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Do US Treasury bonds protect UK investors better than gilts?

noticed a few of the wilier cats among the Monevator crowd were holding US government bonds going into the coronavirus crisis. They seemed pretty pleased with themselves, so I decided to see what’s up.

After all, there’s no better time to change your strategy than after the horse has bolted…

Most of the passive investing gurus advise holding high-quality domestic bonds (i.e. gilts, if you’re a UK-based investor). But then, most of the passive gurus are from the US. What if there’s some kind of American Exceptionalism playing out here and I’ve been a Lee Harvey Oswald-style patsy all this time?

To assuage my fears I logged into the ETF-screening and portfolio-building service, JustETF.

I compared unhedged1, intermediate government bond ETFs of the US, Euro, Global, and UK persuasion.2 I pitted them against each other and an MSCI World ETF during as many stock market bloodlettings as possible. My fears were un-assuaged.

Coronavirus Crisis – government bond comparison

Coronavirus crisis: comparison of intermediate government bond funds: gilts, euros, US Treasuries and global unhedged

The yellow line is why those Monevator cats are purring about their US Treasury bond holdings.

World equities hit bottom on 23 March. Our team of high-quality government bond ETFs were all straining in the opposite direction that day – stopping our portfolios and us jumping off the ledge.

Some did more work than others, however. As world equities clocked a loss of -26.4% (relative to 20 February), the bond ETFs countered with gains of:

  • 4% – Intermediate UK Gilts (Blue line; ticker: IGLT)
  • 7.6% – Intermediate Euro Government bonds (Red line; ticker: IBGM)
  • 11.9% – Intermediate Global Government bonds (Orange line; ticker: SGLO)
  • 17.7% – Intermediate US Treasury bonds (Yellow line; ticker: IBTM)

Gilt returns peaked on 9 March and then the pound slid 12% through to 23 March. Gilts turned negative on 18 to 19 March while overseas bonds were buoyed by the falling pound. The Euro has fallen away since, but US Treasuries are still up 11.9% to gilts’ 5.3% on 24 April.

Consider my interest piqued.

Global Financial Crisis (GFC)

Global Financial Crisis: comparison of intermediate government bond funds: gilts, euros, US Treasuries, all unhedged

The same ETFs are back in play bar the global government bond effort (it was only launched in the midst of this crisis).

The world turned dark on 6 March 2009 with losses reaching -38%.3 Thankfully our bonds would have offered a ray of hope:

  • 18.6% – Intermediate UK Gilts (Blue line)
  • 47.7% – Intermediate Euro Government bonds (Red line)
  • 73% – Intermediate US Treasury bonds (Grey line)

The pound took a beating against the US dollar in 2008 and, though it recovered some ground in 2009, by the end of the crisis the US Treasury bond ETF was up 62% versus 57% for the Euro gov bonds and 16% for the gilts.

Clearly we’d have all slept more soundly with US Treasuries in our portfolios.

Incidentally, notice that shark’s jawbone image you get when you compare the grey line’s upward flex versus the orange line’s downward gape from October 2008 to August 2009. That’s what textbook negative correlation looks like and that’s why we hold high-quality bonds in our portfolio.

European Sovereign Debt Crisis

European Sovereign Debt Crisis: comparison of intermediate government bond funds: gilts, euros, US Treasuries and global unhedged

The world was down -14.9% on 2 Jul 2010.4 By that day our bond ETFs had responded with:

  • -2.1% – Intermediate Euro Government bonds (Red line)
  • 4.6% – Intermediate Global Government bonds (Orange line)
  • 5.2% – Intermediate UK Gilts (Blue line)
  • 9.1% – Intermediate US Treasury bonds (Yellow line)

Okay, Euro Government Bonds were not the place to be during the European Sovereign Debt Crisis. Fair enough. Once again US Treasury bonds proved to be the safest of safe havens, though there was less than a percentage point in it by 13 December 2010.

It’s starting to feel a bit voyeuristic – like I’m some kind of rubber-necking vulture looking for another carve-up.

Still, why stop now when we’re having fun?

2018 Global Stock Market Downturn

2018 Global Stock Market Downturn: comparison of intermediate government bond funds: gilts, euros, US Treasuries and global unhedgedWorld equities delivered an unwelcome Christmas present of -15.9% in just a few months to 24 Dec 2018.5 Bonds took until 3 January to respond properly, after the sales were in full swing:

  • 1.5% – Intermediate Euro Government bonds (Red line)
  • 1.7% – Intermediate UK Gilts (Blue line)
  • 4.5% – Intermediate Global Government bonds (Orange line)
  • 6.4% – Intermediate US Treasury bonds (Yellow line)

Again US Treasuries were the place to be in comparison to gilts.

