Huge losses going on in Bonds right now!

[vand]

That's true, I haven't talked about Index linked FI yet.

TBH I'm not that knowledgeable about them...

I don't invest in Personal Assets IT or the other "wealth preservation" trusts, but the commentary in the recent quarterly report is really worth reading, especially with regard to the behaviour of index linked bonds. The section entitled "The way things work: index-linked" is what I'm referring to: https://www.patplc.co.uk/Portals/0/Lite ... 202022.pdf

I personally have zero interest (see what I did there?) in bonds, although I still weakly hold a few preference shares as my only fixed income investments.

All the best, Si

Thanks, yes, that's what the Pensioncraft video is explains too. It makes sense, but with anything new just takes a while to wrap one's head around.

One also has to very relevantly ask: Is the Bond market any good at predicting inflation at all?

I present this evidence that the bond market is actually a lousy predictor of future inflation and that the expectation of inflation it sets is most highly correlate with a rear-view mirror of what past inflation has already happened, rather than what future inflation actually turns out to be...

https://www.piie.com/blogs/realtime-eco ... -inflation


"The first line of the table shows that a 10-year average of past inflation is the best predictor for US yields, with an R2 of 0.82. A one percentage point increase in past inflation raises the yield 1.11 percentage point. The current inflation rate has only a small effect of 0.18 percentage point... Thus, bond yields are not good predictors of inflation over any future horizon."

[Walkeia]

As someone who bought Government bonds for the first time recently (-3% so far) and planning to buy more soon my 2 cent would be.

Bond markets price CB action far into the future - we are already priced for aggressive and decisive action from the CBs across the world for the coming years and in some cases the market is pricing much more aggressive moves than recent central bank rhetoric. UK prices 2.25% base rate in Dec; this is a hike at every meeting this year of 25bp; despite the BoE saying they would most likely pause in the summer as growth concerns rise.

Central banks are making it pretty clear they will do whatever it takes to bring inflation down - even if supply side driven. So the question is hard or soft landing... and their record on soft landings is pretty awful.

Most importantly - I run my portfolio with varying degrees of leverage. Currently leverage is low after reducing over the last year as we approached the end of the quantitative easing programmes. Government bonds are incredibly useful for my portfolio margin calcs and management of margin. After deeming them squeezed by quantitative easing I now believe they are getting to levels (US 10y @ 3%, Germany 10y @ 1%; 10y Italy at 2.75%) which make sense to start adding them into your portfolio. So yes, I am giving up a small amount of return to reduce the volatility of my portfolio (leverage could compensate for this) but when the next crisis comes I think I'll be glad for the insurance I am placing into my portfolio now.

One last thing I'll add is that I guess it is strange for me, whose over arching investment theme is that we've lived through a period of fiat money and devaluation of cash, that I should be buying government bonds. I am personally not convinced this period is over... and plan to continue to hold a portfolio which is short cash (investment portfolio on margin + mortgages) to varying degrees. But I will absolutely hold bonds over cash from here due to the negative correlation in a real crisis.

[dealtn]

So yeah, you happily collected the income and didn't need to worry about the value of your bond, but all the while the purchasing power of the bond was decreasing.

But you’re overlooking the opportunity to hold inflation linked bonds whose purchasing power keeps up (or down) with the inflation rate. It’s easy to overlook this type of asset which can have a useful place for some folk.

Again I would have to say this is not true and a fundamental misunderstanding of inflation linked bond pricing. Purchasing power only "keeps up/down" when you are able to purchase at a price around par (and enjoy whatever limited coupon may be available). The vast majority of index linked bonds are priced comfortably above par, with negative real yields. Hold these to maturity and you will suffer a loss, in many cases a large loss, of purchasing power.

[Walkeia]

Again I would have to say this is not true and a fundamental misunderstanding of inflation linked bond pricing. Purchasing power only "keeps up/down" when you are able to purchase at a price around par (and enjoy whatever limited coupon may be available). The vast majority of index linked bonds are priced comfortably above par, with negative real yields. Hold these to maturity and you will suffer a loss, in many cases a large loss, of purchasing power.[/quote]

You are correct for the U.K. and some European markets - a large part of which is driven by regulation driving pension fund demand. However, 10y Italy+ or US real yields 10y plus offer you a positive real return this morning so these are large liquid markers offering what the original poster describes.

