Are Bonds worth considering

[Hariseldon58]

Interesting-how do you split these 2 funds in your portfolio?-what % in each fund seeing the the US fund market is so big
xxd09

My default view is 50% sterling “cash” and IGLS ( cash for spending to live on, but predominately IGLS) and 50% US Treasury bonds split equally between VUTA and ITPS

At present, I recently bought an individual UK Index linked gilt maturing in March 2026, it has a positive real yield and will cover living expenses for a year on maturity in 2026 and covers the short term inflation risk.

I am also heavily into UBTL (the long duration version of ITPS), US$ 20+ year Treasury Inflation Protected Securities ETF , denominated in £, it is NOT hedged. In time I will rotate this back to the regular ITPS with its much shorter intermediate duration at around 7 years.

These US Tips have a real yield of 2.5% or so, that’s pretty attractive…

[xxd09]

Hariseldon58-thanks for that
TIPs are certainly back in fashion with the current inflation rates
Alan Roth on his website and on Bogleheads forum has a viable plan for TIPs in a retirement portfolio but American bias
Scott Burns “Couch Potato portfolio “ fame-feels that the math involved for the amateur investor is too much at the moment
Maybe Burns is getting old like me!
xxd09

[richfool]

Hariseldon 58-I think that’s a very interesting point you have made
I switched from a 5 year gilt ladder many years ago because of the work involved and I wanted access to world markets as I had done with my equity-logical step?
Been in a global bond index fund hedged to the pound for many years now
It’s certainly a simple solution especially as you get older
Your bond split is something I might do if starting out again but at 77 making life more complicated is problematic
xxd09

The UK Gilts in IGLS is a good starting point and the US$ exposure in VUTA and/or ITPS (US$ Tips) is my long term policy.

A few more thoughts that arose during my coffee this morning.

I can certainly see the merit of IGLS, 0-5 year Gilts. It's also a bit shorter duration than VGOV.

Re VUTA, noted that is accumulation (so you aren't looking to draw income) as opposed to distribution, and "unhedged". I take it VUTA is to some extent a play on the weakness of sterling/strength of the dollar. I also noted TER/OCR 0.07% + management fee 0.07% + spread 0.05%, so costs moving up a bit there.

As bonds are somewhat outside my area of full understanding and I want to avoid situations that draw me into tinkering, (indeed I really want to set up and then forget), so I think I still tend towards a more diversified global bond ETF, such as IGLH, (albeit with its TER of 0.25%), along with a UK Gilts ETF (such as IGLS and/or VGOV).

[Hariseldon58]

The UK Gilts in IGLS is a good starting point and the US$ exposure in VUTA and/or ITPS (US$ Tips) is my long term policy.

A few more thoughts that arose during my coffee this morning.

I can certainly see the merit of IGLS, 0-5 year Gilts. It's also a bit shorter duration than VGOV.

Re VUTA, noted that is accumulation (so you aren't looking to draw income) as opposed to distribution, and "unhedged". I take it VUTA is to some extent a play on the weakness of sterling/strength of the dollar. I also noted TER/OCR 0.07% + management fee 0.07% + spread 0.05%, so costs moving up a bit there.

As bonds are somewhat outside my area of full understanding and I want to avoid situations that draw me into tinkering, (indeed I really want to set up and then forget), so I think I still tend towards a more diversified global bond ETF, such as IGLH, (albeit with its TER of 0.25%), along with a UK Gilts ETF (such as IGLS and/or VGOV).

I respect your choice of course , there is a distribution version of VUTA which is VUTY, at .07% it’s cheap too and priced in sterling.

My point about IGLH is ask yourself what benefits it brings you over UK Gilts ?

[richfool]

A few more thoughts that arose during my coffee this morning.

I can certainly see the merit of IGLS, 0-5 year Gilts. It's also a bit shorter duration than VGOV.