JustETF doesn’t have the data to take me back further in time. But if the last 12 years’ worth of downturns are anything to go by then I have just one question…

Is this a thing?

US Treasuries look better than gilts for UK investors when it comes to stock market crash protection over the last decade and more.

But it’s also nice if your assets provide long-term returns, so let’s see how our options stack up on that score:

Returns comparison of intermediate government bond funds: gilts, euros, US Treasuries and global unhedged, March 2009 to April 2020

US Treasuries win again.6 Not by a devastating margin, but you wouldn’t say no.

And there’s certainly a rational story to justify holding US government bonds. America is the global superpower and the dollar is the world’s reserve currency.

Why wouldn’t everybody run into the arms of US Treasuries during a meltdown?

Moreover, the pound is described as a pro-cyclical currency: it tends to fall when the global stock market falls. In which case, you might well expect to see an exaggerated spike in US Treasury returns (as measured in pounds) at the very moment equities nose-dive, especially as currency volatility is meant to dominate government bond returns.

Wait! Let’s get a longer-term perspective

A portfolio is for life, not just for bear markets.

This table comes from the Sarasin Compendium Of Investment, albeit from 2012. It shows that US Treasury bonds are far from a no-brainer for UK investors when viewed over a different timeframe. 

This comparison of 10-year government bonds shows that UK investors averaged a return of 8.9% per year versus 7% for US Treasuries of this period when returns are measured in pounds (see the Sterling Return column).

Notice that in 1987 – the year of the Black Monday Stock Market Crash – US 10-year government bonds returned -19.7% in pounds, whereas gilts brought home 15.5%. The falling dollar wiped out 21% off the return of Treasuries.

Global equities suffered another set back in 1990 as Saddam Hussein invaded Kuwait and Japan entered its multi-decade slump. Gilts spiked 9% while US Treasuries dropped -9.5%. Unhedged currency exposure backfired again, this time to the tune of -16.7%.

So. Maybe this special relationship isn’t all one-way.

The monumental returns of the 80s and 90s (I weep that I was in short trousers not the market then) ended with a pop as the dot-com bubble burst. US Treasuries trounced gilts in 2000 and 2001, but suffered a reversal in 2002.

If you scan your eye down the Currency Effect column, you can see from the size of the effect versus return that most of the differential between gilts and US Treasuries (sterling return) is explained by exchange rate volatility. 2008 was the annus mirabilis as the currency effect added 57.7% to the year-end return of US Treasuries.

Still, it’s surprising to see that gilts came out on top over the whole 15-year period.

It’s a struggle to go back much further than this with the data we have access to. We do know that the 1970s oil crisis smashed up global equities in 1973-74 and that UK equities suffered their worst loss on record during this period: -71%. Gilts were a car crash, too, going down 50% between 1972 and 1974.

Meanwhile, the pound lost just -1.28% to the dollar in 1973 and then gained 1.29% in 1974. I highly doubt you’d have noticed that shimmy, what with the oil crisis, recession, double-digit inflation, miners’ strike, the Three-Day Week, and general elections every five minutes.

Did any Monevator readers have market exposure during this one? I was there but my only assets were a £5 Premium Bond, a romper suit, and dimples.

Where does that leave us?

Good question. Opting for US Treasury bonds is a currency play for UK investors pure and simple. You’d be betting on the pound falling against the dollar as investors head for the safe haven hills.

Despite recent history and the supremacy of the States, events don’t always unfold as expected. I read a couple of research papers that said the Euro was a reliable safe haven until it wasn’t. And of course, we’ll only find out that reality is no longer following the script at the worst possible moment – when we need diversification the most.

Multiple papers concluded that UK investors should hedge any global bond exposure they have, including this report from Vanguard:

In Figure 10, we examine the performance of unhedged global bonds, hedged global bonds, and local market bonds in the bottom decile (the worst-performing 10%) of monthly returns for the global equity market. We find that hedged global bonds provided more consistent returns and in many cases better levels of counterbalancing than local bond markets. Unhedged global bonds, on the other hand, had a much wider range of returns and in the majority of cases did not provide similar levels of diversification.

Thus, hedging away the currency risk is necessary if global bonds are to provide the maximum level of diversification and fill the traditional role of high-quality bonds in a balanced portfolio.

Ultimately, I’m a passive investor because I want to keep my investing life simple. I’m unlikely to be agile or informed enough to know if there’s no longer good reason to believe in the dollar as a ‘risk-off’ currency.

Yes, I get my head turned when I come across a fund that would have been amazing to hold these last few years. But by the time I’ve found out about it, it’s already too late.

