Bonds - when and why hold them? What to hold?

[reformed nice guy]

Bonds have been mentioned a few times in the credit deflation thread and it is an area that I am not terribly familiar with.

A lot of mainstream thought is to allocate a certain percentage of your portfolio to bonds and the usual claim is that good quality bonds are a way to lower risk.

I thought I would start this thread to stimulate a discussion on bonds.

There have been a lot of arguments for and against them, and there is a complex, varied eco-system of bonds.

To kick start, here are three links:

https://lategenxer.streamlit.app/Gilt_Ladder
This is an online calculator that builds gilt ladders for you.

https://www.yieldgimp.com/
Great name for a website. Tables of information for UK gilts.

https://finsight.com/bond-screener/corporate-bonds?

[Frank Hovis]

They of course lower risk, in that the future cash stream is known if you intend to hold them to maturity, but are prone to erosion by inflation.

My (overly) simplistic reason for not holding them but instead holding equities is that I would rather own the factory than lend money to the factory owner.

For the same reason I always want ordinary shares rather than preference shares.

I remember way back someone who ran the pension fund of my audit firm being immensely proud of the fact that they had never lost money in any year.

My immediate reaction, which I kept to myself, was that they could only do that by primarily holding bonds and cash so we're massively missing out on the huge gains that the stock markets were making.

I transferred out when I left.

[desertorchid]

when and why hold them? 

Now seems an excellent entry point given the majority of Economic commentators consider interest rates have likely peaked with a window of opportunity before yields begin to fall. With companies like HSBC/ Standard Chartered having Perp Bonds yielding about 8-9%, this is a guaranteed* way to double your money in under 10 years. The question is do you think you could guarantee the same result with Bitcoin, Ordinary Shares, Gold etc. I have doubts so am about 60% in Bonds.

* only if you believe these banks which are notoriously conservative are genuinely safe. DYOR and spreading risk, as with shares is the best approach.

[BWW]

1 hour ago, desertorchid said:

when and why hold them? 

Now seems an excellent entry point given the majority of Economic commentators consider interest rates have likely peaked with a window of opportunity before yields begin to fall. With companies like HSBC/ Standard Chartered having Perp Bonds yielding about 8-9%, this is a guaranteed* way to double your money in under 10 years. The question is do you think you could guarantee the same result with Bitcoin, Ordinary Shares, Gold etc. I have doubts so am about 60% in Bonds.

* only if you believe these banks which are notoriously conservative are genuinely safe. DYOR and spreading risk, as with shares is the best approach.

what are trying to achieve by doubling your money. assuming its to buy something you are taking a bet that its price will have less than doubled by the time the ten years are up and your fiat has a number twice what it was.

IMO bonds have no place in holdings you're not planning to spend for 10 years except maybe if senility is approaching and yoy're vulnerable to being sold bad investments.

Bonds are good for money you expect to spend within a few years on something fairly stable in price but as pension cos discovered around the time the truss kwarteng  administration assassination, bonds can screw you over too.

[desertorchid]

5 minutes ago, BWW said:

 

"IMO bonds have no place in holdings you're not planning to spend for 10 years"

I don't think most pension funds would agree with that.

[afly]

I don't own bonds because i don't trust governments. Pretty stupid really as they will come after my "fat cat" shares long before they renege on bonds

[BWW]

30 minutes ago, desertorchid said:

I don't think most pension funds would agree with that.

I agree with @DurhamBorn
on pension funds.

Their purpise atm seems to be divert some of funds from rich-or-not boomers to public sector pension scroungers and (not)- disabled claimants.

Edited November 28, 2023 by BWW
eta. actually I think db would say almost all not some.

[PETR4]

Bonds are really a wealth management tool for after you have acquired wealth, not a speculative investment for perceived short term gains.

Most people pay for stuff from earned income or borrowed money. The game changes once you have shed loads and month to month bugeting stops and you move into wealth management strategy.

You'd typically buy them to cover a future known repeating expense. That way you always know the money will be available. Or to guarantee a payout of X amount at a future date.