Re VUTA, noted that is accumulation (so you aren't looking to draw income) as opposed to distribution, and "unhedged". I take it VUTA is to some extent a play on the weakness of sterling/strength of the dollar. I also noted TER/OCR 0.07% + management fee 0.07% + spread 0.05%, so costs moving up a bit there.

As bonds are somewhat outside my area of full understanding and I want to avoid situations that draw me into tinkering, (indeed I really want to set up and then forget), so I think I still tend towards a more diversified global bond ETF, such as IGLH, (albeit with its TER of 0.25%), along with a UK Gilts ETF (such as IGLS and/or VGOV).

I respect your choice of course , there is a distribution version of VUTA which is VUTY, at .07% it’s cheap too and priced in sterling.

My point about IGLH is ask yourself what benefits it brings you over UK Gilts ?

Thanks for flagging up VUTY. I'll have a look at that. But may I ask, what are your objectives in terms of the investment in VUTA?

Re IGLH, my thinking is to have broad exposure to government bonds other than, or should I say in addition to, UK Gilts/sterling, in case they (UK Gilts) fall out of favour for a period (e.g. future perceived UK government incompetence/debt mismanagement).

The only other related thought might be to look for an unhedged version (of global government bonds). I appreciate a US version (VUTA/VUTY) may well suffice, though then one is hanging one's hat totally on the US and US dollar. (Neither Trump nor Biden inspire one with confidence in the US!).

[Hariseldon58]

I respect your choice of course , there is a distribution version of VUTA which is VUTY, at .07% it’s cheap too and priced in sterling.

My point about IGLH is ask yourself what benefits it brings you over UK Gilts ?

Thanks for flagging up VUTY. I'll have a look at that. But may I ask, what are your objectives in terms of the investment in VUTA?

Re IGLH, my thinking is to have broad exposure to government bonds other than, or should I say in addition to, UK Gilts/sterling, in case they (UK Gilts) fall out of favour for a period (e.g. future perceived UK government incompetence/debt mismanagement).

The only other related thought might be to look for an unhedged version (of global government bonds). I appreciate a US version (VUTA/VUTY) may well suffice, though then one is hanging one's hat totally on the US and US dollar. (Neither Trump nor Biden inspire one with confidence in the US!).

I hold VUTA ( VUTY) instead of something like IGLH for the same reason, the possibility of UK Gilts/sterling falling out of favour / disastrous incompetence etc.

An unhedged fund of Global Government bonds would fulfil that brief but my knowledge there isn’t one.

In the event of something bad happening to Gilts/Sterling the hedging of IGLH takes you down with sterling, if Gilts are deemed uncreditworthy I cannot imagine a situation where sterling would not tumble. Whilst IGLH might keep a level price in sterling its fair value would tumble whilst an unhedged fund would rise at the same rate as sterling falls.

The government bond fund in dollars ( or euros , yen mix) actually hedges the risk of a sterling currency crisis in the true sense of the word.

[richfool]

OK, right. I've got you and am convinced.

Thanks for your input.

PS. I hold (unhedged) MCT.

[UnclePhilip]

....Portfolio has been through many ups and downs during this time including the last year or two
The bond part of my portfolio has however done what it was supposed to do
Reduced portfolio volatility
Preserved wealth ....
xxd09

Genuinely interested, not being au fait with bonds. Have they really 'preserved wealth' as in increased in real value, allowing for inflation?

[richfool]

The government bond fund in dollars ( or euros , yen mix) actually hedges the risk of a sterling currency crisis in the true sense of the word.

Hariseldon, Just an observation based on today's market movements and noting that the £ strengthened against the dollar and UK Gilts rose:

- The SP of VGOV increased today, though more than than that of IGLS. Both hold UK Gilts. Noted that IGLS holds shorter duration bonds.

- The SP of VUTY and VUTA (US bonds) understandably fell, presumably due to the strengthening of the £ against the dollar.

- (But) the SP of IGLH (global government bonds) rose significantly, even though it is hedged. (US bonds are the majority holdings).

