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Does anyone use bond ladders?

Including Financial Independence and Retiring Early (FIRE)
hiriskpaul
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Re: Does anyone use bond ladders?

#410633

Postby hiriskpaul » May 9th, 2021, 9:37 pm

JohnW wrote:
hiriskpaul wrote:The advantage of a gilt ladder compared to a deposit ladder though is that of liquidity. Gilts can be sold instantly,

Well, you don’t need liquidity with a non-rolling ladder. Secondly, if you have to sell during rising interest rate times you’ll lose capital. Yuk.

In theory yes. Unfortunately life doesn't always go totally according to plan.

One way to mitigate the liquidity risk is to hold a sum in instant access accounts. You can get up to 0.45% on instant access, so still currently better than with 5y gilts held to maturity. This also has the advantage that if interest rates started to rise, you may end up better off than you would have done had you locked in a fixed rate. The risk is that if interest rates stay the same or drop you will lose out compared to taking fix rate term deposits.

Personally I keep most of our cash on instant access, although this has become a problem now that NS&I pay such derisory rates. That allows me to take advantage of short term opportunities as they arise - mostly with options trading, but also with short dated high yield bonds and similar. I am prepared to lose a sub 1% amount for this optionality.

TUK020
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Re: Does anyone use bond ladders?

#410678

Postby TUK020 » May 10th, 2021, 8:24 am

NotSure wrote:Put it this way - it will not happen - but imagine the central banks suddenly decided to rapidly taper QE and then raise interest rates. I believe in this extreme 'thought experiment', bonds would fall, but shares would crash, so having an allocation to bonds would allow rebalancing while shares are 'cheap'.

The whole area of asset allocation is of great interest to me personally - I'm accumulating, but reaching the age where I may need to start thinking about consolidation - the time is approaching where a big correction could impact my retirement plans, if I'm 'all in' on equities (and I'm pretty close to that). But bonds just look like a terrible 'bet' at the moment, but taken in the round, maybe not as bad as they look at first glance. Hence my appreciation of TLF!


NotSure (great handle for an investment site, by the way)
Your 'extreme thought experiment' can be relabelled 'what happens in inflation takes off?' Not sure that all shares would fall further than bonds.

Also of considerable interest to me - I am trying to extricate myself from work at the moment, and am significantly tilted towards equities.
My actions of the moment are to increase my cash holding, and also gold (ETF phsyical gold, plus Gold miners ETF)

tuk020

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Re: Does anyone use bond ladders?

#410707

Postby UnclePhilip » May 10th, 2021, 9:59 am

scrumpyjack wrote:If I wished to hold some cash assets in case of rising interest rates, falling equities, rising inflation (and I do hold a large amount of cash to cover many years of living costs), I would not want to limit my thoughts simply to sterling bonds, cash, ILGs etc. Another alternative would be to park cash in a stronger currency more likely to withstand rising inflation (whether cash or bonds in that currency). Historically swiss francs have been a pretty reliable store of value and if significant inflation increases arise in GBP and USD, Swiss francs would be a good safe haven, IMO.


At the risk of being naive, can I ask how one would hold Swiss Francs?

I ask as a dual UK/Swiss citizen, whose Swiss bank account was closed when swingeing fees were introduced on small holdings.

How does a UK citizen hold foreign currency? Genuine question....

scrumpyjack
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Re: Does anyone use bond ladders?

#410728

Postby scrumpyjack » May 10th, 2021, 11:05 am

UnclePhilip wrote:
scrumpyjack wrote:If I wished to hold some cash assets in case of rising interest rates, falling equities, rising inflation (and I do hold a large amount of cash to cover many years of living costs), I would not want to limit my thoughts simply to sterling bonds, cash, ILGs etc. Another alternative would be to park cash in a stronger currency more likely to withstand rising inflation (whether cash or bonds in that currency). Historically swiss francs have been a pretty reliable store of value and if significant inflation increases arise in GBP and USD, Swiss francs would be a good safe haven, IMO.


At the risk of being naive, can I ask how one would hold Swiss Francs?

I ask as a dual UK/Swiss citizen, whose Swiss bank account was closed when swingeing fees were introduced on small holdings.

How does a UK citizen hold foreign currency? Genuine question....


Not difficult, you can open a foreign currency account with HSBC
https://www.hsbc.co.uk/international/currency-account/

hiriskpaul
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Re: Does anyone use bond ladders?

#410752

Postby hiriskpaul » May 10th, 2021, 12:50 pm

With gilts yielding so little, it is interesting to consider the effect of spreads and fees on trading for retail investors. Even though spreads are small they can still make a nonsense out of a plan to buy a short dated gilt. For example, I just got a quote for 10k of the Treasury 1.5% maturing on 22 July 2027 of 105.9475. That is a gross redemption yield of just 0.08% and that does not include the broker fee. Then there are taxes to consider if held outside a SIPP or ISA. The coupon of 1.5% is high compared to the GRY, so taxes are really punitive on this. income tax at 20% would mean a net redemption yield of around -0.2%. Compare that to Marcus, paying 0.4% (0.32% net) on instant access and if someone does want to lock in a 5 year rate, Hodge are offering 1.35%, or 1.08% net of 20% tax.

9 year gilts are not much better, for the 4.75% 2030 I was quoted 136.3998, for a GRY of 0.79%, or about 0% net of 20% income tax.

NotSure
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Re: Does anyone use bond ladders?

