Bonds - still so confusing...

12467

Comments

  • eskbanker
    eskbanker Posts: 30,992 Forumite
    First Anniversary Name Dropper Photogenic First Post
    chiang_mai wrote: »
    On 17 September the BOE announced interest rates would rise sooner rather than later
    Do you have a link for this announcement? I thought it was more like Carney opining that this is likely rather than an official bank announcement that it will happen (which would obviously undermine the role of the MPC).
  • chiang_mai
    chiang_mai Posts: 156 Forumite
    First Anniversary First Post Combo Breaker
    Apologies for not being grammatically precise, when I wrote "BOE announced", I intended that to mean and I thought it would be sufficently clear that Carney was reported to have said that.......Carney/BOE, anounced/opined, all the same thing really in the context of something happening sooner rather than later.
  • ColdIron
    ColdIron Posts: 9,039 Forumite
    First Anniversary Name Dropper Photogenic First Post
    I seem to remember Mark Carney announcing in his 2013 Forward Guidance that he would not increase rates until unemployment was less than 7%, today it's 4.4%. I think in this context 'sooner rather than later' is near meaningless. I'm not a Carney knocker, I just choose to put little store in his opinings on timing
  • chiang_mai
    chiang_mai Posts: 156 Forumite
    First Anniversary First Post Combo Breaker
    I do hope you don't think that just because Carney said X in his forward guidance four years ago that that remains cast in stone today!

    Regardless, when Carney (or any other Central Bank Govenor) speaks, markets listen and react to what was said, even if what was said was not an offical anouncement, whatever they are any more!
  • ColdIron
    ColdIron Posts: 9,039 Forumite
    First Anniversary Name Dropper Photogenic First Post
    chiang_mai wrote: »
    I do hope you don't think that just because Carney said X in his forward guidance four years ago that that remains cast in stone today!
    Absolutely not, he rewrote his Forward Guidance in 2014 ditching unemployment in favour of the rather nebulous 'spare capacity in the economy'
  • chiang_mai
    chiang_mai Posts: 156 Forumite
    First Anniversary First Post Combo Breaker
    This red herring has perhaps been stretched far enough, at the risk of sidetracking: the subject is bonds, I've offered guidance that my bond holdings dipped significantly after Carney spoke and also that the degree of rise (or fall) in interest rates is key in understanding the impact on bond performance.
  • lluzers
    lluzers Posts: 133 Forumite
    The biggest bond trader in the world is running from bonds.His name is Bill Gross.
  • chiang_mai
    chiang_mai Posts: 156 Forumite
    First Anniversary First Post Combo Breaker
    "The biggest bond trader in the world is running from bonds.His name is Bill Gross".

    Not quite, especially since he's the portfolio manager of Janus Henderson Global Bond fund!

    And today he wrote: "Investors should brace for higher Treasury bond yields as the Fed begins to unwind its quantitative easing program but yields will edge up "only gradually,".
    https://www.cnbc.com/2017/10/10/bill-gross-of-janus-blames-us-fed-for-fake-markets.html

    So what does all that mean? I think it means that interest rates are going to rise, slowly, and that is indicated by the rising yields of T'bills - the operative word is SLOWLY.

    The impact of those things on existing bonds (that are of poor credit quality and/or of long duration) is that their value will fall, others may not.
  • aroominyork
    aroominyork Posts: 2,826 Forumite
    Name Dropper First Post First Anniversary
    chiang_mai wrote: »
    The impact of those things on existing bonds (that are of poor credit quality and/or of long duration) is that their value will fall, others may not.
    Which brings me nicely back to near-ish where I started – how to manage the bond element of a portfolio. At a basic level the relative risks of high yield bonds and cautious/strategic are clear (in the way that another thread is today discussing SMT vs. VLS60) but that leaves the question of how to assess when to invest where on the bond spectrum, since bonds seems to need more active management than equities (especially if taking on board coldiron’s view that index bond funds are buckets of failure).

    I am becoming clearer that my current allocation is too cautious (10% high yield, 18% cautious/strategic, 2% in VLS80), partly because I have a chunk of cash which, for reasons I won’t go into, has to remain in cash right now and so lowers my overall risk. A short term thought is to sell half of each of the two strategic funds, split the proceeds of one between the two HYB funds, and add the proceeds of the other to my VLS80.

    But while that would make me comfortable today, I would soon be thinking whether the environment is changing and I should be moving things around again. Sure, I could try to get the level of knowledge of wiser heads on this forum (and make mistakes along the way when a little bit of knowledge proves a dangerous thing) but I really don’t aspire to that level of understanding. So I come full circle to asking how to most effectively manage a portfolio where I am happy to make decisions about equities but want a more hands off approach to bonds?
  • ColdIron
    ColdIron Posts: 9,039 Forumite
    First Anniversary Name Dropper Photogenic First Post
    At a high level you can think of bonds on a sliding scale from sovereign debt (gilts, US treasuries etc) through strategic and corporate bonds to high yield and emerging market debt. The left hand of the spectrum would be low yield with little prospect of capital gain but offer reasonable protection against volatility. The right hand offers quite a bit more yield (clue's in the name) though is likely to move in the same direction as equities in distressed conditions. Corporate and strategic bonds would sit somewhere between the two. If you know what job you want your bond holding to do it should be easier to identify which ones will achieve that objective

    There's no reason to take on more risk than necessary, particularly if you exchange it for income or yield that you don't need with 10 years to retirement. Perhaps cross that bridge when you come to it

    If you are worried about chasing different funds in different conditions and want a more hands off approach then strategic bonds may be useful. They are less constrained and can range across the bond spectrum, the bond fund manager will be better informed than you, let him earn his fee

    If this was my portfolio and I wasn't happy with my somewhat fixed bond allocation I might sacrifice some or all the HYB for strategic funds. If I felt it was too cautious then I'd target equities in exchange for the same. I can't see a good case to increase the HYB element. But it isn't my portfolio and there is nothing too wacky about it so leaving it as it is wouldn't be the worst decision you ever made

    Just my view and, as ever, it's all about opinion. BTW the two 'strategic' bonds in your OP aren't, they are in the Sterling Corporate sector. Look for funds in the Sterling Strategic sector like M&G Optimal Income and Jupiter Strategic Bond (not a recommendation)

    Sorry if this brings on another bout of - Why isn’t there a “throws hands up in the air” emoji?!' :)
This discussion has been closed.
★ ★ ★ Meet your Ambassadors

Categories

  • All Categories
  • 343.2K Banking & Borrowing
  • 250.1K Reduce Debt & Boost Income
  • 449.7K Spending & Discounts
  • 235.3K Work, Benefits & Business
  • 608K Mortgages, Homes & Bills
  • 173K Life & Family
  • 247.9K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.9K Discuss & Feedback
  • 15.1K Coronavirus Support Boards