Replacement for 1 Year Savings Bonds if Interest Rates start to fall.

Bulwark

I was wondering if anyone has a view on  iShares Core GBP Corporate Bond UCITS ETF to use instead of One year Savings Bonds if/as  interest rates fall  - or is there something better ?

Robert 

kempiejon

Bulwark said:

I was wondering if anyone has a view on  iShares Core GBP Corporate Bond UCITS ETF to use instead of One year Savings Bonds if/as  interest rates fall  - or is there something better ?

Robert 

What do you see as the features of that particular ishares product that makes it like a One year Saving Bond? You have a view on interest rates - they'll reduce, presumably in a year or why the comparison? That's more certainty than I have on rates. 
So what drew you to chose that particular corporate bond etf there are others in that marketplace I think? Why would it be nominated as similar or an alternative to what I assume is cash in a one year savings bond. Or are one year savings bonds something different?

Bulwark

I have read that they are classed low risk and have a low fee. I understand that hedging funds against currency movements can be uneconomic, so a £ Sterling fund is better. 

kempiejon

Hedging can go both ways but I see you're down on that idea - fair enough.
But you want corporate bonds as an alternative to cash savings accounts. Unless that's not what a One year Savings Bond is.

Bulwark

I also assumed that Corporate Companies on average, would be paying a higher amount of interest on their borrowing then the rates paid to investors of one year savings bonds. I presume that I am wrong?




    

poseidon1

Bulwark said:

I also assumed that Corporate Companies on average, would be paying a higher amount of interest on their borrowing then the rates paid to investors of one year savings bonds. I presume that I am wrong?




    

Listed companies can indeed pay higher interest on loan notes issued to investors,  one of mine pays 12%.

However even stockmarket listed companies can go bust, and in extreme circumstances bond holders like myself lose their capital investment.

An ETF holding a basket of such loan notes spreads that risk, but the risk is still there, so a bond etf cannot guarantee your initial investment will remain intact. It can just as well go down as well as up.

Indeed anyone that acquired the etf you mention back in 2020 when it had hit £160 is likely feeling less than sanguine about its current price of £122.

The saver in a 1 year savings bond from a bank or building society does not face any of those concerns, so I fail to see a valid comparison between the two.

Rollinghome

Bulwark said:

I was wondering if anyone has a view on  iShares Core GBP Corporate Bond UCITS ETF to use instead of One year Savings Bonds if/as  interest rates fall  - or is there something better ?

Robert 

You might like to look at money market funds such "Royal London Short Term Money Market".   Look at the charts on somewhere like HL and see what you think.

It's often used as a substitute for cash but it's not the same, nothing is.  Or even somethng like Capital Gearing which hasn't done so well of late.  Or consider equity funds if you haven't already.  

Those are all investments and the difference is that with savings your money remains yours no matter what, even if it loses value; with investments you spend your money to buy something that you hope will give better returns than cash.  What you get depends on the actions of other investors - the markets.

thunderroad88

Presumably you have a one year deposit bond with a bank? If you want to get a return that beats these products, you’ll have to increase risk. Something like Royal London Short Term Fixed Income enhanced could give you a small boost as it has a small bond element added to its money market instruments and the increased risk is also small. Or maybe something like Aegon Absolute Return Bond Fund which holds quite short duration corporate and govt bonds plus other fixed income instruments and aims to beat base rates by 2-3%…it also seems to be less volatile than most bond funds and is 2/7 on the risk scale.

If you think there’s a chance you might need your cash in the near future you might be safer just getting another bank deposit bond though..

OldScientist

As others have said, the fund you identified fund is not the same as a 1 year savings accounts. For example, according to morningstar (https://global.morningstar.com/en-nd/investments/etfs/0P00015R8Q/portfolio ), the fund currently has a yield to maturity of 5.2%, a weighted average maturity of 8.7 years and a modified duration of 5.6. This means that with no future changes in yields, this would give a return of roughly the same as the yield (i.e., 5.2%). If yields fall for each percentage point of fall, the price of the fund would go up by roughly 5.5% and vice versa for increasing yields. Note that yields at longer maturities are not necessarily correlated with changes in the base rate.

A short term corporate bond fund (e.g., U.K. Short-Term Investment Grade Bond) would have less price volatility), but still not look entirely like a 1 year savings account.

As @thunderroad88 said, the Royal London Short Term Fixed Income enhanced fund adds a few bonds to money market instruments and has an effective duration around the 1 year mark, and is probably as close as you might get.

FWIW, we hold two 1 year fixed savings accounts (maturing 6 months apart - corresponding to when we take withdrawals from our portfolio) and various global bond funds (both short term and long term) to give an overall average maturity in the 1-2 year range. The savings accounts will hold their nominal value, while if rates fall then the bond funds increase in nominal value and vice versa.

masonic

Bulwark said:

I have read that they are classed low risk and have a low fee

Low risk you say?

Above is what happened when interest rates rose, below is what happened at the start of the last financial crisis:

Bulwark

Thank you, then if the best available One Year Saving Bonds go down to below 4%, I will try switching to the Royal London Short  Term Fixed Income Fund as an alternative saving.
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