My portfolio is built for the next 40 years (I hope) and I believe it’ll get through the next 40 months just fine.

Take it steady,

The Accumulator

Bonus chart: August 2011 stock market downturn

After I finished the post, I had a nagging doubt I’d missed something and here it is. The oh-so memorable August 2011 slump. At last there’s a recent-ish downturn when US Treasuries didn’t completely dominate gilts. World equities had their darkest hour on 19 August 2011 bottoming out at -18.7%.7 Gilts topped the charts that day:

  • 1.8% – Intermediate Global Government bonds (Orange line)
  • 2.4% – Intermediate Euro Government bonds (Red line)
  • 3.7% – Intermediate US Treasury bonds (Yellow line)
  • 5.1% – Intermediate UK Gilts (Blue line)

US government bonds had nudged slightly ahead by the time equities nosed into positive territory on 13 March 2012. In reality it was neck-and-neck with US Treasuries on 11.2% and gilts on 10.9%.

  1. i.e. Not currency hedged. []
  2. Long bond ETFs would be more dramatic but we’ve never recommended them here due to the potential losses from interest rate rises. []
  3. Relative to 12 October 2007. []
  4. Relative to 15 April 2010. []
  5. Relative to 29 August 2018. []
  6. The 6 March 2009 start date is defined by the launch date of the youngest product in our line-up: iShares Global Government Bond ETF. []
  7. Relative to 8 July 2011. []
{ 132 comments… add one }
  • 1 Alistair April 28, 2020, 11:36 am

    But is currency risk such a big risk in reality?

    Sure if the value of the pound were to jump vs the dollar, and all my assests are in US stocks/bonds (they arn’t), on paper I would have lossed out. But I would also expect the cost of things in the shops to drop (or at least not rise). Most of what we buy (fuel/food/technology) is produced or traded internationally (even locally grown food has an international component in the fuel costs).

  • 2 Naeclue April 28, 2020, 12:07 pm

    A really timely article for me. I am trying to think through whether it is worthwhile making a change in strategy regarding asset allocation and most specifically, bonds. We mainly hold gilts, but have US Treasuries ETFs and short term deposits. 60/40 global equities/bonds, which we have run with for many years. But we are deaccumulating and contemplating whether this is the appropriate strategy to continue with, especially (I know I should not be thinking this) now that intermediate/long bond yields are so low. We are now in uncharted territory and a reversal of the decades long bull market could be devastating. I appreciate it could be even worse for equities of course.

    US Treasuries are an anomaly I have long recognised to be part of the portfolio and smacks of an irrational aspect of my otherwise passive approach. I hold them for precisely the reasons you state, but I know full well that there are plenty of periods in the past when they would not have helped, such as the period after the dot com bust. I think you have a typo error by the way “US Treasuries trounced gilts in 2002” – I think you mean 2000. Gilts trounced US Treasuries in 2002 due to the fall of the dollar.

    I am also trying to feed in all the newer research on drawdown strategies from Pfau, McClung and others. Added to that I am grappling with what I think we can afford to give away to the kids and inheritance tax issues.

    There are those that advocate much shorter duration bonds and a growing “glide path” allocation to equities in deaccumulation.

  • 3 Algernond April 28, 2020, 12:16 pm

    I added global hedged bond fund (VAGP) to your chart for the Coronavirsu period, as this is my main bond holding.
    It’s the worst 🙁

  • 4 Keith April 28, 2020, 12:36 pm

    @Algernond. Yes, VAGP seem to have traced the v-shaped path both of stocks and the pound/dollar exchange rate, rather than providing diversification.

  • 5 Brod April 28, 2020, 12:39 pm

    @TA – Thanks, that was very interesting.

    I think for me Bonds are to provide ballast, equities growth. And isn’t the advice to hold them in the currency you’ll spend them in to minimise currency impacts?

    Last November, after a particularly crap day at work, I had an inspiration. Markets (I thought) were toppy, so I had not-so-much upside to lose (slightly dubious, I know) so why not make sure I’m bomb proof? I’ve got 12 years until the state pension and my small Civil Service pension start paying (which will cover the floor), so over November/December/January I moved from 100% equities to a liability matched portfolio and 30% of my portfolio is now in iShares Core Global Aggregate Bond UCITS Hedged (Dist) AGBP; 10% in SPDR Bloomberg Barclays 15+ Year Gilt UCITS ETF GLTL and 10% in Gold (what the heck, it dances to its own beat). The rest in global equities. That’ll mean I can pull the trigger before the pensions arrive. If I keep working a few years longer, I can rebalance each year’s expenses back into global equities for hopefully higher returns.

    What great timing… that is, strategic insight!

