Bond bull market is over

[Jwdool]

If you take a gilt, such as the TG61, 0.5%, 2061 trading at 27p, the question you need to ask doesn't really involve an analysis of inflation, growth, interest rates, or macroeconomics. It reduces down to this: will there be some sort of awful crisis of some sort between now and 2061, i.e. in the next 38 years. The answer to that is almost certainly yes.

We not really had a 38 year period of calm, nor are we likely to. I don't have any idea what sort of crisis is going to emerge in the next 38 years, but I have a strong suspicion that something is going to happen and when it does, we'll see central banks reducing rates at a rapid pace.

These sorts of gilts will fly once that happens - and in the meantime, you get paid an absurd ~4.6% in the meantime on a relatively risk free basis. Not to mention that virtually all macro indicators are now pointing downwards.

Good luck.

[monabri]

If you take a gilt, such as the TG61, 0.5%, 2061 trading at 27p, the question you need to ask doesn't really involve an analysis of inflation, growth, interest rates, or macroeconomics. It reduces down to this: will there be some sort of awful crisis of some sort between now and 2061, i.e. in the next 38 years. The answer to that is almost certainly yes.

We not really had a 38 year period of calm, nor are we likely to. I don't have any idea what sort of crisis is going to emerge in the next 38 years, but I have a strong suspicion that something is going to happen and when it does, we'll see central banks reducing rates at a rapid pace.

These sorts of gilts will fly once that happens - and in the meantime, you get paid an absurd ~4.6% in the meantime on a relatively risk free basis. Not to mention that virtually all macro indicators are now pointing downwards.

Good luck.

I can forsee one massive crisis in the next 38 years. If it doesn't happen then the upside will be a soggy card from King William landing on my doorstep.

[Lootman]

TG58 recent 66p price (actual price of whatever inflation adjustment), 0.125% yield ... and near insignificant taxable income/interest, most of the the gain being price appreciation (66p to 100p as the bond nears maturity + inflation on top). In effect to buy £10,000 of 2058 spending power cost just £6,600 of present day money.

So you want me to tie up my money for 25 years and then all I get back is a sum of money that will buy what I can buy today for the sum invested?

I can see buying these things in short-dated maturities, but even then only as a substitute for savings accounts and the like. But it is not an investment for me since my sum invested will not grow.

And the other problem is the 100% exposure to sterling. I would much rather hold a mix of currencies, given the historical weakness of sterling for as long as I can remember.

[NotSure]

If you take a gilt, such as the TG61, 0.5%, 2061 trading at 27p, the question you need to ask doesn't really involve an analysis of inflation, growth, interest rates, or macroeconomics. It reduces down to this: will there be some sort of awful crisis of some sort between now and 2061, i.e. in the next 38 years. The answer to that is almost certainly yes.....

A couple of points - you mean a deflationary crisis, I assume? What about an inflationary or currency crisis?

Plus, your 38 year bond will only be a 37 year bond next year, etc. etc. Like me (but for different reasons) you probably haven't got the full 38 years

But the very best of luck.

[dealtn]

If you take a gilt, such as the TG61, 0.5%, 2061 trading at 27p, the question you need to ask doesn't really involve an analysis of inflation, growth, interest rates, or macroeconomics. It reduces down to this: will there be some sort of awful crisis of some sort between now and 2061, i.e. in the next 38 years. The answer to that is almost certainly yes.

... you get paid an absurd ~4.6% in the meantime on a relatively risk free basis.

No. You have a massive duration risk that includes possibilities such as having to sell before maturity, due to say death, divorce settlement, plus exposure to regime or regulatory change, plus inflation among others.

You are right there will likely be a crisis (but not all positive to gilt prices)

You are right 4.6% is an absurd return

You are wrong it isn't on a relatively risk free basis.

Good luck.

[Zebedee71]

No. You have a massive duration risk that includes possibilities such as having to sell before maturity, due to say death, divorce settlement, plus exposure to regime or regulatory change, plus inflation among others.
You are right there will likely be a crisis (but not all positive to gilt prices)
You are right 4.6% is an absurd return
You are wrong it isn't on a relatively risk free basis.
Good luck.

.....which begs the question...should whoever originally bought this crap in the first place (Instos/Life/Pensions etc) be put out to grass?