[hiriskpaul]

It’s always worth having an open mind about financial assets, there is a difference between the price that people will pay and the underlying investment.

There’s nothing like an accepted “wisdom” that bonds are totally rubbish to make me take notice !!!

Having been a mathematician I find bonds interesting, as so much about them is known, it’s the market viewpoint of the future that determines the price but not always the value…

Index linked bonds have two main factors driving them, expectations of inflation and expectations about the levels of interest rates, both factors drive prices at the same time and it’s not always clear which is dominant.

Falling prices for bonds mean that coupons can be reinvested at more attractive prices and this will be helpful if your holding period exceeds the duration of the bonds.

The ability to move back and forth between bonds and equities can be rewarding whether this is through rebalancing or judgement calls.

Market timing is difficult but not impossible and the amateur has advantages of not having a fixed mandate or oversight of quarterly reporting etc.

If we see a heavy market fall of 30/40% then a chunk of bonds that have fallen less or even risen will provide options…

Well said. In the past I have done very well out of government bonds. During the financial crisis I held a substantial proportion of gilts, which held up well. During the Eurozone debt crisis I held Spanish and Italian bonds when many reckoned they were heading for default, the Euro would disintegrate, etc. and I held long duration US treasuries right up until the Covid-19 crash. At that point the yields got too low for me.

Right now anyone fearing inflation could do a lot worse than TIPS, which have started offering real yields again: https://www.reuters.com/business/financ ... 022-04-20/

I also think that cash is very maligned as an asset class. For those who think we are in for a repeat of the 1970s and drawing an income from their investments, holding cash gave a better outcome than long dated gilts. Even though cash lost money in real terms it did not lose as much as equities and was much less volatile than gilts. The lack of volatility is really important for anyone needing an income from investments. Retail investors have an edge over institutional investors when it comes to cash as well. They can typically achieve better rates of return and have the advantage of FSCS protection.

[vand]

Moneyweek's recent take.. succintly summarizing the state of where we are today.

https://moneyweek.com/investments/bonds ... comes-next

not sure what the TLDR version is.. the past is always clearer than the future.

[JohnW]

Again I would have to say this is not true and a fundamental misunderstanding of inflation linked bond pricing. Purchasing power only "keeps up/down" when you are able to purchase at a price around par (and enjoy whatever limited coupon may be available).

Quite right; thanks for elaborating on this. Some current inflation linked bonds have a negative yield, so if you hold them to maturity you have a negative real rate of return and lose some purchasing power; might be a percent or so each year depending on the bond. But that’s a known loss when you purchase, and inflation whatever it turns out to be will not change your final result. I hope I got that right.
So, as far as risk goes: they have credit risk (the government might default); they have interest rate risk (to the extent that if interest rates rise you are stuck holding a lower yielding bond if you hang on to it until maturity rather than being able to buy a new higher yielding bond); but they don’t have inflation risk while you hold them.

[vand]

Hi Vand.

I'm not sure that's quite representative for all instruments relating substantially to "junk" (aka "high yield") bonds. Here is the ten year record of two that I am currently in (from TrustNet) ...



the better of the two is BIPS, the other HDIV. At some level, their performance is slightly understated due to their current discount to NAV (they are Investment Trusts). Not as good as a global equity tracker over the period (and not GoSeigen's 4-bagger) but not terrible all the same.

Further, similar to (but not quite as much as) VAGP, they offer some diversification.

Regards, Newroad

Thanks for this Newroad.

Those are active funds, rather than ETFs, and I agree they look to have done a decent job. I haven't done that much research into this, but I've read that its much easier for active BOND funds to beat their benchmarks than it is for active Stock funds.

With stocks, the upside on individual securities is unlimited, so your performance is reliant upon picking out the few highest performing stocks - this is very difficult to do.

With bonds, the upside is capped to the coupon rate on the instrument, so the skill of the fund manager becomes about avoiding the bad apples. This game is easier to win.

However, a word of warning is appropriate if anyone things these are diversifying options - as these two funds show, Junk bonds behave nothing like government bonds. Look back a their performance in moments of panic - they sold off just as much as stocks during the GFC and CV19 crash.. so their risk profile is just as high as stocks. If you are looking for diversification for your stocks, then you won't find it in junk bonds.

