Hi All,
I am looking to add some more bond exposure with the current yields.
I am looking for government bond exposure rather than corporate.
Can anyone recommend any decent funds / investment trusts or ETF's that might fit the bill.
Very many thanks.
Richard
Hi Richard,
I'm not actually a fan of gov't bond funds myself as you don't have any control over the pricing if you need to sell. Given the current market and volatility in bond yields I have opted for single bonds which expire when I need the cash ie to maturity so you know exactly what your return will be. You can currently get between 4% - 5% depending upon the duration. Yield gimp is an excellent site for current Gilt Yields
https://www.yieldgimp.com/
Alternatively if you believe rates will be higher for longer you can go with a money market fund / ETF which tracks SONIA and is currently at 4.7%. I'm currently in CSH2 which is an ETF.
Hi Andy,
That's very helpful. Many thanks and I'll have a look at yieldgimp and the options you mention.
My preference is likely to be the ETF.
Best
Richard
Hi Andy re not having any control over pricing when you want to sell , I'm trying to figure out how this is so giving all bonds Gov and Corp move around a bit on the second market.
I also prefer individual bonds to a fund.
In case it has not been mentioned, a common strategy for private investors is to look for entry points on short dated bonds and hold to redemption.
I personally wouldnt be looking at long dated stuff.
Hi Richard.
I would start by looking at Trustnet. This link is for the universe of ETFs and you can filter by sector (government bonds).
The biggest thing to decide is what combination of yield and duration you are looking for, and which government.
For example, if you just want to take the high yields on offer with little risk, then you could use something like the iShares 0-1yr Treasury ETF. The are unhedged and hedged versions depending if you want to benefit from any further dollar strength, or protect against dollar weakness, respectively.
The other end of the spectrum would be if you thought yields were due to decline and wanted to benefit from that movement. Then the TLT ETF would be the extreme choice... its annual return is driven by how the change in yield affects its capital value, rather than the yield itself.
Personally, I've been parked in the short duration camp for quite some time, when it comes to this asset class.
There are plenty of ETFs which cover different parts of the yield curve for the UK and US, certainly. You might also get EU and global options, but other govts are less easy to access I think.
Hope this helps!
I do the same. It’s worth pointing out that holding government bonds comes with certain tax advantages, especially for higher rate tax payers. Any capital gains you make on gilts are not subject to CGT, so if you buy a low-yielding bond trading well below par (where most of the return comes from the increase in the capital value rather than the coupon) then your tax-adjusted return will be higher than the quoted yield to maturity.
Yieldgimp is great because it highlights the bonds that have those particular characteristics, and also shows the tax-adjusted yields for comparison.
The tax advantages that Daniel mention are not available to bonds/gilts held in a fund or ETF, so if your account is not tax sheltered (i.e not and ISA or SIPP) then you want to hold your bonds directly and not via an ETF.
Hi, Can anyone tell me the difference between these two money market funds because I am struggling to understand. Thanks.
It might be this....
Royal London Short term Fixed Income
The Fund’s investment objective is to achieve a total return over rolling 12-month periods by mainly investing in cash and cash equivalents and government securities. The Fund’s performance target is to outperform, before the deduction of charges, the Bank of England Sterling Overnight Interbank Average (SONIA) by 0.50% per annum over rolling 12-month periods.
https://www.hl.co.uk/funds/fun...
Compared with this...
Royal London Short term Money Market
The fund’s investment objective is to preserve capital and provide an income over rolling 12-month periods by investing at least 80% in cash and cash equivalents. The fund’s performance target is to outperform, after the deduction of charges, the Bank of England Sterling Overnight Interbank Average (SONIA) over rolling 12-month periods. For further information please refer to the Prospectus.
Hi Phoenix,
For example I held iShares £ Index-Linked Gilts UCITS ETF GBP Dist (LON:INXG) which holds many differing UK Gilts with differing maturities. From memory the avg duration was about 15 years. As yields have increased the price goes down proportionally but multiplied by the duration. So very roughly if the yield went up 1% the price would drop by 15%. Therefore owing to the multiplier and the fact that the bond fund would typically always have an avg duration of 15 years because it would buy longer dated gilts as short dated ones matured the price will always vary by the 15 year duration up or down. In a nutshell a bond fund never reaches maturity and the price can vary wildly unlike a short dated single Gilt which will mature and you will get back £100 for each one. The closer the gilt gets to maturity the less the yield movements will have on its price as it will always get to £100 when it matures. If you hold a single long duration Gilt it will be subject to the same wild price variations as yields move.
