Gilts, US Treasuries, or both?

1404

Hi all,

I would like to have some bonds in case of a crash. However, I would like to know the pros and cons of having either a fund of Gilts, a fund of US Treasuries, or a 50/50 combination of both.

These are the three funds I'm looking at:

UK gilts:

iShares Core UK Gilts UCITS ETF GBP (Dist)

LON: IGLT

US Treasuries:

Vanguard USD Treasury Bond UCITS ETF Dis

LON: VUTY

Another US Treasuries:

iShares $ Treasury Bd 7-10y UCITS ETF USD Dist

LON: IBTM

I am thinking of splitting my allocation along the following lines:

50% UK Gilt fund: IGLT

25% US Treasuries: VUTY

25% US Treasuries: IBTM

I guess my questions are:

- is it a good idea to share the bonds between UK and US?

- could a fall/rise in either the USD or GBP have a detrimental effect on my capital? Or are all the funds priced in GBP so it wouldn't make any difference?

- any other opinions or things to consider?

Thanks. 

GeoffTF

The gilt fund will be vary interest rate sensitive. The price will fall a lot if interest rates go up. The two US bond funds are not hedged into sterling, and will be very volatile, because of exchange rate movements. They are effectively a bet that the pound will fall relative to the dollar. A global bond fund hedged into sterling, e.g VAGP or VAGS. would be more sensible. Alternatively, you could buy individual gilts with appropriate maturity dates.

masonic

1404 said:

I would like to have some bonds in case of a crash.

Perhaps it would be better to think about what outcome you want from an investment "in case of a crash", and then it may be possible to assess whether there is a suitable option available. The answer will be different depending on whether you want something that will pay out a guaranteed sum on a particular date vs something that might go down but nowhere near as much as equities vs something that may go up when equities go down but could crash itself.

1404

masonic said:

1404 said:

I would like to have some bonds in case of a crash.

Perhaps it would be better to think about what outcome you want from an investment "in case of a crash", and then it may be possible to assess whether there is a suitable option available. The answer will be different depending on whether you want something that will pay out a guaranteed sum on a particular date vs something that might go down but nowhere near as much as equities vs something that may go up when equities go down but could crash itself.

I would like something which will preferably go up when the market crashes. Not something which will itself crash. I'm not looking to short the market.

I'm happy to keep a chunk of money (15%-30% of my investible funds) in cash for this eventuality. I've been doing this for a while. But I was thinking that by having bonds I may actually see some capital gains when the crash happens.

masonic

1404 said:

masonic said:

1404 said:

I would like to have some bonds in case of a crash.

Perhaps it would be better to think about what outcome you want from an investment "in case of a crash", and then it may be possible to assess whether there is a suitable option available. The answer will be different depending on whether you want something that will pay out a guaranteed sum on a particular date vs something that might go down but nowhere near as much as equities vs something that may go up when equities go down but could crash itself.

I would like something which will preferably go up when the market crashes. Not something which will itself crash. I'm not looking to short the market.

A gilt fund would be an example of something that may go up when the market crashes but can crash itself. Other examples would be gold and commodities. I'm not aware of any investment where you can decouple the two and get something that will go up when the market crashes but has a low loss potential. You are probably asking the impossible.

1404 said:
I'm happy to keep a chunk of money (15%-30% of my investible funds) in cash for this eventuality. I've been doing this for a while. But I was thinking that by having bonds I may actually see some capital gains when the crash happens.

To get that to any appreciable extent, you must hold a longer duration fund, but that will give you interest rate risk. A vanilla gilt fund can (and recently has) gone down 30%+. Maybe a fall of that magnitude is once in a lifetime, but 10-20% falls would not look that out of the ordinary. Here is IGLT, which you proposed above:

Millyonare

When there is a crash, everything crashes (except domestic cash).

1404

Millyonare said:

When there is a crash, everything crashes (except domestic cash).

Yes, this is true. So stay in cash then? 

But some things bounce back quick. Like bonds and gold. 

Hoenir

masonic said:

1404 said:

masonic said:

1404 said:

I would like to have some bonds in case of a crash.

Perhaps it would be better to think about what outcome you want from an investment "in case of a crash", and then it may be possible to assess whether there is a suitable option available. The answer will be different depending on whether you want something that will pay out a guaranteed sum on a particular date vs something that might go down but nowhere near as much as equities vs something that may go up when equities go down but could crash itself.