[richfool]

For those looking for high yields, wouldn't renewable energy IT's be something of a substitute for bonds currently. Yields in the 4.5% -6.7% range/

[NotSure]

Were it not for the high level of CPI, major 10-year government bond yields are beginning to look almost normal (by modern standards), perhaps high enough that they would provide refuge if shares took a nosedive (that is, do their job by anti-correlating)?

e.g. Vanguard U.K. Long Duration Gilt Index Fund down 20% in last 6 months. At what point would the bond experts here consider them to be useful as an equity hedge? I guess there are plenty of headwinds still ahead - rising base rates and even the threat of QT (though I'll not believe that until I see it). The fund I mentioned above is still trading 'above par' but much less so that a few months ago.

[vand]

Were it not for the high level of CPI, major 10-year government bond yields are beginning to look almost normal (by modern standards), perhaps high enough that they would provide refuge if shares took a nosedive (that is, do their job by anti-correlating)?

e.g. Vanguard U.K. Long Duration Gilt Index Fund down 20% in last 6 months. At what point would the bond experts here consider them to be useful as an equity hedge? I guess there are plenty of headwinds still ahead - rising base rates and even the threat of QT (though I'll not believe that until I see it). The fund I mentioned above is still trading 'above par' but much less so that a few months ago.

You can't disassociate yields from inflation - the high CPI is the overwhelming reason why yields have risen... I know you probably know that..

what is most interesting for me is that this seems to be an environment where stocks and bonds are suffering together. We dubbed it the Everything Bubble, and at least 2 pillars of that bubble now seem to be collapsing. If or when real estate starts to collapse too there will be very few places to hide

[BT63]

what is most interesting for me is that this seems to be an environment where stocks and bonds are suffering together. We dubbed it the Everything Bubble, and at least 2 pillars of that bubble now seem to be collapsing. If or when real estate starts to collapse too there will be very few places to hide

Gold?

[NotSure]

You can't disassociate yields from inflation - the high CPI is the overwhelming reason why yields have risen... I know you probably know that..

No, of course you can't. If you believe current levels of CPI will persist or deteriorate, then bonds still look ugly. But they are now maybe at a level where falling inflation would see them fairly valued. A little attractive even, from the 'get rich slowly' perspective. As per the title of this thread, (US) bonds have now fallen more rapidly than at any time since 1842! (In nominal terms)

https://www.wsj.com/articles/its-the-worst-bond-market-since-1842-thats-the-good-news-11651849380?st=tsuh94k78ogz00z&reflink=desktopwebshare_permalink (no paywall)

what is most interesting for me is that this seems to be an environment where stocks and bonds are suffering together. We dubbed it the Everything Bubble, and at least 2 pillars of that bubble now seem to be collapsing. If or when real estate starts to collapse too there will be very few places to hide

Things have changed IMHO - outside of US tech perhaps, valuations again look fair to me. Not bullish or bearish, just fair. Check out yields/PER in e.g. Europe, Asia Pacific, Japan etc. (Consequently I'm underweight US, but it is still by far the largest single component of what I hold - just not 65%).

I don't have much to say on RE - I'm more interested in liquid stuff. RE has looked overvalued for at least 20 years to me, but I have a home I'm happy with and no plans to speculate there! I clearly just do 'do not get' RE.

Of course we may be on the verge of an horrendous global recession/depression, but is that not always the case

[vand]

You can't disassociate yields from inflation - the high CPI is the overwhelming reason why yields have risen... I know you probably know that..

No, of course you can't. If you believe current levels of CPI will persist or deteriorate, then bonds still look ugly. But they are now maybe at a level where falling inflation would see them fairly valued. A little attractive even, from the 'get rich slowly' perspective. As per the title of this thread, (US) bonds have now fallen more rapidly than at any time since 1842! (In nominal terms)

https://www.wsj.com/articles/its-the-worst-bond-market-since-1842-thats-the-good-news-11651849380?st=tsuh94k78ogz00z&reflink=desktopwebshare_permalink (no paywall)

what is most interesting for me is that this seems to be an environment where stocks and bonds are suffering together. We dubbed it the Everything Bubble, and at least 2 pillars of that bubble now seem to be collapsing. If or when real estate starts to collapse too there will be very few places to hide

Things have changed IMHO - outside of US tech perhaps, valuations again look fair to me. Not bullish or bearish, just fair. Check out yields/PER in e.g. Europe, Asia Pacific, Japan etc. (Consequently I'm underweight US, but it is still by far the largest single component of what I hold - just not 65%).

