Gilts, US Treasuries, or both?

masonic

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

1404

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

masonic

1404 said:

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

Absolutely. They are currently valued to adjust their coupons for today's prediction of long term rates being around 3.5%. If future interest rates are higher then they will devalue further. That's most likely to happen when inflation is high and will limit the benefit of holding index linked gilts. It's how long duration bond prices work, and the average linker is pretty long duration.

Hence why buying the index vs individual short dated linkers is risky. Individual linkers will give you an investment with the benefit of index linking without countering the gains with falls due to rising interest rates at precisely the time inflation protection is most useful.

1404

masonic said:

1404 said:

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

Absolutely. They are currently valued to adjust their coupons for today's prediction of long term rates being around 3.5%. If future interest rates are higher then they will devalue further. That's most likely to happen when inflation is high and will limit the benefit of holding index linked gilts. It's how long duration bond prices work, and the average linker is pretty long duration.

Hence why buying the index vs individual short dated linkers is risky. Individual linkers will give you an investment with the benefit of index linking without countering the gains with falls due to rising interest rates at precisely the time inflation protection is most useful.

Is there an ETF for the types of bonds you are referring to?

InvesterJones

1404 said:

masonic said:

1404 said:

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

Absolutely. They are currently valued to adjust their coupons for today's prediction of long term rates being around 3.5%. If future interest rates are higher then they will devalue further. That's most likely to happen when inflation is high and will limit the benefit of holding index linked gilts. It's how long duration bond prices work, and the average linker is pretty long duration.

Hence why buying the index vs individual short dated linkers is risky. Individual linkers will give you an investment with the benefit of index linking without countering the gains with falls due to rising interest rates at precisely the time inflation protection is most useful.

Is there an ETF for the types of bonds you are referring to?

ETFs (ie bond funds) are risky for the reasons already given above. Better to buy individual index linked gilts to avoid valuation losses.

iBonds are a possible exception as they have a fixed maturity, though not sure if there is an index linked version.

1404

InvesterJones said:

1404 said:

masonic said:

1404 said:

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

Absolutely. They are currently valued to adjust their coupons for today's prediction of long term rates being around 3.5%. If future interest rates are higher then they will devalue further. That's most likely to happen when inflation is high and will limit the benefit of holding index linked gilts. It's how long duration bond prices work, and the average linker is pretty long duration.

Hence why buying the index vs individual short dated linkers is risky. Individual linkers will give you an investment with the benefit of index linking without countering the gains with falls due to rising interest rates at precisely the time inflation protection is most useful.

Is there an ETF for the types of bonds you are referring to?

ETFs (ie bond funds) are risky for the reasons already given above. Better to buy individual index linked gilts to avoid valuation losses.

iBonds are a possible exception as they have a fixed maturity, though not sure if there is an index linked version.

Why do people buy Treasuries/Gilts ETFs then (such as the ones I've mentioned:  IGLT (gilts), and VUTY & IBTM (Treasuries)?

These are huge ETFs.  Are all the people invested in them just gamblers who're onto a hiding to nothing?  Does avoiding valuation losses on the individual gilts also mean you avoid valuation gains should interest rates go down?

masonic

1404 said:

masonic said:

1404 said:

masonic said:

Hoenir said:

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.  

Indeed, but anyone buying in after others have been burned expecting reversion to those extreme valuations in the future is likely to be disappointed. For there to be a "recovery" in that sense, we'd likely need another decade of near zero interest rates rather than the 2010s being a historical anomaly. Most likely, as others pointed out earlier in the thread, that crash was the mathematical reversion and there will be no meaningful reversal to higher valuations.

Is there much chance of lower valuations for these bond funds though?

Absolutely. They are currently valued to adjust their coupons for today's prediction of long term rates being around 3.5%. If future interest rates are higher then they will devalue further. That's most likely to happen when inflation is high and will limit the benefit of holding index linked gilts. It's how long duration bond prices work, and the average linker is pretty long duration.

Hence why buying the index vs individual short dated linkers is risky. Individual linkers will give you an investment with the benefit of index linking without countering the gains with falls due to rising interest rates at precisely the time inflation protection is most useful.

Is there an ETF for the types of bonds you are referring to?

There are no short dated linker funds, and this has been noted over the years in several publications and here on the forum. The reason why is a matter of opinion, but my take on it is that there are too few short dated index linked gilts in circulation to meet the minimum requirements for running a fund. There are a handful of short dated global inflation linked bond funds, and there are funds and ETFs for short dated US TIPS (e.g. TP05). NS&I Index Linked Savings Certificates used to fulfil this role for UK consumers, but obviously aren't available now and have had their inflation linking weakened for existing holders.

Coming back to your objective: "I would like something which will preferably go up when the market crashes. Not something which will itself crash.", this sort of investment would meet the second part of your criteria, but not the first.

1404 said:

Why do people buy Treasuries/Gilts ETFs then (such as the ones I've mentioned:  IGLT (gilts), and VUTY & IBTM (Treasuries)?

These are huge ETFs.  Are all the people invested in them just gamblers who're onto a hiding to nothing?  Does avoiding valuation losses on the individual gilts also mean you avoid valuation gains should interest rates go down?

The previous few posts were discussing inflation linked bonds, those are nominal bond funds. There are plenty of short dated versions of these available, and money market funds would be at the extreme end.

Longer duration bond funds serve two primary purposes. Long duration bonds can serve as a (partially) negatively correlated asset in a mixed asset portfolio and allow a higher proportion equities to be held for the same level of risk as compared with cash-like investments, for investors with a more limited risk tolerance (so for example instead of having 50:50 equities/cash, the same volatility may be achieved through a 60:40 equities/bonds portfolio - numbers just for illustrative purposes, I haven't done the actual analysis). The negative correlation only works in certain circumstances (e.g. in the absence of high inflation, and when interest rates can be cut). However, equities and bonds can crash at the same time, and bonds can crash independently of equities (as we have seen recently).

The other main purpose, and probably the primary purpose, is to provide an income for life for an individual. In this case the capital value is irrelevant as long as the income continues to be paid out. The main purchasers of government bonds are annuity providers and pension funds. They are still used to lifestyle the portfolios of retirees ahead of their retirement and when they eventually buy an annuity their pension fund will be already be invested in alignment with the investment strategy the annuity provider will use to provide their lifetime income, which reduces uncertainty over the level of pension income that can be expected in the years leading up to retirement. But many retirees today opt for drawdown instead of buying an annuity, and remain invested in equities in retirement.

People who invest heavily in bonds are not usually gamblers, because there is not much upside potential in bond investing. Rather, based on those who have been kind enough to post threads here, they tend to be very risk averse investors who did not appreciate the downside potential of a portfolio heavily in bonds, and may have invested under advice. They will have a long term investment plan that does not involve short term speculation. Hence they have suffered the pain of the last few years, but looking ahead over the next decades, they either have an enhanced annuity rate or stable distribution income to look forward to, so need to focus away from the short term capital losses they have suffered.

Coming back to your objective: "I would like something which will preferably go up when the market crashes. Not something which will itself crash.", this sort of investment would meet the first part of your criteria, but not the second.