    The Gilts and the Gold have done great, AGBP not a lot. But that’s OK, it’s a store of value and, barring unexpected inflation, it’s yield should just about cover CPI.

  • 6 Seeking Fire April 28, 2020, 12:48 pm

    Great article and very nice to see the comparisons so thanks for doing these. Most of the bonds I hold are $ TIPS (for geo-political insurance (i.e UK going down the gurgler) and liquidity purposes) that have benefitted from the lowering of rates / fall in £. In retrospect I should have gone for the longest $ duration bond fund I could find. I don’t think inflation is a medium term problem but it could be hence the TIPS purchase. I have a view that $ are a better store of value than £ given the UK is structurally weaker than the US although neither long term are very good (just £ worse than $). And most people reading this board are very exposed to £ given house, salary, rental investments, which is to an extent fine as your liabilities are also in £. Plus your house has some behavioural characteristics to Gilts – they are positively correlated to each other in that they both benefit from a fall in interest rates. And therefore I came to the conclusion I was overweight £ and increasingly less confident on UK outlook. So far it’s worked well but you make the valid point things can change back. Were I to be in de-accumulation, I would have a higher % of my assets in bonds and would hold £ gilts too. It is interesting that many US investors have concerns over the decline of the $ – I suppose it’s a matter of perspective. Also I believe $TIPS are < expensive than Index Linked Gilts if that's of interest. That with some gold and sterling reserves have been a real source of comfort over the last couple of months as I thought wrongly equities would decline a lot.

  • 7 AtlanticSpan April 28, 2020, 1:13 pm

    Didn’t Lars Kroijer writing in an article for your blog suggest that for most people owning a low-cost government bond fund in the currency of their own country would be sufficient?

  • 8 The Investor April 28, 2020, 1:23 pm

    @AtlanticSpan — Yes, that’s clearly stated as the prevailing advice in paragraph three. The idea is to explore that notion.

  • 9 Mathmo April 28, 2020, 1:30 pm

    I hold agbp as a hedged global bond fund. Would have been interested to see how it performed in these graphs. Trying to avoid corporate bonds like the plague, but seems some of them creep into these indices, although they are mostly treasuries and other govt bonds.

    Seemed to hold value for rebalancing benefit in the recent blip. Exhibited a strange blip (520 to 530 to 500 to 520) which I don’t fully understand but otherwise seemed fine.

    As I understand it the cost of the hedge is more than the benefit of the hedge, but mostly just posting until zxspectrum48k comes along to explain everything…

  • 10 Boltt April 28, 2020, 1:46 pm

    RATESETTER update in case anyone is waiting in the queue.

    I received some funds this morning that we’re requested on the 16th March.


  • 11 J.D. April 28, 2020, 2:03 pm

    Thank you for this article. I’ve been wondering about this very idea for quite a while now yet have not seen it discussed anywhere!

    I wish I had more to add, but will be interested to see the comments that come.

  • 12 WhiteSheep April 28, 2020, 2:52 pm

    Thanks for the interesting article.

    I hold a large part of my bond exposure in (unhedged) US government bond ETFs. The main reasons are:
    – I am not sure if all my future spending will be in sterling.
    – It seemed a hedge against country specific tail risks, both in terms of currency and credit risk.
    (It also seems a hedge against Brexit related risks. This is not entirely rational in that I don’t presume to be able to predict future exchange rate impacts. But I think I would gain more satisfaction from bonds holding up well if the pound were to lose value than I would lose if Brexit impact and costs were lower than expected and the pound strengthened to reduce the value of my bonds.)

    I didn’t view dollar exposure as a means to enhance returns other than perhaps at a portfolio level, more as an insurance policy.

  • 13 AshantiGold April 28, 2020, 4:21 pm

    This was a really great article. I hold ultralong duration Gilts maturing in 2068 and 2071 and have found that they have performed excellently during this crisis and kept my overall portfolio flat during the crisis which is remarkable considering I hold more than 50% MSCI World.

    I do though wish I had gone ultra long on Treasuries as well, I am sure I would have made an even larger killing. It would great to see the comparison for 30 year treasuries vs ultralong Gilts. The US does not yet issue 50 year or longer bonds so this might be an advantage for gilts. Vanguard Extended Duration offers only 20-30 year on treasuries.

    I might add 20% EDV for a bit of diversification, I also hold some Emerging Market Debt which only dropped 3% and gives a great yield.