#410753

Postby NotSure » May 10th, 2021, 12:56 pm

TUK020 wrote:NotSure (great handle for an investment site, by the way)


itsallaguess was already taken......


TUK020 wrote:Your 'extreme thought experiment' can be relabelled 'what happens in inflation takes off?' Not sure that all shares would fall further than bonds.


That is certainly one scenario. But the current 'orthodoxy' of 'stick it all on a global tracker' does lead to a high weighting of US growth stocks on rather fruity earnings multiples. But for the purposes of the thought experiment, merely central banks deciding that pumping trillions into economies already growing at record rates maybe wasn't the the best present we could be giving our descendants and perhaps 'old school sound money' wasn't a totally stupid idea. Not likely though.


TUK020 wrote:
Also of considerable interest to me - I am trying to extricate myself from work at the moment, and am significantly tilted towards equities.
My actions of the moment are to increase my cash holding, and also gold (ETF phsyical gold, plus Gold miners ETF)

tuk020


Congratulations on getting yourself in that position. I'll be working another 10 - 15 years yet, so just getting to point where I feel I need to consider some sort of consolidation - where 'risk factors' of 5, 6 or even 7 felt fine a couple of years ago, there is now the potential, maybe necessity, to derisk a bit, and be thankful of recent gains, but not expect them to continue until I need the money. Successful investing has been like 'shooting fish in a barrel' for a while now - Madoff sucked people in with promises of 10 %. Seems almost quaint now! I'm not sure about gold, feels like a 'punt' to me, but I do feel that a bit of cash, taken from recent profits, or possibly short/mid term bonds, or a mix, may well come in handy if we do have a another 'reversion to mean' within the next few years.

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Re: Does anyone use bond ladders?

#410759

Postby 1nvest » May 10th, 2021, 1:18 pm

dealtn wrote:What post WW2 QE?

:)

QE is the large scale acquisition of assets by the state. Post WW2 there was massive nationalisation i.e. Labour landslide won in 1945 and then nationalised coal, gas, electricity, telecoms, Bank of England, rail, steel, NHS ...etc.

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Re: Does anyone use bond ladders?

#410762

Postby dealtn » May 10th, 2021, 1:27 pm

1nvest wrote:
dealtn wrote:What post WW2 QE?

:)

QE is the large scale acquisition of assets by the state. Post WW2 there was massive nationalisation i.e. Labour landslide won in 1945 and then nationalised coal, gas, electricity, telecoms, Bank of England, rail, steel, NHS ...etc.


Not a definition of QE I have ever seen used before anywhere, but at least I now know what you are referring to.

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Re: Does anyone use bond ladders?

#410771

Postby 1nvest » May 10th, 2021, 1:55 pm

Post WW2 up to early 1950's and 10 year Gilt yields stayed down at around 2% levels https://fred.stlouisfed.org/series/MTGB10UKM whilst in some years inflation spiked up to 7% type levels https://inflation.iamkate.com/ (1947/48) and even 9% levels (1951/52). A handful of years of -6% real gross (worse after taxes) compounds to getting on towards a third loss.

For T-Bills, Barclays Equity Gilt Study 2016 figures indicate they remained at 0.5% levels from the start of 1946 to the end of 1951. So even worse.

In the 1970's interest rates more aligned to inflation, but so also were taxes raised, to around 38% for basic rate taxpayers. 15% interest, 15% inflation, 38% taxation is close to -6% real, which again over a handful of years might be getting on toward a third loss.

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Re: Does anyone use bond ladders?

#410777

Postby 1nvest » May 10th, 2021, 2:31 pm

In total gross terms, excluding costs and taxes, 1945 to 1952 and bonds lost money in real terms. Stocks just about broke even, as did 67/33 stock/bond. Given current circumstances/valuations we're perhaps more inclined to see a repeat of the 1945 to 1980 era than we are likely to see a repeat of the post 1980 era. For accumulators, breaking even in real terms is fine. Dips may even see some reasonable cost-averaging benefits. For those in drawdown, a 0% or worse outcome when you're also drawing 4%/whatever eats capital. Extended out to a decade or two and potentially critically so. The 4% SWR rule of thumb suggests that 60/40 worse case survived 30 years, with nothing remaining at the end. So in that sense OK, assuming you don't live 30 years or aren't concerned about leaving money to heirs. Talmud and Old-Money type asset allocations fared (much) better. But equally during the 1980 to 1999 'compensation' years, good/great times for stocks/bonds, they did lag stock heavy asset allocations, modest/reasonable gains instead of great gains.

A third in home value, a third in stock, a third gold ... using US data since 1994 has pretty much overall compared to 67/33 total stock/total bond. And also is potentially the more tax efficient - especially when taxes might be raised as they typically are during 'bad times'.

A risk however is that Labour is increasingly being pushed towards more extremes and a 'great nationalisation' including homes is perhaps increasingly more likely when they do landslide into government. Wealth tax, capital gains on sale of primary homes tax ...etc. General seizure of assets/wealth for the 'greater good'. The reality as before is that wealth flights to leave the rest having to plug that hole (1% richest pay 30% of the tax take so when they flight the rest have to find/pay more).

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Re: Does anyone use bond ladders?

#411535

Postby Gilgongo » May 13th, 2021, 7:49 am

Hi - OP here. Reading this thread, I'm thinking the answer to my original question is "No." Or a least, "Yes, but those who do use bond ladders may not be deriving the benefits bond ladders were originally supposed to provide."


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