Discussion
I looked at this recently as UK gilts offer some tax advantages as capital gains are free from tax if you hold them unwrapped.
Bond or gilt funds don't offer those advantages.
I wasn't comfortable that I knew enough about what impact any future rate rises would have on bond prices.
i.e. great you've locked in a 5% yield but your capital value has just halved (even if you get it back eventually).
Bond or gilt funds don't offer those advantages.
I wasn't comfortable that I knew enough about what impact any future rate rises would have on bond prices.
i.e. great you've locked in a 5% yield but your capital value has just halved (even if you get it back eventually).
Too many factors to take into account like age / current investments etc etc etc.
Bond funds work differently to individual bonds but basically the yield and price of the bond work inversely to each other. If interest rates rise, bond prices fall and if interest rates fall, bond prices rise. You have to determine where you think interest rates are going from here. In simple words - a good scenario for current holders of bonds is for interest rates to fall, and the capital price of the bond to rise. I am buying bonds (funds - UK gilts) because 1/ I think the peak in interest rates is near, and 2/ The downside risk from here is probably in favour of bonds over equity (due to the lag effects of money tightening has not yet been fully felt).
This is a good video, but 1/ it's American. 2/ It was made a year ago. But in the beginning of the vid it explains the relationship basics of how bonds and their yields work.
https://www.youtube.com/watch?v=u5YrIuQbfiU
eta - then you have to think about duration and default risk etc. Long term bonds are much more volatile than short term, but the upside capital gain (if interest rates are cut) to long term is obviously bigger... but so is the downside capital loss if rates rise - hence why many investors opt for government (less credit risk) bonds in a medium duration. < Probably badly worded but IYNWIM. Watch the vid.
Bond funds work differently to individual bonds but basically the yield and price of the bond work inversely to each other. If interest rates rise, bond prices fall and if interest rates fall, bond prices rise. You have to determine where you think interest rates are going from here. In simple words - a good scenario for current holders of bonds is for interest rates to fall, and the capital price of the bond to rise. I am buying bonds (funds - UK gilts) because 1/ I think the peak in interest rates is near, and 2/ The downside risk from here is probably in favour of bonds over equity (due to the lag effects of money tightening has not yet been fully felt).
This is a good video, but 1/ it's American. 2/ It was made a year ago. But in the beginning of the vid it explains the relationship basics of how bonds and their yields work.
https://www.youtube.com/watch?v=u5YrIuQbfiU
eta - then you have to think about duration and default risk etc. Long term bonds are much more volatile than short term, but the upside capital gain (if interest rates are cut) to long term is obviously bigger... but so is the downside capital loss if rates rise - hence why many investors opt for government (less credit risk) bonds in a medium duration. < Probably badly worded but IYNWIM. Watch the vid.
Edited by Phooey on Thursday 2nd November 09:39
I have a horrible feeling we've just missed an opportunity to lock in 5% on 20-30 year gilts that may not return unless we get a bout of unexpected inflation. But who knows. For what it is worth I have been dabbling with buying individual gilts for different purposes.
Near zero coupon gilts outside of tax wrappers for CGT exemption and near term purposes, some higher coupon short dated gilts in SIPP, and I just bought a 15 yr gilt earlier this morning to lock in @ 4.75%. Again not too bothered if the yield goes higher on that one as I will just buy more of it over time and hold to maturity - maybe just drawing the coupon for pension drawdown when the time comes..
ETFs are OK but you don't have control of how and when the yield is distributed or timing maturity for your purposes. I think ETFs are probably better for corporate bonds though where it is more important to diversify across many companies.
I would even consider a 50/50 split between corporate and government bonds for your fixed income allocation.
Near zero coupon gilts outside of tax wrappers for CGT exemption and near term purposes, some higher coupon short dated gilts in SIPP, and I just bought a 15 yr gilt earlier this morning to lock in @ 4.75%. Again not too bothered if the yield goes higher on that one as I will just buy more of it over time and hold to maturity - maybe just drawing the coupon for pension drawdown when the time comes..
ETFs are OK but you don't have control of how and when the yield is distributed or timing maturity for your purposes. I think ETFs are probably better for corporate bonds though where it is more important to diversify across many companies.
I would even consider a 50/50 split between corporate and government bonds for your fixed income allocation.
WayOutWest said:
I have a horrible feeling we've just missed an opportunity to lock in 5% on 20-30 year gilts that may not return.
IMO if you thought 5% was a good idea then you should still buy now.I would definitely be buying but for the fact I've got a wedge of "disasterfest" bonds already and need to wait (hope!) for their recovery rather than selling equities to double that existing bet.
Disasterfest = cash losses c. 20%
Panamax said:
I don't understand that sentence.
This is a Long Duration Gilt Index Fund.
The current yield is good because interest rate rises have pushed bond prices down so yields have risen.
How would you feel if you'd bought a couple of years back and watched that happen to the value of your investment?
