Question
I have several Bond Funds in my ISA. They have done well this year.
Which type of Bond fund should I be invested in now interest rates are recovering and inflation pending?Answer
If you believe both interest rates and inflation will rise moving forwards then I'd be inclined to generally steer clear of corporate bonds as in such circumstances they'll likely fall in price.
However, it's not quite that simple. Even assuming a sustained rise in interest rates and inflation (I'm not convinced that either will rise by much, if at all, over the next year or two) then not all bonds will react to the same extent. Low yielding bonds (i.e. those paying a low income) and those with many years until redemption are likely to be more affected than higher yielding bonds and those nearing redemption.
The price of higher yielding bonds is usually more influenced by the financial strength of the company issuing them, which in practice means performance tends to more correlated to stockmarkets than interest rate and inflationary movements.
So if interest rates/inflation do rise then high yield bonds with shorter redemption dates would appear to make more sense - but you'd need to be fairly confident about economic/stockmarket prospects, which are very debateable at the moment.
And even if interest rates/inflation rise there's still a chance the price of the 'safest' government bonds could rise if investors seek a safe haven due to turmoil in economies and stockmarklets.
To complicate matters further some corporate bond fund managers also look to make money from currency movements and/or use various types of financial instruments (e.g. 'credit default swaps') that allow them to reduce credit risk (i.e. the risk of company not paying interest or capital at redemption) or the impact of interest rate/inflationary movements.
So, to answer your question. If you're convinced interest rates/inflation will rise then consider higher yielding bonds unless you're also worried about the economy and stockmarket.
If you're less sure what will happen then maybe look at a 'strategic bond' type fund where the manager can freely alter exposure between different types of bonds and also use financial instruments like those mentioned above. Just bear in mind that you're then relying on the fund manager's predictions of what will happen in future and they're not always right! So maybe spread the money across several funds to reduce risk.
I have several Bond Funds in my ISA. They have done well this year.
Which type of Bond fund should I be invested in now interest rates are recovering and inflation pending?Answer
If you believe both interest rates and inflation will rise moving forwards then I'd be inclined to generally steer clear of corporate bonds as in such circumstances they'll likely fall in price.
However, it's not quite that simple. Even assuming a sustained rise in interest rates and inflation (I'm not convinced that either will rise by much, if at all, over the next year or two) then not all bonds will react to the same extent. Low yielding bonds (i.e. those paying a low income) and those with many years until redemption are likely to be more affected than higher yielding bonds and those nearing redemption.
The price of higher yielding bonds is usually more influenced by the financial strength of the company issuing them, which in practice means performance tends to more correlated to stockmarkets than interest rate and inflationary movements.
So if interest rates/inflation do rise then high yield bonds with shorter redemption dates would appear to make more sense - but you'd need to be fairly confident about economic/stockmarket prospects, which are very debateable at the moment.
And even if interest rates/inflation rise there's still a chance the price of the 'safest' government bonds could rise if investors seek a safe haven due to turmoil in economies and stockmarklets.
To complicate matters further some corporate bond fund managers also look to make money from currency movements and/or use various types of financial instruments (e.g. 'credit default swaps') that allow them to reduce credit risk (i.e. the risk of company not paying interest or capital at redemption) or the impact of interest rate/inflationary movements.
So, to answer your question. If you're convinced interest rates/inflation will rise then consider higher yielding bonds unless you're also worried about the economy and stockmarket.
If you're less sure what will happen then maybe look at a 'strategic bond' type fund where the manager can freely alter exposure between different types of bonds and also use financial instruments like those mentioned above. Just bear in mind that you're then relying on the fund manager's predictions of what will happen in future and they're not always right! So maybe spread the money across several funds to reduce risk.
Read this Q and A at http://www.candidmoney.com/questions/question327.aspx
No comments:
Post a Comment