Pile into Bonds?

[GeoffF100]

Here is a thought provoking video:

https://www.youtube.com/watch?v=ewddZpfbKrA

Recorded after the Truss crash. Bonds have recovered since then, but they are still much cheaper than they were.

[formoverfunction]

My high yield portfolio has a had a small blip, but it's still compounding at 10%, so the small capital impact has been marginal.

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Pile in? Not sure I'd suggest that but easing in and reinvesting feels like a sensible approach now and for the long term.

[GeoffF100]

This fund looks interesting for use inside a tax shelter:

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

Outside of any tax shelter, I already have 0.125% index linked gilts, and savings term accounts that I am running down as they mature (too much tax to roll-over at current interest rates).

[Lootman]

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Perhaps I am misunderstanding you here but the way I read that, it doesn't make any sense to me. If you hold a bond that yields 8% and then its yield rises to 13%, then you will be sitting on a significant (unrealised) capital loss. So that is not a good thing at all.

Now if you ignore that and hold to maturity, and there is not a default, then you might not care. But with junk bonds a rise in yields of that magnitude is a warning sign and not a reason to rejoice. Either the credit quality has deteriorated or a higher inflation outlook is eating into expected returns. Or both.

Of course if you are looking to buy more then you might be happy. But either way it doesn't not make the interest payments any easier or harder for the issuer to service. The amount of the bond coupon payments remains the same. Rather it reflects a change in investors' perception about how viable the issue is. That bond is now perceived as a lot riskier.

[Seasider]

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Perhaps I am misunderstanding you here but the way I read that, it doesn't make any sense to me. If you hold a bond that yields 8% and then its yield rises to 13%, then you will be sitting on a significant (unrealised) capital loss. So that is not a good thing at all.

Now if you ignore that and hold to maturity, and there is not a default, then you might not care. But with junk bonds a rise in yields of that magnitude is a warning sign and not a reason to rejoice. Either the credit quality has deteriorated or a higher inflation outlook is eating into expected returns. Or both.

Of course if you are looking to buy more then you might be happy. But either way it doesn't not make the interest payments any easier or harder for the issuer to service. The amount of the bond coupon payments remains the same. Rather it reflects a change in investors' perception about how viable the issue is. That bond is now perceived as a lot riskier.

I think what he means is something like IPF2 and IPF3 where the company offers you the chance to swap your 7.75% bonds for ones paying 12% So in theory you have the same amount of principal yielding a higher income.

[Lootman]

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Perhaps I am misunderstanding you here but the way I read that, it doesn't make any sense to me. If you hold a bond that yields 8% and then its yield rises to 13%, then you will be sitting on a significant (unrealised) capital loss. So that is not a good thing at all.

Now if you ignore that and hold to maturity, and there is not a default, then you might not care. But with junk bonds a rise in yields of that magnitude is a warning sign and not a reason to rejoice. Either the credit quality has deteriorated or a higher inflation outlook is eating into expected returns. Or both.

Of course if you are looking to buy more then you might be happy. But either way it doesn't not make the interest payments any easier or harder for the issuer to service. The amount of the bond coupon payments remains the same. Rather it reflects a change in investors' perception about how viable the issue is. That bond is now perceived as a lot riskier.

I think what he means is something like IPF2 and IPF3 where the company offers you the chance to swap your 7.75% bonds for ones paying 12% So in theory you have the same amount of principal yielding a higher income.

OK, fair enough, although I would still wonder what it is about the 12% bond that causes it to yield so much more than the 7.75% issue, given that the issuer and its credit rating is the same in both cases.

It can't be a free lunch. Is it because of a different term/duration? Is the 7.75% note more senior? Is the 12% note callable?

[Seasider]

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Perhaps I am misunderstanding you here but the way I read that, it doesn't make any sense to me. If you hold a bond that yields 8% and then its yield rises to 13%, then you will be sitting on a significant (unrealised) capital loss. So that is not a good thing at all.

Now if you ignore that and hold to maturity, and there is not a default, then you might not care. But with junk bonds a rise in yields of that magnitude is a warning sign and not a reason to rejoice. Either the credit quality has deteriorated or a higher inflation outlook is eating into expected returns. Or both.

