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Short term bond funds

Index tracking funds and ETFs
DelayedInvestor
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Short term bond funds

#415473

Postby DelayedInvestor » May 27th, 2021, 8:59 am

Hi. Sorry another basic one from me.

I'm looking at the Vanguard U.K. Short-Term Investment Grade Bond Index Fund - Accumulation fund. It tracks the Bloomberg Barclays GBP Non-Government 1-5 Year 200MM Float Adjusted Bond Index. Basically, I'm looking for something a bit riskier than cash but with a cap on short-term losses.

The problem I'm having is I can't find more than five years of returns for this one. I can't tell if that because it's only been around 5 years or not.

Anyway, does anyone have any experience with these sorts of funds? What kinds of drawdowns do you tend to get? I'm assuming it would get pretty hairy in a 2008 type situation.

Also, where would this type of fund be if/when interest rates start to rise?

Any thoughts or comments welcome.

GeoffF100
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Re: Short term bond funds

#415481

Postby GeoffF100 » May 27th, 2021, 9:21 am

DelayedInvestor wrote:Hi. Sorry another basic one from me.

I'm looking at the Vanguard U.K. Short-Term Investment Grade Bond Index Fund - Accumulation fund. It tracks the Bloomberg Barclays GBP Non-Government 1-5 Year 200MM Float Adjusted Bond Index. Basically, I'm looking for something a bit riskier than cash but with a cap on short-term losses.

The problem I'm having is I can't find more than five years of returns for this one. I can't tell if that because it's only been around 5 years or not.

Anyway, does anyone have any experience with these sorts of funds? What kinds of drawdowns do you tend to get? I'm assuming it would get pretty hairy in a 2008 type situation.

Also, where would this type of fund be if/when interest rates start to rise?

Any thoughts or comments welcome.

Vanguard gives the average duration as 2.9 years. Every 1% increase in interest rates would result in a fall 2.9%, but the fund would soon be earning higher rates of interest.

https://www.vanguardinvestor.co.uk/inve ... c/overview

(See Portfolio Data.)

The bonds are all investment grade (no junk), but there is some risk of defaults:

https://www.thebalance.com/what-are-san ... es-3305886

DelayedInvestor
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Re: Short term bond funds

#415496

Postby DelayedInvestor » May 27th, 2021, 10:01 am

Thanks for that Geoff.

GeoffF100 wrote:Vanguard gives the average duration as 2.9 years. Every 1% increase in interest rates would result in a fall 2.9%


How did you do that calculation? Is there a formula?

EDIT: Sorry, I just realised what you mean. If the average length was 2.9 years then you'd be earning 2.9 * 1% less over the remaining life of the bonds.

JohnW
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Re: Short term bond funds

#415973

Postby JohnW » May 29th, 2021, 6:42 am

'Bond prices fluctuate in response to market interest rate changes. The duration of a bond, or a bond fund, is a measure of its sensitivity to interest rates.' Have a look here, not sure your explanation is fully correct.
https://www.bogleheads.org/wiki/Bonds:_ ... s#Duration

Alaric
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Re: Short term bond funds

#416007

Postby Alaric » May 29th, 2021, 10:09 am

DelayedInvestor wrote:Also, where would this type of fund be if/when interest rates start to rise?


Initially it would fall back a bit, but ultimately grow faster (being accumulation) because of the higher interest returns available on its investments.

dealtn
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Re: Short term bond funds

#416206

Postby dealtn » May 30th, 2021, 11:41 am

Alaric wrote:
DelayedInvestor wrote:Also, where would this type of fund be if/when interest rates start to rise?


Initially it would fall back a bit, but ultimately grow faster (being accumulation) because of the higher interest returns available on its investments.


Not a fund I know, but if it's composed of short dated Investment Credit, the likely response would be down to how that interest rate rises compared to expectations (not them happening per se), and also the effect on Investment Credit spreads.

For instance a scenario where interest rates are going up as a result of economic strength, and improving prospects for companies (and a resulting reduction in corporate failure) investment credit could easily rise in price with yields falling on such interest rate rises. Compare that to a scenario where UK interest rates rise as a result of currency weakness and a failing economy spooking global investors as the authorities attempt to provide support.


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