Gilts, US Treasuries, or both?

leosayer

Personally, I only hold bonds for capital preservation and I am to maintain a 20% allocation to short-term gilts via an iShares fund. 

If equity markets crash then I rebalance back to 80/20 by selling bonds and buying equities and vice-versa.

I don't expect short-term gilts to give me a real-terms return or to be 100% uncorrelated to equity markets because there is plenty of recent evidence that they can sometime be correlated. However they do dampen volatility even if I might feel I have missed out on all of the global equity market gains I could have made in the past 6 months.

Why short-term gilts? Medium or long term gilts are too volatile as been seen in the past 2 years.

Why gilts and not treasuries? I just don't see the point of being exposed to a foreign markets and exchange rates or fx hedging costs for an investment that is only concerned with capital preservation.

1404

leosayer said:

Personally, I only hold bonds for capital preservation and I am to maintain a 20% allocation to short-term gilts via an iShares fund. 

If equity markets crash then I rebalance back to 80/20 by selling bonds and buying equities and vice-versa.

I don't expect short-term gilts to give me a real-terms return or to be 100% uncorrelated to equity markets because there is plenty of recent evidence that they can sometime be correlated. However they do dampen volatility even if I might feel I have missed out on all of the global equity market gains I could have made in the past 6 months.

Why short-term gilts? Medium or long term gilts are too volatile as been seen in the past 2 years.

Why gilts and not treasuries? I just don't see the point of being exposed to a foreign markets and exchange rates or fx hedging costs for an investment that is only concerned with capital preservation.

Gilts wouldn't do a good job of capital preservation if the GBP gets hammered vs the USD during whatever crash was occurring. 

1404

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

masonic

1404 said:

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

You'd be better off with individual index linked gilts. You would be taking on a lot interest rate risk by holding a fund and what would happen when the next wave of inflation comes along?

It may have been an extreme example over the past couple of years, but someone who correctly identified the inflation risk on the horizon and piled into INXG before it bit would be feeling rather sorry for themselves today.

1404

masonic said:

1404 said:

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

You'd be better off with individual index linked gilts. You would be taking on a lot interest rate risk by holding a fund and what would happen when the next wave of inflation comes along?

It may have been an extreme example over the past couple of years, but someone who correctly identified the inflation risk on the horizon and piled into INXG before it bit would be feeling rather sorry for themselves today.

Yes, that is a grim graph.  Their capital would have pretty much halved in that fund since 2022-ish.  

Hoenir

1404 said:

masonic said:

1404 said:

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

You'd be better off with individual index linked gilts. You would be taking on a lot interest rate risk by holding a fund and what would happen when the next wave of inflation comes along?

It may have been an extreme example over the past couple of years, but someone who correctly identified the inflation risk on the horizon and piled into INXG before it bit would be feeling rather sorry for themselves today.

Yes, that is a grim graph.  Their capital would have pretty much halved in that fund since 2022-ish.  

Upside will follow though. 

masonic

Hoenir said:

1404 said:

masonic said:

1404 said:

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

You'd be better off with individual index linked gilts. You would be taking on a lot interest rate risk by holding a fund and what would happen when the next wave of inflation comes along?

It may have been an extreme example over the past couple of years, but someone who correctly identified the inflation risk on the horizon and piled into INXG before it bit would be feeling rather sorry for themselves today.

Yes, that is a grim graph.  Their capital would have pretty much halved in that fund since 2022-ish.  

Upside will follow though. 

Will it though? Long term yields don't look abnormal by historical standards and who can guess what future interest rates will be decades from now?

The trouble with an ETF like this is that it has inflation and interest rates working against each other. This time clearly interest rates won out, but at any time action taken to combat inflation will be a drag on performance for long dated linkers, which are well represented in the index. Whereas with an individual linker, you hold to maturity for a defined index linked return.

1404

How do bond ETFs such as VUYT, IBTM and VGLT pay yields?  Do you have to buy into the fund for a certain length of time?  Or are the yields added to the overall fund and then drip fed into it making your bond investment go up over the course of the year?

masonic

1404 said:

How do bond ETFs such as VUYT, IBTM and VGLT pay yields?  Do you have to buy into the fund for a certain length of time?  Or are the yields added to the overall fund and then drip fed into it making your bond investment go up over the course of the year?

They either pay a distribution like any distributing fund, or reinvest the income like any accumulating fund. You can find details of distributions in the information from the provider.

Hoenir

masonic said:

Hoenir said:

1404 said:

masonic said:

1404 said:

Separate question:  Would getting an index-linked fund be helpful should we get a 2nd wave of inflation soon?  Such as:

IShares GBP Index-Linked Gilts ETF GBP (DIST) INXG

You'd be better off with individual index linked gilts. You would be taking on a lot interest rate risk by holding a fund and what would happen when the next wave of inflation comes along?

It may have been an extreme example over the past couple of years, but someone who correctly identified the inflation risk on the horizon and piled into INXG before it bit would be feeling rather sorry for themselves today.

Yes, that is a grim graph.  Their capital would have pretty much halved in that fund since 2022-ish.  

Upside will follow though. 

Will it though? Long term yields don't look abnormal by historical standards and who can guess what future interest rates will be decades from now?

Mathematical reversion. ILG's were extremely expensive and were offering negative real returns at a point in time. Easy to get your fingers burnt holding individual ones.