You'll make it back over time but I don't think bond funds aren't simple to understand.
b
hstewie said:
hstewie said: Couldn't get comfortable with the idea of a bond fund as a "safe" place to park cash though.
Yield. The yield on bond funds will increase as it buys new bonds (higher yields) and sells old bonds (lower yields & remit of fund - duration). You'll also get *some* capital gain with funds like you do with individual bonds, but maybe not as much - depends on what and when. Funds are easy, especially in ETF flavour because they are liquid and can be sold in the same day. There's many other pros and cons for funds vs individuals but funds are like a ready made meal vs preparing your own - the ready made meal will suffice and do the job intended but the prepared one might taste better and fill you for longer.Gilt yields are higher than they've been in over a decade which certainly makes them seem attractive, particularly when they are pretty much the lowest risk asset you can hold.
To give an example, you can buy TG35 (0 5/8% Treasury Gilt 2035) at £65 and get £100 back in 2035 plus annual income of £0.65. That's an annualised nominal return of 4.5%.
That seems great if you hold to maturity in 12 years time but what happens if inflation and interest rates continue to rise? By locking in a yield you lock in the risk of making a real-terms loss if you hold to maturity and an actual loss if you sell in the interim. The impact can be quite severe - the price of TG35 was over £100 only 3 years ago. For more distant maturities, the drops are even more severe - TG61 dropped from over £100 to £27.
Index-linked gilts are an option to mitigate that but you pay for the privilege.
Gilt funds help smooth some of that risk/volatility but it does reduce the certainty you get from buying single gilts.
In my opinion, the main reasons to buy gilts are if you want to lock in a certain return because you know you will have a fixed expense at a certain date in the future. How many of us have this and if so, why not buy an annuity instead?
Of course, if you feel lucky then you can buy gilts in the expectation that inflation and interest rates will fall and bond prices will rise.
A reasonable approach, if you have the time, might be to split your low risk investments between cash funds, gilt funds, single fixed gilts and inflation-linked gilts but who has the time for all that?
To give an example, you can buy TG35 (0 5/8% Treasury Gilt 2035) at £65 and get £100 back in 2035 plus annual income of £0.65. That's an annualised nominal return of 4.5%.
That seems great if you hold to maturity in 12 years time but what happens if inflation and interest rates continue to rise? By locking in a yield you lock in the risk of making a real-terms loss if you hold to maturity and an actual loss if you sell in the interim. The impact can be quite severe - the price of TG35 was over £100 only 3 years ago. For more distant maturities, the drops are even more severe - TG61 dropped from over £100 to £27.
Index-linked gilts are an option to mitigate that but you pay for the privilege.
Gilt funds help smooth some of that risk/volatility but it does reduce the certainty you get from buying single gilts.
In my opinion, the main reasons to buy gilts are if you want to lock in a certain return because you know you will have a fixed expense at a certain date in the future. How many of us have this and if so, why not buy an annuity instead?
Of course, if you feel lucky then you can buy gilts in the expectation that inflation and interest rates will fall and bond prices will rise.
A reasonable approach, if you have the time, might be to split your low risk investments between cash funds, gilt funds, single fixed gilts and inflation-linked gilts but who has the time for all that?
bhstewie said:
hstewie said: great you've locked in a 5% yield but your capital value has just halved (even if you get it back eventually).
bhstewie said:
hstewie said:Panamax said:
I don't understand that sentence.
This is a Long Duration Gilt Index Fund.Sure, people who were already holding bonds will be sitting on losses but that's an entirely different situation. And they certainly won't be getting a 5% yield on the cost of their investment.
Ah with you now 
Sorry that was an example of me trying to articulate what I think can be the "but bonds are risk free aren't they?" view some people have of them.
Government bonds should be risk free if held until maturity i.e. you're guaranteed to get a return of principal - but they are still subject to rises and falls in the capital value which a lot people don't expect and didn't appreciate when it happened to them.
Sorry that was an example of me trying to articulate what I think can be the "but bonds are risk free aren't they?" view some people have of them.
Government bonds should be risk free if held until maturity i.e. you're guaranteed to get a return of principal - but they are still subject to rises and falls in the capital value which a lot people don't expect and didn't appreciate when it happened to them.
NowWatchThisDrive said:
I noticed recently that iShares (BlackRock) now offer some target maturity bond ETFs, albeit US-focused only.
The US Treasury seems to be well ahead of the UK when it comes to making government bonds available to the general public. This makes the concept of a bond ladder for retirement planning much easier.https://treasurydirect.gov/marketable-securities/t...
Duration is very important once you understand the basics of capital price movement (bond). It was one of the problems with SVB i believe - holding too many long-duration government bonds from the low-interest rate era - which is fine if you hold them to maturity (they will get made whole) - but in a fast interest-rate hiking cycle they lost capital value (fast) because new higher-yielding bonds were being issued. Just like stocks, bonds also have some risks.
eta - I find bonds quite interesting. Sad i know
eta - I find bonds quite interesting. Sad i know
Edited by Phooey on Friday 3rd November 18:28
Save yourself some time. Go here to check the latest returns on maturity:
https://www.yieldgimp.com/gilt-yields
Go to iWeb to purchase the gilts, as they are only £5 and currently dont charge any new fees for new customers.