Here's a real world example from when I worked for Merril Lynch Private Clients. We had this plastic surgeon couple who were in the 10's of millions wealth bracket with a big holding in bonds instead of equities. I asked the investment manager why this was and was told it was because they gave a fixed amount to charity each year and to save using other pots of money they had the bond holding to ensure there was coverage.

The other primary usage for private clients is converting the equity position into an annuity to pay the pension for the last 20 (ish) years of someone's life. You wouldn't want a large equity fall wiping* out a chunk of capital at that stage of your life.

 

*bonds can also fall substantially in face value if you buy long dated bonds at a price significantly over par and then central banks increase interest rates rapidly.

[snaga]

This is very good, explains bonds and bond funds very well, impo it's a must watch for anyone not already a bond expert.

 

[reformed nice guy]

How about corporate bonds? @Kendo?

This link lists some of the commonly available ones in an easy to use format:
https://www.europeanhighyield.online/bond-prices/

Apple bonds at 4.592%, 93.6250 price maturing 2029
Barclays bank at 11.717%, 95.7500 maturing Sept 2024
BP at 6.918%, 92 for March 2027
If you fancy a punt, British American Tobacco at 7.003%, price of 42.2500 and matures 2052

Edited November 28, 2023 by reformed nice guy

[Kendo]

9 hours ago, reformed nice guy said:

How about corporate bonds? @Kendo?

This link lists some of the commonly available ones in an easy to use format:
https://www.europeanhighyield.online/bond-prices/

Apple bonds at 4.592%, 93.6250 price maturing 2029
Barclays bank at 11.717%, 95.7500 maturing Sept 2024
BP at 6.918%, 92 for March 2027
If you fancy a punt, British American Tobacco at 7.003%, price of 42.2500 and matures 2052

I don’t have much to add on this, though it’s true I was quite heavily invested in corporate bonds (passively) via a Halifax Regular saver ISA for many years. Took it out in my 20s on the Halifax ‘advisor’s’ recommendation but I never really understood what I had. The whole fund did well though during those disinflation years so I didn’t think too much about it for a long time.

I cashed it in in June this year as it had lost a fair bit since peaking in Jan 2022 and I just lost faith and got more jitters about talk of gilt strikes, etc. I think Durhamborn had talked about gilt holders losing around 20% investment value in that first year of inflation and I wasn’t far behind that. It did feel like it closely tracked the 10-year gilts and there were a few Euro banks in the top holdings if I recall. Transparency with the fund’s full list of holdings wasn’t great though.

Just had a look and the fund is 1% up on this time last year, so I might not have cashed in at the best time but overall I’m still glad I’m out of it now. Having been burnt a bit I’m not thinking about corporate bonds at the moment but it might be a good time if you choose wisely with select bonds. 

[desertorchid]

16 hours ago, PETR4 said:

Bonds are really a wealth management tool for after you have acquired wealth, not a speculative investment for perceived short term gains.

Most people pay for stuff from earned income or borrowed money. The game changes once you have shed loads and month to month bugeting stops and you move into wealth management strategy.

You'd typically buy them to cover a future known repeating expense. That way you always know the money will be available. Or to guarantee a payout of X amount at a future date.

Here's a real world example from when I worked for Merril Lynch Private Clients. We had this plastic surgeon couple who were in the 10's of millions wealth bracket with a big holding in bonds instead of equities. I asked the investment manager why this was and was told it was because they gave a fixed amount to charity each year and to save using other pots of money they had the bond holding to ensure there was coverage.

The other primary usage for private clients is converting the equity position into an annuity to pay the pension for the last 20 (ish) years of someone's life. You wouldn't want a large equity fall wiping* out a chunk of capital at that stage of your life.

 

*bonds can also fall substantially in face value if you buy long dated bonds at a price significantly over par and then central banks increase interest rates rapidly.

Good post and would largely explain why some folk perceive bonds differently. As a close to retirement/FIRE candidate they are ideal to plan for monthly income needs if and when i reach my goals. They will rarely be the "best" investment out there though.