I would like something which will preferably go up when the market crashes. Not something which will itself crash. I'm not looking to short the market.

A gilt fund would be an example of something that may go up when the market crashes but can crash itself. Other examples would be gold and commodities. I'm not aware of any investment where you can decouple the two and get something that will go up when the market crashes but has a low loss potential. You are probably asking the impossible.

1404 said:
I'm happy to keep a chunk of money (15%-30% of my investible funds) in cash for this eventuality. I've been doing this for a while. But I was thinking that by having bonds I may actually see some capital gains when the crash happens.

To get that to any appreciable extent, you must hold a longer duration fund, but that will give you interest rate risk. A vanilla gilt fund can (and recently has) gone down 30%+. Maybe a fall of that magnitude is once in a lifetime, but 10-20% falls would not look that out of the ordinary. Here is IGLT, which you proposed above:

Trouble with charts in their purest form is that there's no context. In essence. Why? (said rhetorically). 

JohnWinder

'When there is a crash, everything crashes (except domestic cash).'

I like the bravery on show but the statement is pretty easy to discredit.

From 2000 to 2003 US stocks fell 40%, that's a crash. 10 year government bonds rose 40% during that time. https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

From 2007-2009 US stocks fell 50%; those bonds rose 25%.

You spread the risk of default with two country's bonds, but than't not likely for either country.

You spread the risk that one country's bonds will yield more than the other's by holding two country's bonds, but how big will the difference be (not much probably) and how big an impact will that have on your portfolio if you have only 30% in bonds? Even less.

If you want bonds for stability of portfolio, foreign bonds need to be currency hedged.

Bond fund duration is perhaps the most important consideration, particularly if you haven't considered the implications of that yet. Borrow Annette Thau's bond book, or Larry Swedroe's. 

1404

JohnWinder said:

'When there is a crash, everything crashes (except domestic cash).'

I like the bravery on show but the statement is pretty easy to discredit.

From 2000 to 2003 US stocks fell 40%, that's a crash. 10 year government bonds rose 40% during that time. https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

From 2007-2009 US stocks fell 50%; those bonds rose 25%.

You spread the risk of default with two country's bonds, but than't not likely for either country.

You spread the risk that one country's bonds will yield more than the other's by holding two country's bonds, but how big will the difference be (not much probably) and how big an impact will that have on your portfolio if you have only 30% in bonds? Even less.

If you want bonds for stability of portfolio, foreign bonds need to be currency hedged.

Bond fund duration is perhaps the most important consideration, particularly if you haven't considered the implications of that yet. Borrow Annette Thau's bond book, or Larry Swedroe's. 

This is a good article about how Gilts v Treasuries have performed during crashes:  https://monevator.com/do-us-treasury-bonds-protect-uk-investors-better-than-gilts/ 


Spoiler alert!:  They have performed quite differently in various crashes.  But overall they aren't too dissimilar. GBP/USD fluctuations can right or wrong foot British investors who hold Treasuries.



But in the Treasuries funds I am interested in (VUTY and IBTM), they are priced in GBP.  So does that mean they are GBP hedged?

1404

masonic said:

1404 said:

masonic said:

1404 said:

I would like to have some bonds in case of a crash.

Perhaps it would be better to think about what outcome you want from an investment "in case of a crash", and then it may be possible to assess whether there is a suitable option available. The answer will be different depending on whether you want something that will pay out a guaranteed sum on a particular date vs something that might go down but nowhere near as much as equities vs something that may go up when equities go down but could crash itself.

I would like something which will preferably go up when the market crashes. Not something which will itself crash. I'm not looking to short the market.

A gilt fund would be an example of something that may go up when the market crashes but can crash itself. Other examples would be gold and commodities. I'm not aware of any investment where you can decouple the two and get something that will go up when the market crashes but has a low loss potential. You are probably asking the impossible.

1404 said:
I'm happy to keep a chunk of money (15%-30% of my investible funds) in cash for this eventuality. I've been doing this for a while. But I was thinking that by having bonds I may actually see some capital gains when the crash happens.

To get that to any appreciable extent, you must hold a longer duration fund, but that will give you interest rate risk. A vanilla gilt fund can (and recently has) gone down 30%+. Maybe a fall of that magnitude is once in a lifetime, but 10-20% falls would not look that out of the ordinary. Here is IGLT, which you proposed above:

Looking at that chart, now seems like a good time to buy that fund.  It is at a historical low.