I appreciate there are multiple factors that influence price movements, but the last one puzzled me somewhat.

[xxd09]

Uncle Philip-Preserving wealth is an elastic term
It doesn’t always mean an increase in value
What it means in the case of bonds as the market falls equities tumble but bonds may fall also but not to the same degree
So wealth is “preserved”
In the opposite vein as equities start to rise bonds ascend also but at a much slower pace
It’s an imperfect system but the best we have at the moment
xxd09

[Hariseldon58]

The government bond fund in dollars ( or euros , yen mix) actually hedges the risk of a sterling currency crisis in the true sense of the word.

Hariseldon, Just an observation based on today's market movements and noting that the £ strengthened against the dollar and UK Gilts rose:

- The SP of VGOV increased today, though more than than that of IGLS. Both hold UK Gilts. Noted that IGLS holds shorter duration bonds.

- The SP of VUTY and VUTA (US bonds) understandably fell, presumably due to the strengthening of the £ against the dollar.

- (But) the SP of IGLH (global government bonds) rose significantly, even though it is hedged. (US bonds are the majority holdings).

I appreciate there are multiple factors that influence price movements, but the last one puzzled me somewhat.

There was a lot going on this afternoon and for a largely passive investor I was trading like a day trader !!

US inflation came in at 3.2% below the expected 3.3%, markets think this means that inflation as a whole is moderating and interest rates may not rise further or perhaps even fall.

The dollar fell rather than the pound strengthened because of a fall in US interest rates.

UK gilts fell because they followed the trend and the market believes the same about uk interest rates.

VGOV has a longer duration than IGLS so the prices rise relatively more. ( yields down, prices go up)

IGLH is hedged , so the price is not moved significantly by the currency movements but the price does rise because of the interest rate falls and the rise in prices of the underlying bonds.

IGLH moves by an amount between IGLS and VGOV because the duration is between the two.

VUTA ( us treasuries intermediate duration) fell by .7% in sterling terms but the dollar fell by 1.85% against the pound. Ie the underlying bonds rose by around 1.15%.

You have got similar movements in prices of bonds for both UK and US Government bonds combined with the movement exchange rates. It’s get a little complex !!!

The other factor to remember with the hedging is that it is effected by the period of the rolling contracts, volatile currency movements can overwhelm the protection. Daily rolling contracts are more accurate than monthly rolling contracts but cost more.

A lot of moving parts ….its worth noting that IGLH didn’t offer anything over UK Gilts of a similar duration, the price movements were pretty much exactly the same.

As an aside infrastructure and property shares rise a lot on the prospect of lower rates today.

[richfool]

There was a lot going on this afternoon and for a largely passive investor I was trading like a day trader !!

US inflation came in at 3.2% below the expected 3.3%, markets think this means that inflation as a whole is moderating and interest rates may not rise further or perhaps even fall.

The dollar fell rather than the pound strengthened because of a fall in US interest rates.

UK gilts fell because they followed the trend and the market believes the same about uk interest rates.

VGOV has a longer duration than IGLS so the prices rise relatively more. ( yields down, prices go up)

IGLH is hedged , so the price is not moved significantly by the currency movements but the price does rise because of the interest rate falls and the rise in prices of the underlying bonds.
IGLH moves by an amount between IGLS and VGOV because the duration is between the two.

VUTA ( us treasuries intermediate duration) fell by .7% in sterling terms but the dollar fell by 1.85% against the pound. Ie the underlying bonds rose by around 1.15%.

You have got similar movements in prices of bonds for both UK and US Government bonds combined with the movement exchange rates. It’s get a little complex !!!

The other factor to remember with the hedging is that it is effected by the period of the rolling contracts, volatile currency movements can overwhelm the protection. Daily rolling contracts are more accurate than monthly rolling contracts but cost more.