  • 14 Naeclue April 28, 2020, 4:23 pm

    I have been looking in more detail at table 5.7. An interesting period in which gilts beat equities; annualised growth rate of the MSCI World Index (in GBP) was 8.1% vs 8.9% for 10y gilts. The correlation between gilt and equity prices was 0.11 and between US Treasuries (in GBP) and equity prices was 0.14, so unhedged US Treasuries still provided diversification comparable to gilts. However, unhedged Treasuries were much more volatile that gilts (15.0% v. 6.7%).

    The interesting thing (interesting to me anyway), is how well an annually rebalanced 60/40 equity/gilts portfolio would compare with a 60/40 equity/US Treasuries portfolio. The both produced similar returns (8.9%, 8.3%), but the volatility of the equity/US Treasury portfolio was higher (11.1%, 13.3%).

    In this period at least, if you were running a 60/40 portfolio it certainly helped from a risk/reward trade off to be in gilts compared to Treasuries. I might do the same exercise later with the ETFs that @Accumulator identified.

  • 15 Petepool April 28, 2020, 4:42 pm

    Interesting article. I’m now into the deaccumulation phase and have been holding the defensive portion of my portfolio in UK gilts and Index linkers. Very much influenced by Time Hale etc. The article just prompted me to reread his section on why he recommends holding your defensive assets in your local currency and your growth assets in global markets. I think I’m still broadly happy with that approach but will see what others think especially regarding US TIPPs.

  • 16 xxd09 April 28, 2020, 4:50 pm

    Getting old-simplifying -aged 73
    Bond part of 2fund portfolio is Vanguard Global Bond Index Fund hedged to the Pound ((VIGBBD)-been for many years
    Since inception in June 2009 has averaged 4.43% pa
    That’s enough for me from the Bond side of my Portfolio

  • 17 Naeclue April 28, 2020, 5:06 pm

    @Petepool, I don’t have Hale’s book, but am I right in saying he favours short dated bonds? Thought I read that somewhere, maybe on here?

  • 18 The Rhino April 28, 2020, 5:27 pm

    @xxd09 when I get a mo I’ll reproduce TA s chart and add your hedged bond fund and see how it compares.

    I fully intend to copy your portfolio when I get round to my next experiment. (After the disastrous UK equity income experiment)

  • 19 IanT April 28, 2020, 5:50 pm


    Thanks for that. My request was placed 23/3 so hopefully it’ll process in a week or so.

    They must be under tremendous pressure.

  • 20 Petepool April 28, 2020, 5:54 pm

    He distinguishes between the cautious and less cautious investors but does indeed recommend short dated gilts and linkers due to their lower volatility for the cautiuos investor.

  • 21 Algernond April 28, 2020, 6:14 pm

    I suppose the reason why the Global Hedged bond funds (VAGP, AGBP and xxd09’s VIGBBD) have done so disappointingly is because the dollar got stronger and the funds have a large dose of corporate/financials in them also?

  • 22 Mathmo April 28, 2020, 6:38 pm

    I’m not sure I’m that disappointed by AGBP — it seems to have done more or less what I wanted it to — been a place to store dry powder when madness struck. It seems to be about 50% sovereign, all BBB or above. The 2% wiggle I think is the cost of the hedge moving as currencies moved around at different times.

  • 23 Algernond April 28, 2020, 7:26 pm

    Does seem to be the corporate/financial element of VAGP/AGBP which have subdued their rise a little bit though.

    SGLO (unhedged) & IGLH (hedged) Gov. only Global do seem to be ~2% up on them

  • 24 Naeclue April 28, 2020, 7:36 pm

    @AshantiGold, we hold EDV and it has done very well, but we don’t hold sufficient to have kept our portfolio flat. Good luck with buying some. HL have stopped us buying any more US listed ETFs due to the PRIIPs irritation and US ETF providers not bothering to create compliant KIDs. It is a real shame as US listed Vanguard funds have UK reporting status.

    I get the impression the ban is across the board. What you need is if a broker that let’s you have professional investor status. HL and probably many of the other retail brokers don’t currently support professional investor status. Something to consider though if you do find a broker that allows you to go down that route is that you may be giving up retail protection of some sort.

  • 25 Naeclue April 28, 2020, 8:23 pm

    Regarding AGBP, it has behaved as to be expected according to the linked Vanguard paper. Holders should expect lower volatility and it is what they got.

  • 26 c-strong April 28, 2020, 8:25 pm

    I had planned to introduce bonds (for the first time) into my portfolio this January. (I didn’t in the end – long story). I was going to go with (hedged) USTs simply because the yield on 10yr Treasuries was about 1.6% and the yield on 10 year gilts was about 0.6%. Surely the decision which to hold should be largely driven by yields? Not only does a higher-yielding government bond pay better in “normal” times, there is more wriggle room for the price to increase in a crash – something I would argue has been borne out by the last one. (I know 0% isn’t the floor but still.)