I don't have much to say on RE - I'm more interested in liquid stuff. RE has looked overvalued for at least 20 years to me, but I have a home I'm happy with and no plans to speculate there! I clearly just do 'do not get' RE.

Of course we may be on the verge of an horrendous global recession/depression, but is that not always the case

Yeah, markets stack on top of one another. Government Bonds set the rate of return that riskier asset classes have to exceed in order to make them worthwhile. So if bonds yields go from 1% to 3%, the expected return on stocks, corporate bonds, junk bonds, VC etc... all has to go up too by some amount too to make them worth holding (ie their price has to come down), so what we are seeing in stocks all makes a lot of sense to me.

Bonds do look slightly more attractive less repulsive than they did at the start of the year. Even Warren Buffett took a not-very-conceiled swipe at holding bonds in the 2021 annual letter when he opined "Bonds are not the place to be these days. Can you believe that the income recently from a 10-year Treasury bond - the yield was 0.93% at yearend - had fallen 94% from the 15.8% yield available in September 1981?"

But I have to say that imo they are still not an attractive proposition when taken as a standalone investment case. I think inflation is going to run higher for a while, and at ~3% on the 10yr I don't see it likely that there will be a positive real return over that time. It's true that a pending economic recession may temper inflation and give bonds a sharp rise, but it could also well be that the next recession actually creates more inflationary pressures.. and if your investment thesis is based around positioning yourself for recession then there are probably better ways you can do it

[JohnW]

But I have to say that imo they are still not an attractive proposition when taken as a standalone investment case.

Now that’s a high standard; nominal government bonds as the sole asset in a portfolio is not attractive? What about gold, alone; or just developing market stocks? That’s why we have diversified portfolios.

[vand]

But I have to say that imo they are still not an attractive proposition when taken as a standalone investment case.

Now that’s a high standard; nominal government bonds as the sole asset in a portfolio is not attractive? What about gold, alone; or just developing market stocks? That’s why we have diversified portfolios.

Agreed... and I never said that you should not hold any bonds. They may still have a roll to play in your portfolio if you believe that their historical correlation and therefore the benefits of holding them will persist. However, at the moment, we are seeing evidence that their relationship with risk assets may be changing. That also has to be factored in.

[CliffEdge]

It's difficult to know what to do at the moment

[NotSure]

It's difficult to know what to do at the moment

To me, that is always the case! At any point in time, everything is priced in according to the collective view of the future of many people more intelligent and informed than myself. Hence, what does one do? NotSure

However, provided one is taking a longish term view, and in the drip-feeding accumulation phase, now is maybe easier than 5 or 6 months ago. Stuff in general looks much more fairly priced than then - PEs have dropped sharply, bond yields have 'multi-bagged'.

I guess your comment is regarding the 'new' double issue of high inflation and risk of recession? Hopefully, neither will persist for more than a year or three, so have little impact on long term strategy? Or are you near to or into decumulation phase? I haven't thought much about that, but I guess that SOR risk is rearing its ugly head?

[JohnW]

They may still have a roll to play in your portfolio if you believe that their historical correlation and therefore the benefits of holding them will persist. However, at the moment, we are seeing evidence that their relationship with risk assets may be changing.

I don’t know what correlation they’d be better off having, or what’s coming, or what relationship with equities might change. But US bonds and stocks have had a negative correlation for 20 years (about -0.4), and a positive correlation of about 0.4 for 30 years before that. During that 30 year period government bonds returned 8%/year compound growth, and more than doubled in value in real terms. Predicting what will happen from here…..good luck.
https://www.bogleheads.org/forum/viewtopic.php?t=248325

[BT63]

It's difficult to know what to do at the moment

Something loosely based on the Permanent Portfolio?
Maybe not the 25/25/25/25 cash/bonds/gold/share split but at least 15/15/15/15 with the remaining 40 allocated according to your views.