Will bond prices return to recent highs?

[gcdonaldson]

As a small retail investor, It is tempting at the moment to invest in government bonds to lock in returns of about 4% and there is a potential for capital gains if prices return to recent highs.

However, it is possible that the recent highs were due to central banks and quantitative easing lowering interest rates to extraordinary low levels.

Now, that the cost of borrowing is around long term norms, central bankers will do nothing and the upside is illusory.

I would be interested in peoples thoughts.

gcdonaldson

[JohnW]

https://www.marketwatch.com/story/yes-1 ... e9103eb3f8
“Yes, 100% of economists were dead wrong about yields”
“Back in April (2014) every economist in a survey thought yields would rise. Guess what they did next….”
What chance have we got?

[dealtn]

As a small retail investor, It is tempting at the moment to invest in government bonds to lock in returns of about 4% and there is a potential for capital gains if prices return to recent highs.

What do those retruns look like in the real space, in other words after the effect of inflation? Is that still tempting?

However, it is possible that the recent highs were due to central banks and quantitative easing lowering interest rates to extraordinary low levels.

Possible? What other explanation do you have for government bonds rising in price other than reductions in market interest rates?

[88V8]

As a small retail investor, It is tempting at the moment to invest in government bonds to lock in returns of about 4% and there is a potential for capital gains if prices return to recent highs.
I would be interested in peoples thoughts.

Some imponderables around just now, war, oil/gas prices, recessions or not, so timing uncertain, but the bottom was last Octoberish.
There will be more upside, but not to previous highs.
Better yields are available from bond funds and some Prefs. Again, there will be some SP uplift, guess 5-10% or so.

My thoughts.

V8 (Prefs, no gilts)

[Gan020]

I would be interested in peoples thoughts.

gcdonaldson

Imho there due to QE there is far too much liquidity in the system and all assets regardless of whether equities or bonds are overpriced.

As QE reverses some of this will come out of the system

However, I find it difficult to predict what central banks will do next as their recent track record has been poor. I know what they should do but what they will do may be significantly differently. I am therefore loathe to own very much that has a maturity horizon of more than 5-7 years

[funduffer]

Having spurned UK govt bonds for nearly a decade, I have purchased a UK gilt tracker this morning with a modest amount of capital. Toe just dipped in water really!

My logic is that inflation has already peaked, and will drop dramatically. The OBR are forecasting deflation in a couple of years time!

With austerity (more tax, less spend) and higher mortgage rates, a deep-ish recession looms.

Surely this means BoE interest rates will peak quite soon and then start to fall. I can't see 4%+ interest rates when inflation is back at around zero.

So rising bond prices probably, but by how much, who knows?

FD

[1nvest]

I suspect we may have hit the bottom, where Gilts perhaps forevermore might broadly yield negative net real returns. The state doesn't want your money, it can just print/spend. Banks don't want your money as they no longer partner deposits/lenders and instead can just create debt out of thin air.

Think back to when money was gold/silver, coins worth their weight. The King/State borrowed that gold (money) in return for interest, in total more gold having been returned to the lender at maturity as part of that loan. Fiat (1930's onward) ended that. The US arranged for many to adopt the US dollar instead of gold, on the promise that it would peg the US dollar to gold, but where as with all fiat currencies that promise was repeatedly broken, to extremes.

Nowadays you have to short gold, in order to lend to the state/treasury (buy Gilts). Sell gold to lend, and where after inflation/taxation/costs the final outcome when the loan is repaid and you buy back gold and you may very well find that you ended up with less gold than before.

Today's currency is worthless and lending to the state is lending to someone who can direct inflation (print/spend that devalues all other notes in circulation), change interest and taxation rates, and at the end of the day doesn't want you to lend to them. Pension funds are under remit to buy Gilts, as that is a form of additional revenue for the state, net negative real yields = taxation of pension funds, similar to how inflation in general is just another form of taxation. "I promise to pay the bearer the sum of ten pounds" ... well go on. The Pound originally in the 700's was a Saxon Pound weight of silver. Later it became the Sovereign gold coin, legal tender One Pound value. More recently a Britannia one ounce gold coin has legal tender value of One Hundred Pounds, so at £1562/ounce recent gold price = £156.20 for a ten pound note payment value. The "I promise to pay...." wording on notes has become increasingly smaller with each new note edition, indicative of the fading away of (broken) promises.

Tangible currency is better than fiat currency, backed by something - such as stocks and/or gold. Convertible into Pound fiat currency in T+3 or less time (withdrawal notice period, i.e. typical time to sell shares and have the cash deposited into your account) when you want to spend it. Storing or depositing fiat currency, Pound notes, Gilts, bank deposits ... are all just wasteful, excepting perhaps if you can time the fiat currency markets in a favourable/productive manner (broadly on average timing washes, some win, some lose).

