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Strangways
Posted: 05 October 2022 17:41:19(UTC)
#22

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Thrugelmir;241353 wrote:
mark spurrier;241118 wrote:
Thrugelmir;241041 wrote:
I suspect that the reality of what lies ahead hasn't fully sunk in yet. Many investors are still living in the bull market era. Viewing many shares ( and indirectly) asset prices as cheap or offering a discount.

A famous quote sums on the current mood.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” - Sir John Templeton,

Government Bonds are entering a new era. Higher yields are here to stay. They offer a risk free return in an unstable climate. As a consequence there'll be a period of adjustment while individual company shares are rerated. At the core the financially weak companies will portionately suffer.

Next year investment into Government Bonds will back on the agenda. As sure as night follows day.


The risk free return relates to the very small likelihood that the coupon wont be paid and they wont redeem at par in "n" years.
Investment risk is another thing all together
If anyone can assess the macro and political risks correctly at the moment they are better man than me.

If Central Banks want to increase rates by 1% jumps the bond market is going to leap around US is looking at a 300% rise in rates - what does anyone think is going to happen with a fixed return bond?

Low risk? Absolutely not.

If you want a laugh at gilts = low risk have a look at the chart on this one

TREASURY 0.125% 22/03/2073

Why were the pension funds screaming ?


You appear to be confusing volatility with risk. Government bonds, other than index, return a fixed amount over the term held Totally predictable. Government debt globally is graded. My observations relate purely to the UK , US etc.

Pension funds have been using derivatives. I doubt that they were screaming. That's just media hyperbole. The BOE will simply act as a market maker to stabilise matters and allow time for the positions to unwind.

US 30 year mortgage rates are already approaching 7%. There's a reset underway.


Is that you, Lodos :)
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2 users thanked Strangways for this post.
Jimmy Page on 05/10/2022(UTC), Thrugelmir on 06/10/2022(UTC)
Thrugelmir
Posted: 06 October 2022 16:52:27(UTC)
#23

Joined: 01/06/2012(UTC)
Posts: 5,332
Strangways;241624 wrote:
Thrugelmir;241353 wrote:
mark spurrier;241118 wrote:
Thrugelmir;241041 wrote:
I suspect that the reality of what lies ahead hasn't fully sunk in yet. Many investors are still living in the bull market era. Viewing many shares ( and indirectly) asset prices as cheap or offering a discount.

A famous quote sums on the current mood.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” - Sir John Templeton,

Government Bonds are entering a new era. Higher yields are here to stay. They offer a risk free return in an unstable climate. As a consequence there'll be a period of adjustment while individual company shares are rerated. At the core the financially weak companies will portionately suffer.

Next year investment into Government Bonds will back on the agenda. As sure as night follows day.


The risk free return relates to the very small likelihood that the coupon wont be paid and they wont redeem at par in "n" years.
Investment risk is another thing all together
If anyone can assess the macro and political risks correctly at the moment they are better man than me.

If Central Banks want to increase rates by 1% jumps the bond market is going to leap around US is looking at a 300% rise in rates - what does anyone think is going to happen with a fixed return bond?

Low risk? Absolutely not.

If you want a laugh at gilts = low risk have a look at the chart on this one

TREASURY 0.125% 22/03/2073

Why were the pension funds screaming ?


You appear to be confusing volatility with risk. Government bonds, other than index, return a fixed amount over the term held Totally predictable. Government debt globally is graded. My observations relate purely to the UK , US etc.

Pension funds have been using derivatives. I doubt that they were screaming. That's just media hyperbole. The BOE will simply act as a market maker to stabilise matters and allow time for the positions to unwind.

US 30 year mortgage rates are already approaching 7%. There's a reset underway.


Is that you, Lodos :)


Who? Not someone I'm aware of. Had an account for a long time but rarely used until now,
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Keith Cobby
Posted: 06 October 2022 17:31:43(UTC)
#54

Joined: 07/03/2012(UTC)
Posts: 5,064
Who? How quickly people are forgotten!
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Logic Prophets
Posted: 06 October 2022 21:42:44(UTC)
#55

Joined: 23/07/2018(UTC)
Posts: 1,636
.
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MarkSp
Posted: 07 October 2022 05:50:56(UTC)
#56

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@Thrugelmir

Pension funds have been using derivatives. I doubt that they were screaming. That's just media hyperbole. The BOE will simply act as a market maker to stabilise matters and allow time for the positions to unwind.


You have a very different view about what happened last week. That was a major event in the bond market. If an asset can't be priced, or if you have to look at the current buy price as the VALUE under mark to market, LDI margin calls will create a selling circle into a market where buyers are thin. If you can't sell your bonds to free cash then you have to sell anything you can sell.

If the financial stability team at BoE thought it was necessary to step in, given the messaging impact of a stability intervention it indicates to me that something was very wrong indeed.


I do recall sitting in the car park at IBM in Portsmouth within a few months of getting my first mortgage and Lamont raised interest rates (was it to 17%?) I knew I could either pay my car loan or, have somewhere to live

That experience has clouded my perception of mortgages and I have always been very careful not to over extend. The man at Lloyds laughed at me when I was taking out a 5 year fixed on £100k @ 2% plus a few BPs and asked for a quote at 7%

With 15 years of very low nominal rates, and negative real rates most of the world has forgotten that we were living in the aftermath of the GFC and everyone had forgotten what "normal" was and I had a explain "boom/bust" to someone.

I am expecting nominal rates to level out at 4-5% with real rates c 1%.

