Bonds question

dunstonh

Prior to the Truss mini budget, I believed that bonds were a safe place to place wealth into (particularly as company pension schemes tend to rebalance in favour of bonds as retirement age approaches).

They were falling before Truss and they have fallen further since Truss

The correct answer to all financial and retirement questions seems to be "it depends" 

Markets will act within their typical range 95% of the time.  5% of the time they will act outside of that range.   So, rare events will occur.

OliverLacon

I'm receiving a small DB pension currently. I'll get the state pension later this year. My DC pension is deferred, but not cashed in yet. The split on that one is 70% equities 30% bonds/cash. I don't actually need to  access the DC pension just yet. If I opt to take the DC as draw down at some point, would 50:50 be suitable once it is in draw down - or some other ratio?

Marcon

OliverLacon said:

I'm receiving a small DB pension currently. I'll get the state pension later this year. My DC pension is deferred, but not cashed in yet. The split on that one is 70% equities 30% bonds/cash. I don't actually need to  access the DC pension just yet. If I opt to take the DC as draw down at some point, would 50:50 be suitable once it is in draw down - or some other ratio?

What's your attitude to risk?

MarkCarnage

OliverLacon said:

MarkCarnage said:

You will still get your £100 back at maturity, but it isn't worth that if you want to sell it now. 

.

My (incorrect) belief was that pension funds kept the bonds until maturity. If that had been the case, then there would have been no risk or loss to any investment. What I didn't realise was that pension funds were buying and selling pre-existing bonds. Before the events that unfolded after that mini budget ,I'm sure  most people thought that any pension savings that had been moved to bonds could not fall in value. 

They still have to value at current market prices. The specific issue surrounding defined benefit pension funds at the time of the Truss fiasco was that many of them had leveraged their bond holdings to seek to neutralise the short term valuation risks of their liabilities. The sharp downward move in bond prices (and upward move in yields) left them exposed to paying collateral on that 'hedging' strategy. Some had to sell bond holdings to meet these collateral calls, and it became a vicious spiral....
Not sure where the assertion in your last sentence comes from. Bonds will typically be less volatile than equities, but the situation of coming out of a period of artificially low interest rates, coupled with the leverage of DB pension funds outlined above, led to sharp falls in bond prices which hadn't been seen before. 
Unless you are intending to buy an annuity (in which case holding bonds is a fairly sensible strategy), or you expect to need all your fund within less than about 5 years, then holding it all in bonds probably isn't wise. 

OliverLacon

MarkCarnage said:

OliverLacon said:

MarkCarnage said:

You will still get your £100 back at maturity, but it isn't worth that if you want to sell it now. 

.

My (incorrect) belief was that pension funds kept the bonds until maturity. If that had been the case, then there would have been no risk or loss to any investment. What I didn't realise was that pension funds were buying and selling pre-existing bonds. Before the events that unfolded after that mini budget ,I'm sure  most people thought that any pension savings that had been moved to bonds could not fall in value. 

Not sure where the assertion in your last sentence comes from. 

I think that most people that are in a company pension scheme were under the impression that their savings were de-risked as they neared retirement age. Unless the saver is well informed regarding the reason why the value of bonds might fall, they would assume that if their money is  invested in government bonds with  a guaranteed value upon maturity - then their money would be safe. I thought that, and I'm sure than many others did too. I now understand this subject better - and can see why the apparent safety of bonds still has a risk.

OliverLacon

Marcon said:

What's your attitude to risk?

I don't mind a degree of risk as I have a small DB income and later this year the state pension. I also have cash ISAs and other savings equal to about 3 years worth of day to day living expenses.

Linton

OliverLacon said:

I'm receiving a small DB pension currently. I'll get the state pension later this year. My DC pension is deferred, but not cashed in yet. The split on that one is 70% equities 30% bonds/cash. I don't actually need to  access the DC pension just yet. If I opt to take the DC as draw down at some point, would 50:50 be suitable once it is in draw down - or some other ratio?

Rather than choose an arbitrary ratio I suggest you base your allocation on your plans for the money.  Anything you are likely to take in the next 5 years should be in cash or short dated bonds.  Anything for the long term, say >10 years, can be in equities.  

MarkCarnage

OliverLacon said:

MarkCarnage said:

OliverLacon said:

MarkCarnage said:

You will still get your £100 back at maturity, but it isn't worth that if you want to sell it now. 

.

My (incorrect) belief was that pension funds kept the bonds until maturity. If that had been the case, then there would have been no risk or loss to any investment. What I didn't realise was that pension funds were buying and selling pre-existing bonds. Before the events that unfolded after that mini budget ,I'm sure  most people thought that any pension savings that had been moved to bonds could not fall in value. 

Not sure where the assertion in your last sentence comes from. 

I think that most people that are in a company pension scheme were under the impression that their savings were de-risked as they neared retirement age. Unless the saver is well informed regarding the reason why the value of bonds might fall, they would assume that if their money is  invested in government bonds with  a guaranteed value upon maturity - then their money would be safe. I thought that, and I'm sure than many others did too. I now understand this subject better - and can see why the apparent safety of bonds still has a risk.

There is still that guaranteed value on maturity...a nominal value for conventional government bonds, and a real value for index linked bonds. However, it's what happens on the journey to maturity...
'De risking' is not as simple as it may sound....moving into bonds would represent 'de-risking' if the intention was to buy an annuity at retirement. However, if it was to use drawdown, then moving most or all to bonds would not be a good idea in general, particularly in the run up to 2022 when many government bonds were a case of return free risk.....
Nominal bonds also don't provide protection against inflation risk, which matters.