Shortening duration

aroominyork

Global events seem to signal a fair chance of a slowing in the speed that base/bank rates will fall so I am shortening duration on fixed interest. Are others making any changes?

InvesterJones

If you think rates might rise, then fair enough. I'm not sure a slowing (compared to..?) is having any effect on ratio of yield long term to short, the inversion has pretty much disappeared entirely by now.

aroominyork

I wouldn't bet on them rising, but a slowdown in rate cuts would reduce prices for medium-term bonds and hit bond index funds. That seems reasonably likely.

masonic

For context:

https://www.bankofengland.co.uk/statistics/yield-curves

Is your thinking that the increase that has happened over the last month has not gone far enough?

GeoffTF

The markets and the central banks both have a dreadful record of predicting future interest rates. The truth is that nobody knows. A change from nobody knows to nobody knows does not amount to much. My bonds are all index linked or short duration, with a little medium duration. I am doing what I always do. Little or nothing.

aroominyork

masonic said:

For context:

https://www.bankofengland.co.uk/statistics/yield-curves

Is your thinking that the increase that has happened over the last month has not gone far enough?

Putting aside whether the UK mirrors global... my hunch is that the slight increase from blue to red does not sufficiently reflect what is happening. In the short term I cannot see base rate reductions speeding up, but I can see them slowing down, so there is more potential upside than downside in staying in cash or very short duration (eg CSH2) than a medium term index fund.

GeoffTF said:

The markets and the central banks both have a dreadful record of predicting future interest rates. The truth is that nobody knows. A change from nobody knows to nobody knows does not amount to much. My bonds are all index linked or short duration, with a little medium duration. I am doing what I always do. Little or nothing.

So you are already nicely set!

masonic

aroominyork said:

Putting aside whether the UK mirrors global... my hunch is that the slight increase from blue to red does not sufficiently reflect what is happening. In the short term I cannot see base rate reductions speeding up, but I can see them slowing down, so there is more potential upside than downside in staying in cash or very short duration (eg CSH2) than a medium term index fund.

You didn't mention the geography of holdings before now, only global events. If you hedge your international bonds, then it becomes even more difficult to understand what impact events would have as interest rate policy will impact currency strength. I'm not feeling that the returns on offer from US Treasuries at the moment are sufficient for the amount of crazy emanating from that part of the world. For example, the orange one's nominee to chair the Council of Economic Advisers plans to force creditors to swap their shorter duration Treasuries for 50 or 100 year bonds, or the impose a "user fee" on holdings. Then there is the Eurozone, where the US apparently switching sides in the Russia-Ukraine conflict is going to have the greatest impact. I still have a legacy holding of international bonds, but anything I decided to sell would not be reinvested there.

My focus so far in 2025 is gilts, and I am making monthly contributions into short-dated index linked gilts. I also invested into two flat gilts in January, which still have a YTM of about 4.9% between them based on their current price. At one point when I'd made a 4% capital gain in two weeks, I'd considered selling and reducing duration, but wanted to avoid playing the trading game. I'd sell them in the event of a very large equities crash in order to rebalance, but otherwise I'm content to hold to maturity. My linkers, which will end up being a more significant holding, insure me somewhat against interest rates going up beyond 5% in the medium term.

I don't really like the look of short-dated flat gilts. Locking in a YTM of just over 4% does not look like a very good idea when there is doubt over future rate cuts. A MMF looks to be the better option for now, and potentially consumer savings products if MMF returns fall.

aroominyork

I’ve don’t understand the intricacies of linkers enough to buy them. Maybe one day when I am feeling brave…

I agree that short dated nominal gilts don’t look great, but if they are low coupon and unwrapped they are in the same ballpark as MMFs (esp. after CGT on CSH2 hiked to 18%). My default for fixed interest is Vanguard Global Bond Index, so I tend to start from there and look at what needs adjusting and, if wrapped, MMFs feel comfortable at the moment.

masonic

aroominyork said:

I’ve don’t understand the intricacies of linkers enough to buy them. Maybe one day when I am feeling brave…

I agree that short dated nominal gilts don’t look great, but if they are low coupon and unwrapped they are in the same ballpark as MMFs (esp. after CGT on CSH2 hiked to 18%). My default for fixed interest is Vanguard Global Bond Index, so I tend to start from there and look at what needs adjusting and, if wrapped, MMFs feel comfortable at the moment.

Unwrapped is yet another factor that can change what is best. All of my bond holdings are wrapped (as is my small holding of CSH2). Hence I can go for high coupon and get better returns owing to the distortion in the market that increases the price of low coupon. All I have unwrapped is consumer savings products, earning a weighted average interest rate of 5.3%, equivalent to 4.5% after tax allowing for personal savings allowance.

Hoenir

GeoffTF said:

The markets and the central banks both have a dreadful record of predicting future interest rates.

Central Banks don't predict interest rates though. 

Markets are just second guessing.

Without clairvoyant powers forecasting of any kind needs to be taken with a pinch of salt.