What has changed for me is that I can invest globally, move my pot to the US or do whatever I want in response. 20 years ago that was the preserve of professionals and overall there was a massive home bias.
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4 users thanked MarkSp for this post.
Tim D on 07/10/2022(UTC), Harry Trout on 07/10/2022(UTC), Keith Cobby on 07/10/2022(UTC), Jimmy Page on 07/10/2022(UTC)
Harry Trout
Posted: 07 October 2022 08:59:31(UTC)
#57

Joined: 08/06/2014(UTC)
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Thanks to all for an interesting debate on this thread

I've refined my calculator a bit and am now calculating returns as an IRR which is something I'm more familiar and comfortable with.

Here is the refined layout for a 10-year Gilt that I got a quote on yesterday with an IRR of 4.1% by my workings.

071022 Gilt

This calculation feels to me to be ok as the yield is in the same ballpark as the UK Government Bonds 10 Year Yield on Trading View (right now it's 4.215%)

I'm going to purchase today the 0.125% 31/01/23 Gilt in Mrs Trout's account, not for the money it will make but just to experiment and check everything is working how I expect it to. The thinking being that if yields grew towards and beyond 5% I would be very interested to commit more £ and by dipping a toe would have some real-life experience under my belt.

If anyone can see any error(s) in the above calculator I would be pleased to hear. Also, if anyone has bought Gilts through Hargreaves Lansdown, does the above look ok? Or anywhere else for that matter? I can't ever recall seeing a Gilt being purchased on Transactions thread?

Cheers

Harry
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Tim D on 07/10/2022(UTC)
Tony Peterson
Posted: 07 October 2022 09:47:40(UTC)
#58

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Harry

These returns do not look so hot if you calculate them in prospective real terms, factoring in a possible annual depreciation in the value of money @ 10% (or more? or less?).
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4 users thanked Tony Peterson for this post.
Harry Trout on 07/10/2022(UTC), Tim D on 07/10/2022(UTC), Thrugelmir on 07/10/2022(UTC), Keith Cobby on 07/10/2022(UTC)
Tim D
Posted: 07 October 2022 10:27:00(UTC)
#60

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This is one of the things I find fascinating about the generally perceived "forum groupthink"...

Back when inflation was 2% and interest rates was as good as zero, noone wanted to touch this stuff and it was regarded as "return free risk" and as popular as toxic waste.

But now we have inflation at 10% but you can get 4-5% on gilts - so, even worse returns in real terms - suddenly there's growing enthusiasm for this sort of thing!

In the former case, consensus seemed to be that There Is No Alternative to stocks to generate real returns. Seems to me that should be even more true now... but suddenly folks are excited by positive nominal yields, despite them being distinctly underwhelming in real terms currently. (Still, it's better than getting nothing or next to nothing on your platform cash).

Of course a lot depends on where you think inflation and rates are going. At some point rates will peak (and inflation will fall), and locking that in with some long maturity exposure at the top should look like a superb move with hindsight. Good luck timing it though! (As with stocks, "averaging in" may be a sensible strategy for building exposure).
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6 users thanked Tim D for this post.
Tony Peterson on 07/10/2022(UTC), Bulldog Drummond on 07/10/2022(UTC), Sheerman on 07/10/2022(UTC), Harry Trout on 07/10/2022(UTC), Keith Cobby on 07/10/2022(UTC), Jimmy Page on 07/10/2022(UTC)
Bulldog Drummond
Posted: 07 October 2022 10:34:10(UTC)
#61

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Tim D;241804 wrote:
This is one of the things I find fascinating about the generally perceived "forum groupthink"...

Whenever I have mentioned high yield bonds or credit I have been told that I am a head case. Why buy gilts when you can e.g. get 6.1% on Nationwide PIBS?
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Harry Trout on 07/10/2022(UTC)
Harry Trout
Posted: 07 October 2022 10:56:26(UTC)
#59

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Tony Peterson;241797 wrote:
Harry

These returns do not look so hot if you calculate then in prospective real terms, factoring in a possible annual depreciation in the value of money @ 10% (or more? or less?).


Hi Tony, I hope you are keeping well

It's a fair question. Big picture, what I'm trying to do is plan for our investments getting to something like the following structure one day:

2 year's forecast expenses - cash on deposit (mostly with HL active savings which we find to be decent)

A further 3 years' forecast expenses - held in lower volatility stuff - All Weather, Wealth Preservation, Short Duration Bonds, Gilts etc etc

Everything else - equities and longer duration stuff

And what I've discovered this year is that the lower volatility "stuff" is actually still quite volatile! For example, these allegedly lower volatility investments (all the usual forum suspects) are negative for me over 12 months. Thus perhaps I need more certainty in this lower volatility bucket. hence gilts.

Our context today is that our unearned income does not cover our living expenses while we are supporting the kids and there are still a few years of that to go. In other words, if we go too quickly towards the above structure we are likely to be in "sequence of returns risk" territory and I want to avoid that.

And so, the attraction of gilts maybe is to (a) have some guarantee of preservation of nominal capital and to (b) help in our quest to equalise our expenses with unearned income.

Simply put, if I knew I could get an IRR on a 5-10 year gilt of 5%+ per annum in a SIPP / ISA wrapper I would probably chuck a fair bit at it while the kids are still around.

On your point about inflation, we currently have that under control in terms of our expenses. If we see our personal inflation rising it might affect the planned structure but it would probably just result in the kids inheriting a little less in the grand scheme of things. Not a massive concern currently!!

Happy to be challenged though, it's a helpful thread this

Best regards

Harry
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4 users thanked Harry Trout for this post.
Tony Peterson on 07/10/2022(UTC), Bob Macondale on 07/10/2022(UTC), Tim D on 08/10/2022(UTC), Vital Signs on 20/04/2023(UTC)
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