richfool wrote:Hariseldon58 wrote:
The government bond fund in dollars ( or euros , yen mix) actually hedges the risk of a sterling currency crisis in the true sense of the word.
Hariseldon, Just an observation based on today's market movements and noting that the £ strengthened against the dollar and UK Gilts rose:
- The SP of VGOV increased today, though more than than that of IGLS. Both hold UK Gilts. Noted that IGLS holds shorter duration bonds.
- The SP of VUTY and VUTA (US bonds) understandably fell, presumably due to the strengthening of the £ against the dollar.
- (But) the SP of IGLH (
global government bonds) rose significantly, even though it is hedged. (US bonds are the majority holdings).
I appreciate there are multiple factors that influence price movements, but the last one puzzled me somewhat.
There was a lot going on this afternoon and for a largely passive investor I was trading like a day trader !!
US inflation came in at 3.2% below the expected 3.3%, markets think this means that inflation as a whole is moderating and interest rates may not rise further or perhaps even fall.
The dollar fell rather than the pound strengthened because of a fall in US interest rates.
UK gilts fell because they followed the trend and the market believes the same about uk interest rates.
VGOV has a longer duration than IGLS so the prices rise relatively more. ( yields down, prices go up)
IGLH is hedged , so the price is not moved significantly by the currency movements but the price does rise because of the interest rate falls and the rise in prices of the underlying bonds.
IGLH moves by an amount between IGLS and VGOV because the duration is between the two.
VUTA ( us treasuries intermediate duration) fell by .7% in sterling terms but the dollar fell by 1.85% against the pound. Ie the underlying bonds rose by around 1.15%.
You have got similar movements in prices of bonds for both UK and US Government bonds combined with the movement exchange rates. It’s get a little complex !!!
The other factor to remember with the hedging is that it is effected by the period of the rolling contracts, volatile currency movements can overwhelm the protection. Daily rolling contracts are more accurate than monthly rolling contracts but cost more.
A lot of moving parts ….its worth noting that IGLH didn’t offer anything over UK Gilts of a similar duration, the price movements were pretty much exactly the same.
As an aside infrastructure and property shares rise a lot on the prospect of lower rates today.