Bond bubble...?

Hello - first post so please be gentle :)

I'm an experienced investor in equities, ETFs, funds etc and have in the past dabbled in corporate bonds (via funds) but have never been big on bonds. I'm getting to the point in life where I need to de-risk my portfolio to a larger extent and bonds are usually one of the go-to investments to help achieve this. Having read a lot about the "bond bubble" recently, I'm nervous about getting in while interest rates are so low, because I read that rising interest rates usually mean a capital loss for fixed-income investments such as bonds. However I have read the occasional note that suggests that some funds have already handled this risk, and of course buying individual bonds at issue and holding to maturity would avoid this risk. However I feel that funds or similar aggregated investments (such as ETFs or Investment Trusts) are more appropriate for me.

I would appreciate any thoughts from members on how I could get into the bond market today without risking significant capital loss when interest rates eventually rise.

Cheers
Jezzer

Comments

  • The greater risk to capital is probably on credit grounds, not rising rates, unless you buy very long maturities or perpetuals. New issues on ORB seem for now dormant ( or dying off?) so you will either have to buy on ORB existing bonds, mostly way above par, with ever shortening maturities and low yield or live with considerable credit risk, but get 6% plus yields. Only if you can stretch to 50 - 100k minimums ( if you have a large SIPP) the choice gets to be a bit more interesting, with names like Tesco, Gazprom, Esure, Glencore or Old Mutual , all in BB territory, well below or around par, giving you yields of 7.5-8.5% p.a., with default risk hopefully considerably lower than, say, Eros or Enquest.
  • Thanks @Fang - I am thinking more along the lines of bond funds rather than individual company bonds. Any thoughts/comments on those?
  • Dear Jezzer,
    Current difficulty you & other new potential bond holders have, has been the lack of new bond issues on the ORB market, which generally is the best way of building up a balanced portfolio of say 20 bond [email protected] a max of 5% per holding.
    2012 & 2013 saw a good number of new issues, mostly of good quality.

    You could start to buy some of the existing ORB bonds, however the yields are not that good. Shorter the maturity date (ie 3 to 5 yrs), lessor chance of a capital loss when interest rates rise. You may therefore wish to avoid PIBS / Preference shares, as by nature they are undated (but with possible call dates). However recently I have added PIBS & PREF to my SIPP portfolio representing 18% of the total portfolio (which is probably enough).

    Beware of which trading platform to use, some charges can be fairly high. YouInvest charge £9.95 (telephone order only) who I believe to be OK. Barclays Stockbrokers maybe ok for Equities, but not for bonds portfolios.

    Step gradually, & don't be tempted with higher yields, as they have a greater risk.

    Do plenty of reading, including this forum, and the Bond of the week.
    Beware of having too many holdings in a certain sector (eg Oil (Premier & Enquest))

    Also consider Infrastructure funds (eg HICL & JLIF) as part of a portfolio, as they tend to provide a reasonable income.

    Hope this helps,
    Amateur Investor! (trading in Bonds since 2011)


Sign In or Register to comment.