    A more pertinent question is whether it is worth holding bonds at all (rather than cash if you need a risk-free asset) – although I think Monevator has looked at this in the recent past…

  • 27 Sparschwein April 28, 2020, 8:32 pm

    Another interesting article @TA. I also liked the previous one about diversification.

    To me the key question is this:

    In hindsight, over the past few decades, long govt bonds did exceptionally well and that greatly benefited the classical “60/40”. The article shows nicely how this has played out again recently.

    But what now, with yields everywhere close to zero (and most people seem to accept there is a lower boundary for interest rates somewhere in slightly negative territory)? I cannot see much more upside. And then there’s inflation risk – inflation crushes long bonds.

    I think we need to look for other portfolio ingredients to counterbalance stock market risk. I’ve got 15% in precious metals, a good chunk of TIPS and cash. Other suggestions very welcome…

  • 28 Sparschwein April 28, 2020, 8:43 pm

    Side note – I find the “passive” narrative unhelpful when looking at portfolio diversification. There is a spectrum of investable assets and the choice of including or ignoring each is necessarily an active one.

    Currency movements can have a big impact and I accept that I cannot predict them (a hard lesson learned from the Brexit debacle). Therefore I diversified more towards other currencies and generally avoid currency-hedged funds. For us there is a significant probability that we will retire somewhere abroad, hence my target GBP exposure is <50%.

    Unhedged USTs make a whole lot of sense for diversification especially in a GBP-heavy and stock-heavy portfolio. Opposite behaviour of USD and GBP during distress in the financial system. I think we'll all notice if/when USD is replaced by a new global reserve currency.

  • 29 AshantiGold April 28, 2020, 9:32 pm

    @Naeclue, thanks for that, Interactive Investor are still offering EDV.

  • 30 Sparschwein April 28, 2020, 9:55 pm

    @Ashanti – that’s interesting. Have you looked at other US-listed Vanguard funds at II?
    I can’t buy any US funds any more through IB or iWeb.

    And do II charge for currency conversion when buying non-GBP denominated funds?
    (e.g. iWeb charge 1%)

    @Naeclue – I’d be surprised if there was such thing as retail protection, rather the investment banks seem to have a license to fleece retail…

  • 31 xxd09 April 29, 2020, 12:02 am

    Algernond-I am not sure what you expect bonds to do in a portfolio
    Firstly they are there to protect you savings by reducing losses in a downturn -ie not directly correlated to equities
    Secondly they also reduce the volatility in your portfolio allowing you to sleep at night etc
    Thirdly after achieving these first two main points -they also might also make you some money
    If you want to increase your portfolio returns increasing your % of equities is the way to do it ie take more risk ,live with losses -for the sake of better outcomes .
    Bonds and equities have very different jobs to do in your portfolio- confusing their purpose/“Raison d,etre” on the above vital points could lead to severe losses
    This has been a time honoured double act/ relationship -if you can find another way to do it -well done

  • 32 Simon T April 29, 2020, 7:51 am

    I am thinking of using bonds/gilts in an four bucket ladder as I approach drawdown.
    As I think I mentioned I think before, I use them as the second least volatile ingredient. (2 years 14% or portfolio cash first , then 3 years 20% of portfolio bonds or 20/80, then 5 years 30% of portfolio 60/40, then plus 10 years 36% of portfolio 100 and active rebalance annually).
    The reasoning is move stuff up the buckets as the years go by.
    This article is fascinating – I have chosen in the second bucket some MyMap 3 and Lifestrategy 20/80 but these bonds/gilts as well LEGAL & GENERAL ALL STOCKS GILT INDEX TRUST CLASS C – INCOME (GBP); VANGUARD UK LONG DURATION GILT INDEX INCOME (GBP); SPDR BARCLAYS CAPITAL UK GILT GBP (GLTY); ISHARES GBP CORPORATE BOND (SLXX)
    Apologies for caps the Corporate bond (as you have mentioned above) is behaving like equity.
    I noted the @ZX mentions that when we choose equities we DIYersd look at everything and he noted we don’t do the same thing with bonds.
    I do not have a strategy as to why I chose those bonds and gilts above apart from diversification and reasding.

  • 33 Naeclue April 29, 2020, 8:37 am

    @c-strong, I would recommend you read the Vanguard paper linked in the article if you are considering investing in a currency hedged bond fund. It really is very good and explains why, in an efficient market, the expected return on a hedged bond fund is about the same as an equivalent duration gilt fund. ie you cannot expect a higher return because USTs have a higher yield to maturity than equivalent gilts.