A lot of moving parts ….its worth noting that IGLH didn’t offer anything over UK Gilts of a similar duration, the price movements were pretty much exactly the same.
and inflation
As an aside infrastructure and property shares rise a lot on the prospect of lower rates today.

Thanks for that. I noted the movement in both US inflation and exchange rates, which in the case of today's movements clouded the picture re US bonds.

I noted there was quite a large disparity between VGOV (+1.67%) and IGLS (up 0.28%). (IGLH was up by 0.96%).

Yes, some relief on REIT's today.

Thanks again for your input on this.

[GeoffF100]

Vanguard's research suggests that global bonds hedged into the local currency is the best option, and that is (more or less) reflected in their packaged funds. Nonetheless, hedging costs money and is not perfect. Just using gilts is a reasonable alternative, and is advocated by Lars Kriojer:

https://monevator.com/tag/kroijer/

You do not really need corporate bonds. If you want more risk, you can hold more equities.

I had a look at Vanguard Global Bond Fund (hedged into GBP) vs VGOV on Morningstar. (VAGP is cheaper than the Vanguard Global Bond Fund, but does not have as long a history.) VGOV has been trounced. I am feeling more inclined to buy VAGP (or its accumulating version VAGS) than VGOV in my ISA and SIPP. I am already buying low coupon gilts outside my tax shelters. They have a better tax treatment and no ongoing charges.

[richfool]

Vanguard's research suggests that global bonds hedged into the local currency is the best option, and that is (more or less) reflected in their packaged funds. Nonetheless, hedging costs money and is not perfect. Just using gilts is a reasonable alternative, and is advocated by Lars Kriojer:

https://monevator.com/tag/kroijer/

You do not really need corporate bonds. If you want more risk, you can hold more equities.

I had a look at Vanguard Global Bond Fund (hedged into GBP) vs VGOV on Morningstar. (VAGP is cheaper than the Vanguard Global Bond Fund, but does not have as long a history.) VGOV has been trounced. I am feeling more inclined to buy VAGP (or its accumulating version VAGS) than VGOV in my ISA and SIPP. I am already buying low coupon gilts outside my tax shelters. They have a better tax treatment and no ongoing charges.

But, Geoff, VGOV solely holds UK Gilts, whereas, VAGP holds global bonds, - both Government and corporate bonds- and thus the latter should offer higher yields, and with a higher risk, due to the corporate bond element. Also VAGP is hedged, (with associated costs) whereas VGOV doesn't need to be. So, surely, you aren't really comparing like with like.

[GeoffF100]

I had a look at Vanguard Global Bond Fund (hedged into GBP) vs VGOV on Morningstar. (VAGP is cheaper than the Vanguard Global Bond Fund, but does not have as long a history.) VGOV has been trounced. I am feeling more inclined to buy VAGP (or its accumulating version VAGS) than VGOV in my ISA and SIPP. I am already buying low coupon gilts outside my tax shelters. They have a better tax treatment and no ongoing charges.

But, Geoff, VGOV solely holds UK Gilts, whereas, VAGP holds global bonds, - both Government and corporate bonds- and thus the latter should offer higher yields, and with a higher risk, due to the corporate bond element. Also VAGP is hedged, (with associated costs) whereas VGOV doesn't need to be. So, surely, you aren't really comparing like with like.

The corporate bonds are investment grade. Both VGOV and VGAP are reasonable candidates for the bond element of your portfolio. The Vanguard packaged funds mostly use global bonds hedged into sterling. Lars Kroijer favours gilts. The choice is yours, or you can use both. I have used VAGP in the past, but I sold out near the beginning of the bond crash. I might buy same back when I have the money.

[GeoffF100]

When I last held VAGP, the average investment grade of the bonds was the same as that of gilts. AA- if I remember correctly. The better quality of US government debt counter balanced the lower quality of the corporate bonds. There is also a wider spread of risk, of course.

