Bond fund yields

aroominyork

I have a few questions about bond fund yields. First, what is the best way to get an accurate forward/distribution yield? Is HL accurate, showing eg 3.97% for Fidelity’s gilt fund?  Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)? Third, and if HL’s yield is reasonably accurate, what point is there is holding a global bond fund yielding more than a per cent less than the gilt fund, aside from slightly shorter duration/volatility? It is just for the diversification?

Beddie

Re. your second point - you need to look at total returns, not just yield. The latter fund has done much better in that respect, as you'd expect. Just look at the last 12 months for example. Active bond funds have been much better too, worth paying a manager for in my view.

DRS1

Pensioncraft have some videos on youtube about Gilts and funds.  I am sure one of them explains the difference but I can't find it now.  It might be this one (halfway through)
Creating A Bond Ladder For Passive Income
Anyway one point to note is that the gilts may mature but the fund doesn't.  Indeed most funds don't hold the gilts to maturity so you don't know what price they will get when the gilt is sold.
Another thing is taxation if you hold the fund and you make a gain when you sell it that may be subject to CGT whereas if you hold the gilt and make a gain when you sell or it matures it is CGT free.
As to the two bond funds you mention they are quite different beasts - as you say the second one gives you a lot of diversification while the first is pure UK.

masonic

aroominyork said:

I have a few questions about bond fund yields. First, what is the best way to get an accurate forward/distribution yield? Is HL accurate, showing eg 3.97% for Fidelity’s gilt fund?

Probably, here is the information in the monthly factsheet from the end of October:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

aroominyork said:

Third, and if HL’s yield is reasonably accurate, what point is there is holding a global bond fund yielding more than a per cent less than the gilt fund, aside from slightly shorter duration/volatility? It is just for the diversification?

Fortunately Vanguard publishes more useful data in its funds (though you need to use their professional subsite to obtain it). The YTM of their global bond index fund is 3.9%, so only about 0.5% lower than a gilt of the same duration. But of course it will be less sensitive to UK interest rates. That comes with the risk that its 50% US bonds might not respond well if Trump renews his rhetoric about defaulting on foreign debt or interfering in the FOMC. But some of that 50% will be corporate debt, currency hedging may dampen any effect, and chances are US treasuries will continue to be one of the best places to be in a storm.

aroominyork

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

masonic said:

Fortunately Vanguard publishes more useful data in its funds (though you need to use their professional subsite to obtain it). The YTM of their global bond index fund is 3.9%, so only about 0.5% lower than a gilt of the same duration.

For others' info, this is what masonic is pointing to https://www.vanguard.co.uk/professional/product/fund/bond/9142/global-bond-index-fund-gbp-hedged-acc

OldScientist

aroominyork said:

I have a few questions about bond fund yields. First, what is the best way to get an accurate forward/distribution yield? Is HL accurate, showing eg 3.97% for Fidelity’s gilt fund?  Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)? Third, and if HL’s yield is reasonably accurate, what point is there is holding a global bond fund yielding more than a per cent less than the gilt fund, aside from slightly shorter duration/volatility? It is just for the diversification?

1) According to https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000015K8C&tab=3 the yield to maturity of the fidelity fund is 4.5% (as at end of October 2024). The distribution yield is (last distribution)/NAV extrapolated to the next 12 months so is backward looking. If yields are going up, this will be an underestimate while if yields are going down then it will be an overestimate.

2) There will be a correlation between the NAV of a distributing fund and the gilt price provided their durations are similar (this is less true for non-parallel shifts in the yield curves, but is otherwise a reasonable approximation).

3) Diversification is one consideration (e.g., in the unlikely event of a UK debt default). The vanguard global bond fund also holds investment grade corporate bonds which will (probably) increase the return, but at the expense of a slightly higher correlation with equity returns. Shorter duration UK funds are available (e.g., under 5 year gilts and under 10 year gilts funds) if volatility is a concern.

FWIW, since I have a DB pension in payment I am already exposed to quite a lot of UK (inflation linked) gilts and have chosen to hold global bonds (including the vanguard 'short' version) for some diversification in fixed income.


Just an additional comment on bond ladders vs funds (since it has been raised in the thread)

1) In a collapsing (aka non-rolling) ladder, typically comprised of inflation linked gilts, the maturing bonds and coupons are spent. This is different to a bond fund and will behave differently.

2) In a rolling bond ladder the proceeds from maturing gilts and coupons are reinvested in further gilts and is functionally the same as a bond fund with the same weighted duration. Differences lie in fees (transaction fees and bid-ask spreads for the ladder vs fund fees for the fund), taxation when held in a GIA, and, potentially, a difference in how proceeds are reinvested across maturities. I note that the FTSE 'all stocks', 'under 5 years', and 'under 10 years' indices (and funds that follow these indices) all hold gilts until maturity. The MSCI indices (and, AFAIK, virtually all US and international bond indices) tend to have a low maturity cutoff of 1 year.

masonic

aroominyork said:

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

It is not as important to match the yield as to match the duration. There will be some effect from the more favourable tax treatment of low coupon gilts, but you should be able to see from the tables that it doesn't make much difference, especially out at longer durations. But the longer the duration the more different the "average" composition of the fund will be to today's composition over that duration period.

aroominyork

masonic said:

aroominyork said:

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

It is not as important to match the yield as to match the duration. There will be some effect from the more favourable tax treatment of low coupon gilts, but you should be able to see from the tables that it doesn't make much difference, especially out at longer durations. But the longer the duration the more different the "average" composition of the fund will be to today's composition over that duration period.