    According to the article, this is how the hedging is done:

    “In practice, currency hedging is implemented over relatively short horizons of between one and three months. The end result of the global bond and currency returns is a total-return profile that is similar to what an investor would achieve in her local bond market, as shown in Figure 7”

    The hedging is done using FX forward contracts, calculated from the spot rate + forward points. The forward points are calculated from the differential in interest rates between the 2 currencies. It is as though the fund is taking on a whole series of short term bets, but those bets are tilted against the fund in the case of US dollars as interest rates are higher in US dollars than they are in pounds. The expected return from all those bets is such that it wipes out any gain which you might otherwise have expected to receive by investing in USTs. On the other hand, short term bets on currencies with lower interest rates are tilted in favour of the fund.

    So you might ask why bother? Why not just stick with gilts? The article says the extra diversification benefit is worth the cost of the hedging, which they estimate is around 10-15bps per year for dollar hedging.

    I have always stuck with unhedged bonds, but the article is interesting and I could be convinced that a whole of market hedged bond fund, like AGBP, was worth holding. The main thing putting me off is that available ETFs and funds all have a relatively short history. Just the suspicion/feeling that there might be something lurking here that could blow up at some point. I cannot think what that could possibly be as currency hedging of bonds and bond portfolios goes back donkeys years, it is really just a general suspicion of relatively new financial products.

  • 34 Naeclue April 29, 2020, 8:46 am

    @Sparschwein, I suspect you are probably right about retail protection. The only thing I can really think of is possibly losing FSCS protection, but don’t really know if that would be the case. Just something to look into if I ever opted for professional investor. I fear in future I might be forced to do that as more and more restrictions get placed on what retail investors are allowed to invest in, which seems to be the way the FCA prefers to handle the retail protection angle of its brief. One day we might all be forced to put our SIPP/ISA money into generic balanced funds.

  • 35 Simon T April 29, 2020, 9:27 am

    @naeclue isn’t that what investment pathways for drawdown is forcing us to do in January “ One day we might all be forced to put our SIPP/ISA money into generic balanced funds.”, I can’t find anywhere in the FCA ruling which says this is optional

  • 36 Benjomeyer April 29, 2020, 9:30 am

    The products I’m looking for are GBP hedged US Treasury intermediate and long term bond ETFs. I would like these investments to have the same volatility and ‘feel’ as if I was a US local investor. Why does no one offers these in the UK?

  • 37 Naeclue April 29, 2020, 9:34 am

    @Simon T, I have not looked into this “investment pathways for drawdown” stuff, but thanks for pointing it out. I definitely will.

  • 38 The Investor April 29, 2020, 9:36 am

    I fear in future I might be forced to do that as more and more restrictions get placed on what retail investors are allowed to invest in, which seems to be the way the FCA prefers to handle the retail protection angle of its brief. One day we might all be forced to put our SIPP/ISA money into generic balanced funds.

    I share this fear, too, but *in aggregate* retail investors will also have to take some of the blame. The outcry over, for instance, Woodford funds and Hargreaves Lansdown after that manager blew-up is typical of the public voice of retail investors. Satisfaction and some kind of smug belief that this is how it “should” be when things are going well. “We wuz robbed!” when things go badly.

    It’s fine to say Woodford made a series of terrible bets, lost the plot, blew up his own long-term record, whatever. It’s not fine, IMHO, to say when a fund goes up due to active decisions that’s savvy investing, and when it goes down it was all a con.

    A more niche example for me would be banking and other preference shares. The sort of sophisticated retail investors who own these frequently bemoan the lack of availability, for example, of new liquid retail bonds, or their restriction from accessing certain exotic securities of financials etc.

    Yet as soon as there’s a wobble in the market — see the Aviva attempt to redeem at par a couple of years ago — the first thing they do is look to corral a bunch of pensioners together to stress — and I’m deliberately hugely simplifying to make the point — this is their income and they need it to keep the heating on.

    You can’t have it both ways.

    Hopefully any further restrictions will come with some enhanced ability to declare oneself a sophisticated investor (as you have to demonstrate with some unlisted equity investments, for instance) and then a continued capacity to invest.

    But yes, I’ve seen stuff disappear from retail platforms I use for these sorts of reasons, and it’s annoying.

  • 39 Ruby April 29, 2020, 10:07 am

    @Naeclue – I had a quick look at the investment pathway proposal a few days ago – it’s been delayed for a year because of the virus but otherwise looks as clear as mud. It’s not clear to me who it will apply to (pensions imminently about to go into drawdown or existing drawdown plans?), and what they mean by ‘pension providers’ (is it just insurers or does it include platforms that provide SIPP’s as well). However, it doesn’t sound like choosing one of the pathways would be mandatory but more case of pension providers satisfying themselves that pensioners have thought about what products they are choosing and hence ensuring they have ‘taken advice’. I find it hard to believe we would be compelled to take whatever product the pension provider determines is in our best interest – it would only take an episode or two of a provider, like HL for eg, loading people into pet funds which then go wrong for it all to blow up. It would also reignite the whole passive – active argument with the self interested providers no doubt encouraging the latter.