[GeoffF100]

Here are the current numbers:

VAGP

Number of bonds 10,264
YTM 4.7%
Quality AA-
Duration 8.5 years

https://www.vanguard.co.uk/professional ... stributing

VGOV

Number of bonds 58
YTM 4.7%
Quality AA-
Duration 9.3 years

https://www.vanguard.co.uk/professional ... stributing

Yield To Maturity and credit quality are the same for both funds. VAGP has a slightly shorter duration, and much more diversification.

[Hariseldon58]

Here are the current numbers:

VAGP

Number of bonds 10,264
YTM 4.7%
Quality AA-
Duration 8.5 years

https://www.vanguard.co.uk/professional ... stributing

VGOV

Number of bonds 58
YTM 4.7%
Quality AA-
Duration 9.3 years

https://www.vanguard.co.uk/professional ... stributing

Yield To Maturity and credit quality are the same for both funds. VAGP has a slightly shorter duration, and much more diversification.

The duration of VAGP is 6.5 years ( its average maturity is 8.5years). You may have looked at the wrong line in the data profile.

With respect if you are a sterling investor and invest in gilts you can ignore the credit risk when comparing to anything else hedged into sterling. If gilts default then as night follows day the currency will collapse…

Your overseas gilts may retain their credit rating but the hedging into sterling will still kill your investment in the event of a gilts default/sterling collapse.

Another factor with corporate bonds when comparing YTM is that with government bonds you will get the YTM but not with corporate bonds , two factors get you, if the credit rating of a corporate bond improves / interest rates fall invariably some bonds will be called and refinanced at lower rates , the bond holder does not benefit, however if the credit rating of a corporate bonds falls below BBB it will drop out of the index , if the credit rating subsequently improves it’s a ‘fallen angel’ and may come back into the index but the price appreciation will go the holders in a junk bond index.

Heads you lose, tails you lose, throw in the odd default and the YTM for an investment grade bond portfolio falls short of the YTM over time by around .5% to 1% are figures frequently reported.

Interest rate risk linked to duration and credit quality spring to mind with bonds but it’s worth considering currency risk not as the volatility of holding other currencies, which may well be significant but consider a painful fall in your home currency and add to those risks of bonds being called, liquidity risks in corporate bonds are poor and whilst an etf may be very liquid… but if the underlying asset is illiquid you have a problem.

Bonds are interesting, more complex than they initially appear.

[Hariseldon58]

Vanguard's research suggests that global bonds hedged into the local currency is the best option, and that is (more or less) reflected in their packaged funds. Nonetheless, hedging costs money and is not perfect. Just using gilts is a reasonable alternative, and is advocated by Lars Kriojer:

https://monevator.com/tag/kroijer/

You do not really need corporate bonds. If you want more risk, you can hold more equities.

I had a look at Vanguard Global Bond Fund (hedged into GBP) vs VGOV on Morningstar. (VAGP is cheaper than the Vanguard Global Bond Fund, but does not have as long a history.) VGOV has been trounced. I am feeling more inclined to buy VAGP (or its accumulating version VAGS) than VGOV in my ISA and SIPP. I am already buying low coupon gilts outside my tax shelters. They have a better tax treatment and no ongoing charges.

Worth considering these had different durations and the recent bond market crash due to rising interest rates effected VGOV far more due to its longer duration. VGOV has a duration around 9.3 years at present but a couple years back it was around 12.

The rising interest rates reduce the duration of a bond portfolio even if the average maturity remains the same.

[GeoffF100]

Yes, thanks. I copied the wrong line.

If the underlying bonds become illiquid, the price of an ETF holding them often goes to a discount to NAV. Junk bond ETFs sometimes have huge discounts. An OEIC has to cease trading altogether when that happens. Nonetheless here is Vanguard's LifeStrategy 60 portfolio:

https://www.vanguardinvestor.co.uk/inve ... folio-data

The majority of the bond allocation is OEICs hedged into GBP with the remainder in UK bond OEICs. Vanguard is not afraid of investment grade corporate bonds either. Have the van guards got it all wrong here?