gov bond funds haven’t increased in value

Anx

Over the past year I have been purchasing government bond funds:

vgov
vanguard long duration gilt
royal London international gov fund (hedged)
Ishares us treasury eft (hedged)

overall I am sitting on a small loss. I thought that once the boe made it clear they would start reducing rates the gilt funds would at least increase in value but this hasn’t happened. Was I foolish to assume this?

should I just accept gov bond funds aren’t going to increase in value and I should just a take the yield and the insurance they offer in case of a crash??

I think 4 funds is too much and I will sell the long duration gilts. 

The royal London fund didn’t do as well as the gilt or us treasury funds during the covid crash but has generally performed better overall. 

Is it worth keeping; Will gilts and us gov fund offer enough diversification?

lastly I decided against having any corporate bond funds as I kept reading they don’t offer any meaningful protection against a crash.

masonic

Gilts are priced according to interest rate expectations of about 4% in the medium to long term. That is somewhat of a recovery from the Liz Truss era. Base rate is currently 1.25% higher than that, so there is plenty of scope for rate cuts without the prospect of medium-long bonds being impacted very much if at all.

The price may have fallen, but they yield you are getting from the funds is much better than it was a couple of years ago. Over the long term your total return will be better than it would have been if rates stayed at historic lows. Gilts are also priced to allow for them to behave more like they have in the past, and perhaps hold their value or rise when equities are crashing. So there is more of an investment case now than there was during the end of the ultra-low interest rate era.

aroominyork

Interesting to see the Royal London International Government Bond fund. I thought the only way to get exposure to global/developed world govt bonds was IGLH. The RL fund is (from current facstsheets) slightly shorter duration than IGLH which might explain why it has performed better (about 6% better) over the last three years.

Albermarle

There was plenty of advice/comment around 6/9/12 months ago that buying gilts was a no brainer, as following the slump in their price, then the only way was up with interest rate reductions on the horizon.
Gilt prices did in fact rise significantly, but the lowering of expectations about the speed and size of interest rate cuts, has meant prices have slid back to some extent.

dunstonh

overall I am sitting on a small loss. I thought that once the boe made it clear they would start reducing rates the gilt funds would at least increase in value but this hasn’t happened. Was I foolish to assume this?

95% of the time, bond fund unit prices with income units will pretty much remain within a narrow band going up and down but not actually see any growth over the long term.

There will be some bounce from the overselling of the last couple of years but not yet (we had it in Q4 2023 but markets lost confidence on rate drop speed and that unwound early 2024).

should I just accept gov bond funds aren’t going to increase in value and I should just a take the yield and the insurance they offer in case of a crash??

Yes.  You should not expect long term growth.  It's just a short-medium-term wavy line (typically played out over a decade cycle)

Is it worth keeping; Will gilts and us gov fund offer enough diversification?

It depends on your modelling and objective.   We use a general gilt fund, a short term global bond (hedged), a global bond fund (hedged), index linked gilts and inv grade bonds in our bond spread.

lastly I decided against having any corporate bond funds as I kept reading they don’t offer any meaningful protection against a crash.

Depends on what types of corporate bonds you are talking about.  And remembering that gilts suffered up to 40% drops over the last few years which is comparable with the two largest equity drops in the last 30 years.

Beddie

If you want to have a bit more "fun" with bonds, maybe go for something like this:

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/man-glg-sterling-corporate-bond-professional-c-accumulation

Or are corporate bonds really outside your attitude to risk? Yes, it's active with higher charges than trackers, but the bond sector benefits from a selective approach, in my view.

aroominyork

Beddie said:

If you want to have a bit more "fun" with bonds, maybe go for something like this:

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/man-glg-sterling-corporate-bond-professional-c-accumulation

Or are corporate bonds really outside your attitude to risk? Yes, it's active with higher charges than trackers, but the bond sector benefits from a selective approach, in my view.

I think it's a very good fund and I own it, but it's not appropriate for someone looking at government bonds to "take the yield and the insurance they offer in case of a crash". The only sensible way for that kind of investor to buy corporate bonds is through a high quality aggregate bond fund (about 60% govt, 40% corporate) such as Vanguard's hedged global bond index fund which usually performs similarly to a govt bond fund.

dunstonh

Here is a gilt fund from 1995 onwards with income units showing unit price (income withdrawn) and total return (income reinvested)



You can see the green income withdrawn line was very mild from 95 to the credit crunch largely following the direction of interest rates.   Then you have the post credit crunch abnormality which then unwound from Nov 2021 to late 2023.

There is an argument to be made that gilts may not bounce and will go back to the 1990s/early 00s range as nobody expects interest rates to return to post-crunch levels (along with other post-crunch measures).  Where we are now could be the full unwind of the bubble.

GeoffTF

aroominyork said:

Beddie said:

If you want to have a bit more "fun" with bonds, maybe go for something like this:

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/man-glg-sterling-corporate-bond-professional-c-accumulation

Or are corporate bonds really outside your attitude to risk? Yes, it's active with higher charges than trackers, but the bond sector benefits from a selective approach, in my view.

I think it's a very good fund and I own it, but it's not appropriate for someone looking at government bonds to "take the yield and the insurance they offer in case of a crash". The only sensible way for that kind of investor to buy corporate bonds is through a high quality aggregate bond fund (about 60% govt, 40% corporate) such as Vanguard's hedged global bond index fund which usually performs similarly to a govt bond fund.

VAGS is very similar but cheaper:

https://www.vanguard.co.uk/professional/product/etf/bond/9685/global-aggregate-bond-ucits-etf-gbp-hedged-accumulating

The average credit rating is the same as for gilts, but the spread of risk is much wider. There is a wide range of types of issuer, but Treasury/Federal is the largest category at just over 50%. The percentage of corporate bonds is much less than 40%.

Hoenir

Anx said:

overall I am sitting on a small loss. I thought that once the boe made it clear they would start reducing rates the gilt funds would at least increase in value but this hasn’t happened. Was I foolish to assume this?

If you can answer the question when. Then you know more that both the BOE and the global markets. Data drives decisions. Data changes. Words are soon forgotten. 

Altior

It's very much a slow play Anx, once the risk free rate falls then we'll see what happens (if it falls). In the meantime, I'm accumulating in this space. If only the lockdown crash in equities lasted more than 5 minutes!

When the base rate started normalising after the extended period of near zero, it was wall to wall coverage of the so called cost of living crisis, every man and his dog struggling to pay their mortgage, demand for the taxpayer to step in, huge repo risk, even ludicrous suggestions of mortgage bailouts. And we got the mortgage charter. I anticipated there to be a big narrative/political pressure to cut as soon as the variables suggested the conditions were right to do so (ie inflation rapidly falling). Inflation has indeed rapidly fallen (forecasted to fall further), a variable we are told is very much a lagging indicator. However, next to nothing, the pressure in the narrative I expected has failed to materialise (so far). Almost like all of the public's mortgage woes have disappeared. Who knows whether that pressure influences the BoE or not, but that was the direction on sentiment I'd anticipated. As I've noted on here in the past however, in the real world we are waiting on the US. So the slow play continues for the time being (I expect it to be linked to the potus election),