fund with bonds maturing in 25 years will still be a bond fund maturing in 25 years when you need to cash in 15 years from now, and therein lies the danger. Such a long maturing fund can drop in value substantially over a year or so if you’re out of luck with interest rate changes. The safest is to have a fund that will ‘mature’ when you need the money; sadly the funds don’t change maturity to suit investors, and you don’t know exactly when you’ll need to sell up. Safest is to get a fund with much shorter maturity.
Not a bad explanation here: https://occaminvesting.co.uk/duration-matching-an-introduction/

aroominyork

Read the opening post on this thread. It focuses on individual bonds rather than funds but you need to understand how individual bonds work before you can properly understand how a bond funds works. https://forums.moneysavingexpert.com/discussion/6496805/the-bond-gilt-market/p1