The way I see gilts is a good overflow once you’ve used up your ISA allowance. You can also buy premium bonds, but they will provide lower returns on average than short dated gilts.
https://www.yieldgimp.com/gilt-yields
Go to iWeb to purchase the gilts, as they are only £5 and currently dont charge any new fees for new customers.
The way I see gilts is a good overflow once you’ve used up your ISA allowance. You can also buy premium bonds, but they will provide lower returns on average than short dated gilts.
Thanks all
LeoSayer said:
Gilt yields are higher than they've been in over a decade which certainly makes them seem attractive, particularly when they are pretty much the lowest risk asset you can hold.
To give an example, you can buy TG35 (0 5/8% Treasury Gilt 2035) at £65 and get £100 back in 2035 plus annual income of £0.65. That's an annualised nominal return of 4.5%.
That seems great if you hold to maturity in 12 years time but what happens if inflation and interest rates continue to rise? By locking in a yield you lock in the risk of making a real-terms loss if you hold to maturity and an actual loss if you sell in the interim. The impact can be quite severe - the price of TG35 was over £100 only 3 years ago. For more distant maturities, the drops are even more severe - TG61 dropped from over £100 to £27.
Index-linked gilts are an option to mitigate that but you pay for the privilege.
Gilt funds help smooth some of that risk/volatility but it does reduce the certainty you get from buying single gilts.
In my opinion, the main reasons to buy gilts are if you want to lock in a certain return because you know you will have a fixed expense at a certain date in the future. How many of us have this and if so, why not buy an annuity instead?
Of course, if you feel lucky then you can buy gilts in the expectation that inflation and interest rates will fall and bond prices will rise.
A reasonable approach, if you have the time, might be to split your low risk investments between cash funds, gilt funds, single fixed gilts and inflation-linked gilts but who has the time for all that?
To give an example, you can buy TG35 (0 5/8% Treasury Gilt 2035) at £65 and get £100 back in 2035 plus annual income of £0.65. That's an annualised nominal return of 4.5%.
That seems great if you hold to maturity in 12 years time but what happens if inflation and interest rates continue to rise? By locking in a yield you lock in the risk of making a real-terms loss if you hold to maturity and an actual loss if you sell in the interim. The impact can be quite severe - the price of TG35 was over £100 only 3 years ago. For more distant maturities, the drops are even more severe - TG61 dropped from over £100 to £27.
Index-linked gilts are an option to mitigate that but you pay for the privilege.
Gilt funds help smooth some of that risk/volatility but it does reduce the certainty you get from buying single gilts.
In my opinion, the main reasons to buy gilts are if you want to lock in a certain return because you know you will have a fixed expense at a certain date in the future. How many of us have this and if so, why not buy an annuity instead?
Of course, if you feel lucky then you can buy gilts in the expectation that inflation and interest rates will fall and bond prices will rise.
A reasonable approach, if you have the time, might be to split your low risk investments between cash funds, gilt funds, single fixed gilts and inflation-linked gilts but who has the time for all that?
Phooey said:
Duration is very important once you understand the basics of capital price movement (bond). It was one of the problems with SVB i believe - holding too many long-duration government bonds from the low-interest rate era - which is fine if you hold them to maturity (they will get made whole) - but in a fast interest-rate hiking cycle they lost capital value (fast) because new higher-yielding bonds were being issued. Just like stocks, bonds also have some risks.
eta - I find bonds quite interesting. Sad i know
Now you have an awareness of the importance of duration for bonds.eta - I find bonds quite interesting. Sad i know
Edited by Phooey on Friday 3rd November 18:28
This is the next step;
https://www.investopedia.com/terms/c/convexity.asp
Phooey said:
Duration is very important once you understand the basics of capital price movement (bond). It was one of the problems with SVB i believe - holding too many long-duration government bonds from the low-interest rate era - which is fine if you hold them to maturity (they will get made whole) - but in a fast interest-rate hiking cycle they lost capital value (fast) because new higher-yielding bonds were being issued. Just like stocks, bonds also have some risks.
eta - I find bonds quite interesting. Sad i know
Yep. Worth noting for others less versed, SVB was a bank, so one of its core functions was maturity transformation. As rates increased it needed to pay more on its short dated liability book to maintain enough cash, which it couldn't as it had bought low return low risk bonds. Once the cash started to go elsewhere, they were doomed. They were forced sellers. Maturity mismatch is the basis of bank runs. SvB interest rate risk management was appalling. And that's what makes it so fascinating.eta - I find bonds quite interesting. Sad i know
Edited by Phooey on Friday 3rd November 18:28
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