Of course if you are looking to buy more then you might be happy. But either way it doesn't not make the interest payments any easier or harder for the issuer to service. The amount of the bond coupon payments remains the same. Rather it reflects a change in investors' perception about how viable the issue is. That bond is now perceived as a lot riskier.

I think what he means is something like IPF2 and IPF3 where the company offers you the chance to swap your 7.75% bonds for ones paying 12% So in theory you have the same amount of principal yielding a higher income.

OK, fair enough, although I would still wonder what it is about the 12% bond that causes it to yield so much more than the 7.75% issue, given that the issuer and its credit rating is the same in both cases.

It can't be a free lunch. Is it because of a different term/duration? Is the 7.75% note more senior? Is the 12% note callable?

IPF2 matures next year and IPF3 (which has only just been issued) runs to 2027. IPF ran a 1 for 1 exchange offer so it could put off the evil day when it has to repay the existing bond. I thought there would be more take up of IPF3 to be fair - only about 45% took up the exchange offer.

Enquest ran a similar exchange offer a while ago. Their 9% 2027 notes are trading at less than their 7% 2023 ones now. Presumably all down to the different duration.

[Alaric]

IPF2 matures next year and IPF3 (which has only just been issued) runs to 2027. IPF ran a 1 for 1 exchange offer so it could put off the evil day when it has to repay the existing bond.

It's not exactly a default, but it can affect the credit rating having to raise new funds to refinance maturing bonds.

[formoverfunction]

I'm seeing some upwards movement in yields on maturity, so you get the move from 8% >13% as I had this week for a note I was happy to hold before at 8% and I'm comfortable with the idea they will be able to service 13%.

Perhaps I am misunderstanding you here but the way I read that, it doesn't make any sense to me. If you hold a bond that yields 8% and then its yield rises to 13%, then you will be sitting on a significant (unrealised) capital loss. So that is not a good thing at all.

Now if you ignore that and hold to maturity, and there is not a default, then you might not care. But with junk bonds a rise in yields of that magnitude is a warning sign and not a reason to rejoice. Either the credit quality has deteriorated or a higher inflation outlook is eating into expected returns. Or both.

Of course if you are looking to buy more then you might be happy. But either way it doesn't not make the interest payments any easier or harder for the issuer to service. The amount of the bond coupon payments remains the same. Rather it reflects a change in investors' perception about how viable the issue is. That bond is now perceived as a lot riskier.

Correct the bond had matured and is now perceived as being riskier. I believe that concern is a mixture of perceived risk and marked tightness in the willingness to fund high yield when it was renegotiated. In this case I'm happy to take the increase and hold to maturity.

I have a fairly wide array of holding in bonds that encompasses ORB, funds, unlisted, IT's, WiseAlpha etc, so my holding individual high yield instruments is quite balanced. I haven't checked how close, or not, it's presently trading to par. Mainly as it's my intention to hold to maturity and I am happy to hold to the issuers asset backed and unsecured instruments.

[funduffer]

I have hardly any bonds in my portfolio. I have been always put off by the ridiculously low interest rates and subsequent high valuations. Things have changed dramatically in the last 12 months, however.

Surely now, with rising interest rates, it is the time to “pile into bonds”?

I have noticed UK gilt index trackers have fallen much more than global government debt trackers in the past year. I am not sure of the reason for this, as interest rates are rising everywhere. Is it the Truss “moron factor”? It feels to me UK gilts are where the value now is.

I am contemplating a modest investment into Vanguard’s UK gilt index.

Not “piling in”, but a step in that direction.

FD

[GeoffF100]

I have noticed UK gilt index trackers have fallen much more than global government debt trackers in the past year. I am not sure of the reason for this, as interest rates are rising everywhere. Is it the Truss “moron factor”? It feels to me UK gilts are where the value now is.

You need to be more specific here. Which funds, and over what time frame? There are plenty of articles on the moron premium. Search in Google. The market clearly believes the moron premium is justified. What do you know that the market does not? I buy gilts for the tax advantages, but that is another matter.