What does the Bonds "performance" Chart mean?

MetaPhysical

How do I interpret this please?  I understand the decline in bonds at the 2022 mini-budget but to my eyes it looks like there hasn't been a "recovery" back to the 2020-2021 levels??  If an equities fund graph looked like that it would not be so good.  I get it that bonds work differently and their value depends on interest rates etc.  Looking at that graph I would be disinclined to invest in that bond fund because I would have thought a progression to the upper right would be the desired graph plot.  There is something about bonds that I am missing.

Thanks in advance.

eskbanker

Bonds are traditionally used to dampen volatility rather than to deliver sparkling returns comparable to equities, but recovery from the 2022 dip has indeed been fairly sedate....

Albermarle

Prior to Covid, interest rates were very low, which meant bond prices had increased significantly.
As interest rates have normalised it will take a long time for bond prices to recover fully.

In the previous decade, bond funds performed much more positively than historically, due to the super low interest rate after the GFC of 2008. 

dunstonh

 I understand the decline in bonds at the 2022 mini-budget but to my eyes it looks like there hasn't been a "recovery" back to the 2020-2021 levels?? 

The mini budget isn't the cause of the drop.  Its a bit of noise that didn't help but bonds suffered their worst decline in over 100 years.  Mainly on the back of the ending of quantitative easing, rising interest rates and rising inflation.    That was always going to happen as a return with a return to normal but it was accelerated faster than expected due to the Russian invasion of Ukraine the knock on impact.

Bond markets play out over decades normally.  Not months or years.    Also, depending on when you invested, you may never see a "recovery" in unit price on the inc version as that would require interest rates to fall back to post credit crunch levels.  Something that hasn't been the case in hundreds of years.

 If an equities fund graph looked like that it would not be so good.  

Plenty of times equities have looked like that (or similar enough).   If you look at equities from 01/01/2000, they are lower in 2008 than they were in 2000.

 Looking at that graph I would be disinclined to invest in that bond fund because I would have thought a progression to the upper right would be the desired graph plot.  There is something about bonds that I am missing.

You are missing the fact that past performance is not a guide to future returns.

Bond funds did exceptionally well post-credit crunch, but that always had to unwind. A good guide is to look at the fund's income unit.  Not the Acc unit.   As bonds are all about yield, the unit price of the income unit will move based on retained income and market sentiment.    However, it will always remain within a band.   When it's at the upper end of the band, then at some point it will start to fall back (typically as interest rates rise but events can also cause sentiment to impact too).

Take a look at the following.   Blue is the income unit with income not reinvested - i.e. just unit price.  Red is reinvestment (equiv to the Acc unit).



You can see how events over the decades saw the cycle largely follow interest rates and a bit of market sentiment but largely stay within the band.   Post credit crunch, you had tiny interest rates and the unit price went up much higher.  But as interest rates returned to their more typical range, the unit price also returned to its more typical range.

So, now many bond types are back where you would expect them to be.   Hence your comment " I would be disinclined to invest in that bond fund"  would be wrong because with your current viewpoint, you would likely have invested in 2020 with a decade of way above average growth but less likely to invest after a significant fall that has made them more attractive (for what they are).

MetaPhysical

Thank you everyone for the commentary.  So do I take it that it doesn't matter really what the current price on the bond chart is?  If I buy the fund all that matters is that it doesn't - hopefully - decrease?

I want to buy some bonds for my SIPP to diversify from my heavy equity allocation and I am not sure which ones to go for.  The Vanguard fund on the original post is one that has been recommended.

wmb194

MetaPhysical said:

Thank you everyone for the commentary.  So do I take it that it doesn't matter really what the current price on the bond chart is?  If I buy the fund all that matters is that it doesn't - hopefully - decrease?

I want to buy some bonds for my SIPP to diversify from my heavy equity allocation and I am not sure which ones to go for.  The Vanguard fund on the original post is one that has been recommended.

Does your Sipp platform allow you to buy individual gilts? If you want absolute certainty that you won't lose money in nominal terms when held to maturity those would be an option.

Albermarle

If I buy the fund all that matters is that it doesn't - hopefully - decrease?

Correct, and even better that it does not decrease when equities do, so they fulfil their purpose.

MetaPhysical

From what I can tell, we seem to have moved into a world where when equities fall then so do bonds as well.