Cognitive Dissonance Groupthink gone mad methinks

BTW the average 12-month growth rate of UK Consumer Prices Index (CPI) between 1950 and 1988 was 6.4%, while the average between 1989 and April 2022 was 2.5%....make of that what you want when thinking about 4.6% return for the next 37 years in what may well be relatively benign GDP growth environments for advanced economies dishing out money to the corporate, political and public needy.....unless something radical happens

....on the flip side of this I am not sure whether to pity or applaud those in the US with their locked (to the house they now live in) 2.75% mortgage with 20+ years to run, many who now cannot afford to move due to the circa 7% now ....it was not as risk free a purchase as they thought!
z71

[NotSure]

How 10-year Treasurys could produce 20% returns, according to UBS

Carnage in the bond market in September could tee up an opportunity for investors to earn big returns on U.S. government debt in a year.

Owners of 10-year Treasury BX:TMUBMUSD10Y notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management.

The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market.....

https://www.marketwatch.com/story/how-10-year-treasurys-could-produce-20-returns-according-to-ubs-aeee6b89?mod=home-page

[GoSeigen]

No. You have a massive duration risk that includes possibilities such as having to sell before maturity, due to say death, divorce settlement, plus exposure to regime or regulatory change, plus inflation among others.
You are right there will likely be a crisis (but not all positive to gilt prices)
You are right 4.6% is an absurd return
You are wrong it isn't on a relatively risk free basis.
Good luck.

.....which begs the question...should whoever originally bought this crap in the first place (Instos/Life/Pensions etc) be put out to grass?

I don't see any circularity, perhaps begging the question doesn't mean what you think it means?

I am one of those who originally bought "this crap". Please go through your argument carefully as to why I should be put out to grass?

You see, in my view there was nothing "crap" about it. In fact UK gilts brought me over 30% annual gains on several occasions during my holding time.

What makes you say now of all times that it was crap when issued? Were you saying the same at the time? Because you'd have been wrong, or at best your crap would have made you a lot of money which is not bad for a piece of excrement.

Are you sure you're not the victim of groupthink?

GS

[Lootman]

If you take a gilt, such as the TG61, 0.5%, 2061 trading at 27p, the question you need to ask doesn't really involve an analysis of inflation, growth, interest rates, or macroeconomics. It reduces down to this: will there be some sort of awful crisis of some sort between now and 2061, i.e. in the next 38 years. The answer to that is almost certainly yes.

... you get paid an absurd ~4.6% in the meantime on a relatively risk free basis.

No. You have a massive duration risk that includes possibilities such as having to sell before maturity, due to say death, divorce settlement, plus exposure to regime or regulatory change, plus inflation among others.

There is also the risk (or at least I see it as a risk) of being invested in a 100% pound sterling asset. I would much rather be diversified across countries and currencies than bet the farm on the UK. Of course your "exposure to regime or regulatory change" partly covers that. But given the long-term weakening of sterling I would not want more than a basic exposure to it.

[Eddiedcricket123]

Since the original post on this topic, a lot has changed in markets pricing and dynamics.

Firstly, addressing the inflation issue, the elephant in the room, UK Inflation has come down from 7.9% YoY in June to 6.7% in August. Whilst core inflation has come off to 6.2% in August. This is forecast to drop to 5.5% in Q4'23.

Secondly, In November'21 I was watching Natural Gas prices increase, pre-Ukraine invasion. By that time, Rotterdam Futures had just doubled. At that point in time, the increase was solely in conjunction with the uncertainty of the lockdowns, and severe disruption in the supply chain. Fast forward 3 months to Feb'22, and again prices increased 30%. This is when the first signs of more severe energy costs, around the time of the Ukraine invasion. So inflation began to take effect.

Thirdly, the end of QE in the US, UK and other markets in Q2'22. And the ratcheting of QT by way of increased interest rates over the last 15 months.

Now, the question is, have we got over the hump? Is the worst behind us? The probability of recession in the US and UK have declined, especially a deeper recession.

However, with many factors still in play, namely the high cost of capital, especially for those firms who need to refinance in 24 & 25, will they have to sell their assets? And then there's all kinds of knock on factors in the wider economy.

Junk bond spreads have not widened to a significant extent. But it wouldn't take much for some riskier bonds to collapse.

There is some light at the end of the tunnel for UK Bonds, having endured a significant inflationary period, now facing lower energy costs and OPEX, should have more free cashflow in Q4'23 and 1H'23. So with current yields where they are, it is certainly not over for the bond investor.
Taking out duration risk is important now, as there is prospects of rates cuts in Q2'23, and long term swap rates are declining.