But doesn't a higher coupon equate to a shorter duration? Surely with a zero-coupon bond, the bond's time to maturity is equal to its duration. When a coupon is added, the duration is less than time to maturity, and the larger the coupon the shorter the duration. (For my purposes it will make little difference which I choose but it is good to grasp the theory.)

Edit: though it's an interesting question how much yield difference is down to duration and how much to tax treatment. TY25 3.5% with 334 days to maturity yields 4.589%. T26 0.125% with 434 days to maturity yields 3.99%. That's a material difference in yield.

MK62

aroominyork said:

masonic said:

aroominyork said:

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

It is not as important to match the yield as to match the duration. There will be some effect from the more favourable tax treatment of low coupon gilts, but you should be able to see from the tables that it doesn't make much difference, especially out at longer durations. But the longer the duration the more different the "average" composition of the fund will be to today's composition over that duration period.

But doesn't a higher coupon equate to a shorter duration? Surely with a zero-coupon bond, the bond's time to maturity is equal to its duration. When a coupon is added, the duration is less than time to maturity, and the larger the coupon the shorter the duration. (For my purposes it will make little difference which I choose but it is good to grasp the theory.)

Edit: though it's an interesting question how much yield difference is down to duration and how much to tax treatment. TY25 3.5% with 334 days to maturity yields 4.589%. T26 0.125% with 434 days to maturity yields 3.99%. That's a material difference in yield.

It is.......it might be to do with the fact that low coupon gilts might be a bit more in demand atm due to the tax position of gilts for those who invest outside of an ISA/pension.

masonic

aroominyork said:

masonic said:

aroominyork said:

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

It is not as important to match the yield as to match the duration. There will be some effect from the more favourable tax treatment of low coupon gilts, but you should be able to see from the tables that it doesn't make much difference, especially out at longer durations. But the longer the duration the more different the "average" composition of the fund will be to today's composition over that duration period.

But doesn't a higher coupon equate to a shorter duration? Surely with a zero-coupon bond, the bond's time to maturity is equal to its duration. When a coupon is added, the duration is less than time to maturity, and the larger the coupon the shorter the duration. (For my purposes it will make little difference which I choose but it is good to grasp the theory.)

Edit: though it's an interesting question how much yield difference is down to duration and how much to tax treatment. TY25 3.5% with 334 days to maturity yields 4.589%. T26 0.125% with 434 days to maturity yields 3.99%. That's a material difference in yield.

The coupon is a function of the interest rate landscape when the gilt was issued. The price and YTM normalises to the current yield curve, which may vary in shape depending on the economic conditions of the day. Things like tax treatment will distort things a bit, but the effect usually isn't large.

MK62

masonic said:

aroominyork said:

masonic said:

aroominyork said:

masonic said:

aroominyork said:

Second, to what degree is there a correlation between a gilt fund and a nominal gilt with a similar duration (or is it the maturity of the fund I should be looking at?)?

As Beddie suggests, it is the YTM that you'd expect to line up with a gilt. So take TR33, with a current YTM of 4.4%. This is roughly what you'd expect this fund to return if it wound down its portfolio from here. If it buys additional gilts as others mature, as surely it will, then the actual return will depend on the YTM of those too.

Many thanks for this. To compare a gilt fund with a nominal gilt is it important to choose a nominal gilt with a similar yield? For example, if looking at a very long duration gilt fund yielding around 4%, TR60 and TR63 both have 4% coupons and yield 4.84%; TG61, coupon 0.5%, yields 4.46%. Would it be important to choose TR60/TR63 to give similar duration and hence similar responses to interest rate changes?

It is not as important to match the yield as to match the duration. There will be some effect from the more favourable tax treatment of low coupon gilts, but you should be able to see from the tables that it doesn't make much difference, especially out at longer durations. But the longer the duration the more different the "average" composition of the fund will be to today's composition over that duration period.

But doesn't a higher coupon equate to a shorter duration? Surely with a zero-coupon bond, the bond's time to maturity is equal to its duration. When a coupon is added, the duration is less than time to maturity, and the larger the coupon the shorter the duration. (For my purposes it will make little difference which I choose but it is good to grasp the theory.)

Edit: though it's an interesting question how much yield difference is down to duration and how much to tax treatment. TY25 3.5% with 334 days to maturity yields 4.589%. T26 0.125% with 434 days to maturity yields 3.99%. That's a material difference in yield.

The coupon is a function of the interest rate landscape when the gilt was issued. The price and YTM normalises to the current yield curve, which may vary in shape depending on the economic conditions of the day. Things like tax treatment will distort things a bit, but the effect usually isn't large.

Hmmm.......depends on the investor. This website shows the YTM and the effective YTM for a 40% taxpayer.....https://www.yieldgimp.com/gilt-yields

From there you can see that while the YTM for TY25 3.5% is 4.57%, it's YTM for a 40% taxpayer is 3.16%.
Conversely it shows that the YTM for T26 0.125% is 3.96%, while the YTM for a 40% taxpayer is 3.91%.
This is due to the tax treatment of gilt coupons vs capital gain.......low coupon gilts are more desirable for those who must pay HR tax on their gilt returns.......of course, this consideration doesn't apply if investing in an ISA or pension.

The site also shows the equivalent rate a HR taxpaying investor would need to get on a cash deposit account to equal the net yield from a gilt.....not hard to see why investing in gilts is popular with some HR taxpayers, and why low coupon gilts are more popular with such investors.