For more aggressive perhaps 80/20 stock/gold as your tangible assets backed money', so if 80 stock halves to 40, 20 gold doubles to 40, you have the option to sell gold to double up on the number of shares you hold. Down to a more neutral 50/50 stock/gold, perhaps US dollars fiat currency used to buy US shares, barbelled with gold non-fiat global currency and where only half of that has counter-party risk (other half, gold, is in-hand).

US PV data examples

Yes there was a boom time for Gilts/bonds in the following decades after the final disconnection between the US dollar and gold back in the 1970's causing massive initial declines in both stock and bonds (high yields/inflation). Nixon the then president doing so as a means to help pay down the massive cost of the Vietnam war. With the subsequent progressive transition from very high to very low yields stocks and bonds did great. But that's all now in the past. Fiat currencies globally are near cliff edges, susceptible to loss of faith. If they hang-in then stocks will tend to do OK, if not then gold will tend to do well. Better choices of 'currency' IMO than that of fiat based Gilts/cash deposits.

[1nvest]

My logic is that inflation has already peaked, and will drop dramatically. The OBR are forecasting deflation in a couple of years time!

That is based on a big spike, big dip (into deflation territory), 2027 levelling back off at 2% target level Pound devaluation inflation.

This government has cost the UK massively. Sunak's burning money (furlough that paid some £2500/month to stay at home, not others), LT/KK cost. And now high taxation and other factors incentivising a decline in GDP/flight of capital, along with Labour pretty much a dead cert to win a massive dictatorial majority government in a couple of years time, with even further taxation increases etc. and the UK is pretty much now seen as a banana republic, uninvestable. Further burdened with a baby boomers aged support factor.

Uni graduates are incentivised to earn no more than minimum wage or otherwise be placed into a high rate tax position (student tax, NI, income tax). GP's and others are incentivised to stop working when their LTA is reached and where that level is being reduced in real terms. Potential investor are scared off by the ever changing government policies to the extend where even those in government/authority do not even know/understand the ongoing rules. Taxation induces flight of capital, the 1% that pay a third of the total income tax take, leaving those remaining having to pay 50% more in taxes just to fill that hole alone. And continued permitting of mass migration, with no additional spending on increasing/improving the infrastructure to support that (instead the opposite - cuts).

Wouldn't be surprised if at some point within the next 5 years the UK was on the brink, seeing the Pound being massively shorted, very high inflation, very high taxation and interest rates. Maybe to as per the mid 1970's when it had to secure a IMF covering note at the risk of otherwise potentially defaulting. LT/KK pretty much kicked that off and Sunak had to take drastic actions to calm the markets, but the damage had been done and the price to pay will be very expensive all-told. When incompetence rules things more often work out bad, and sadly there is no sign of competent alternatives to replace that.

[CliffEdge]

My logic is that inflation has already peaked, and will drop dramatically. The OBR are forecasting deflation in a couple of years time!

That is based on a big spike, big dip (into deflation territory), 2027 levelling back off at 2% target level Pound devaluation inflation.

This government has cost the UK massively. Sunak's burning money (furlough that paid some £2500/month to stay at home, not others), LT/KK cost. And now high taxation and other factors incentivising a decline in GDP/flight of capital, along with Labour pretty much a dead cert to win a massive dictatorial majority government in a couple of years time, with even further taxation increases etc. and the UK is pretty much now seen as a banana republic, uninvestable. Further burdened with a baby boomers aged support factor.

Uni graduates are incentivised to earn no more than minimum wage or otherwise be placed into a high rate tax position (student tax, NI, income tax). GP's and others are incentivised to stop working when their LTA is reached and where that level is being reduced in real terms. Potential investor are scared off by the ever changing government policies to the extend where even those in government/authority do not even know/understand the ongoing rules. Taxation induces flight of capital, the 1% that pay a third of the total income tax take, leaving those remaining having to pay 50% more in taxes just to fill that hole alone. And continued permitting of mass migration, with no additional spending on increasing/improving the infrastructure to support that (instead the opposite - cuts).

Wouldn't be surprised if at some point within the next 5 years the UK was on the brink, seeing the Pound being massively shorted, very high inflation, very high taxation and interest rates. Maybe to as per the mid 1970's when it had to secure a IMF covering note at the risk of otherwise potentially defaulting. LT/KK pretty much kicked that off and Sunak had to take drastic actions to calm the markets, but the damage had been done and the price to pay will be very expensive all-told. When incompetence rules things more often work out bad, and sadly there is no sign of competent alternatives to replace that.

Brexit