I originally purchased this ETF in 2022 on the basis that I would get my money back plus inflation, however as I saw the price plummet I came to realise that I didn't understand what I had bought. After lots of research I sold out once I realised my very costly mistake.
I hope the above makes some sense, bond funds are very complex especially inflation linked ones.
Thanks Andy totally get it now, yes re duration something I didn't understand a lot about prior to 01.01.2022 onwards like yourself once the losses started racking up on what I thought were safe investments, I got to work understanding duration and getting my head round how interest rate increases/decreases affected the capital value of the bond.
As noted in the comments below it's important not to confuse bond funds with bonds, especially in the current situation. A bond fund never expires and is constantly refreshing its holdings unlike most bonds which have a duration and pay out capital on expiry. Personally I put them in the too hard camp.
Deciding whether to invest in UK government bonds - gilts - is really dependent on your needs and perhaps a view on the direction of travel of interest rates.
Roughly, UK gilt prices are falling (and yields are rising) because US government bonds - treasuries - are falling. As the US bond price is the benchmark for safety the UK has to pay a premium in interest to get investors to buy gilts.
US treasuries are falling because investors are worried that the US economy is running hot and that Trump's policies on tariffs and immigration will stoke inflation, which will force the Fed to hold interest rates higher for longer. The Bank of England could cut interest rates anyway if it believes that inflation isn't such a big problem here, but that risks a run on the pound, and as sterling declines imports become more expensive - which fuels inflation. It's complicated ...
Reeve's budget changes haven't helped, but mainly because she needs to borrow a lot more than markets are happy about, so investors may want higher coupons (dividends) to compensate for this. Obviously other budget changes may fuel inflation - particularly the NI rise, but overall they're probably fairly neutral in impact, partly offset by the previous government's NI cuts last year and partly because the changes are largely redistributive - so poorer people will have more money in their pockets which is likely to be spent on relatively low value goods (like Gregg's sausage rolls).
If you believe you need a safe haven for your money buy short dated gilts - say under two years - where you're guaranteed to recover your money in short order.
If you believe the current spike in interest rates will subside then buy longer dated gilts whose capital value will increase as they adjust to lower rates.
If you believe that stagflation is setting in and that interest rates are set to be higher for longer then don't buy gilts, but look for a combination of inflation matching assets - global equities, property, maybe a little gold and some commodities. In high inflation environments nothing does well, but they'll fare better than most.
If you believe you want to buy a bond fund for any of the above take a deep breath and go for a long walk and then do something else.
Best of luck!
timarr
Always respect your rambles Tim would you personally favour the short end over long if you were putting some of your Sipp into fixed interest at the moment ?
Hi TP
Always respect your rambles Tim would you personally favour the short end over long if you were putting some of your Sipp into fixed interest at the moment ?
I'm at the short-end but my duration to expiry (or at least retirement) is relatively short so that's more about maintaining a quasi-cash position than any belief about the direction of interest rates. As a general position I'm a long-only equity investor and I'm likely to remain so far into the future, albeit I will need more of a cash buffer.
In a high inflation environment with rising interest rates longer dated bonds will lose you more money than shorter dated ones. Reverse that and the reverse tends to be true.
Thanks Tim I'm entering semi retirement and my intention is to hold three years worth of anticipated income across three different money market funds which hopefully will prove a safeguard to avoid selling assets near bottom if we get another 18 months such as jan 2022 to mid 2023.
I don't think there have been many years of three years negative returns possibly early 2000's.
I finished working last year and was lucky enough to have a reasonable cash buffer. My tool of choice is to use the savings on offer through things like HL Active Savings. If you are able to utilise two peoples allowances you can avoid paying tax on up to approx £18k of savings income each.
Obviously once you start drawdown then you might be using some of your TF allowances for income withdrawals. But between Active Savings, Gilts, Money Mkt Funds etc there should be plenty of option for people to hold cash holdings across both protected and unprotected funds.
BTW I don't get anywhere near the £18k savings TF allowance, but it helps to understand the rules fully in order to know where to secure cash whilst looking to reduce higher risk equity holdings :-)
Hi Kevin can i ask how you get to 18k I understand that basic rate tax payers get the 1k savings allowance each and theres another 5k each you can get assuming your taxable income is £12,570 or below which get a couple to 12k but where does the other 6k come from ?
Regards
Andy
Many thanks for such a considered and informative reply, Timarr. Much appreciated.
Richard
Thanks Chris,
I'm so glad I posted the initial request as the responses have been so helpful.
Much appreciated.
Richard