  • 40 AshantiGold April 29, 2020, 10:12 am

    @naeclue II charge 1.5% for forex up to £25k, lower above that. Stiff, but what price access ?

  • 41 Mathmo April 29, 2020, 10:33 am

    I shares does have a gbp hedged 7year treasuries product. But it won’t feel like a local dollar investment because the cost of the hedge changes things.

    In fact if you look at this product it shows the recent “heartbeat” spike/drop that AGBP showed, which makes me think the volatility there was the hedge rather than the underlying bonds.

    However, I don’t properly understand the hedge costs, and wonder where zx has got to…

    I do understand the risk of being the wrong side of a currency movement (and liquidity disappearance) when markets gyrate, and my dry powder doesn’t need yield as much as it needs to be dry.

  • 42 Algernond April 29, 2020, 10:47 am

    Hi xxd09,

    I understand what bonds are for, and they have done the job in my portfolio.
    Really I’m just castigating myself for having a global bond fund that has a large slug of corporate/financials in, since these correlate with Equity.
    I see now that iShares are offering Global Gov. only bond funds (both hedged and unhedged).

  • 43 Naeclue April 29, 2020, 10:53 am

    @TI, I wonder what proportion of these sophisticated retail investors, or for that matter professional investors, really properly understand what they are getting into when buying individual complex securities such as preference shares and some of the complicated subordinated bonds, etc. covered by impenetrable legal gibberish which reference other legal documents full of even more gibberish.

    The Aviva case is one in point. I don’t recall the full details, but I think Aviva wanted to repay their preference shares at par through a reduction of capital. A prospect likely to have been barely touched upon in Aviva’s articles of association, but implicitly permitted by the inclusion of company law. As far as I remember, Aviva backed down not because they did not have this right, but because many of their biggest shareholders also held the preference shares! So even the institutional holders did not see this coming.

    Another that springs to mind is Lloyds calling ECN bonds. That one went all the way to the Supreme Court, which decided 3 to 2 in favour of Lloyds, so even Supreme Court judges could not agree what the terms of the ECNs meant!

    A few of my relatives own conversions of PIBS, originally bought through (sold to them by) building societies decades ago. These ex-PIBS are now bank subordinated bonds. Again, complex instruments to which they have absolutely no idea what the terms and conditions are, or what risks they are running.

  • 44 Naeclue April 29, 2020, 11:22 am

    From a passive investors point of view bonds are tricky as there is no real consensus as to what to hold. With equities it is fairly easy – buy all of them! There are a few disagreements around the level of home bias and whether or not to add “Risk Factors”, but I think most passive investors/experts say just invest most/all into a World tracker.

    With bonds, there seem to be 3 main camps. 1) Buy the whole market, much like a global equity tracker; 2) short dated own currency only (don’t take on interest rate or currency risk); and 3) Duration matching (Lars talks about matching to the investment horizon, which is very similar https://monevator.com/should-you-invest-in-short-or-long-term-government-bonds/). For most investors, option 3 basically means long bonds.

    Then you add in the local currency only, local+foreign, or local+foreign hedged decision.

    AND then, whether to include corporates, emerging, sub-investment grade, etc.

  • 45 Naeclue April 29, 2020, 11:36 am

    @Algernond, I think there is a danger of recency bias here. Yes, not having corporates would have worked out better for you this time, but maybe over the long haul having corporates in the mix may work out better.

    As the Accumulator is exploring in the article, it looks as though having unhedged US Treasuries in the portfolio is a good thing, but he presents other evidence to suggest that it is not necessarily the best strategy for the longer term.

    More generally, focusing on short periods where an investment strategy was good can distract from far longer periods when the strategy might detract from long term performance.

  • 46 Sparschwein April 29, 2020, 12:17 pm

    @Naeclue (#34) – good point about FSCS protection. I’m not sure either.
    Please share if you find out more about how to get professional investor status. I recall that IB required a large invested sum and work experience in the financial industry (I think it was @ZXSpectrum who posted it here).

    This FCA investment pathway stuff is getting me worried…

  • 47 ZXSpectrum48k April 29, 2020, 12:28 pm

    @Sparschwein. See https://www.handbook.fca.org.uk/handbook/COBS/3/5.html under section “Elective professional clients”

  • 48 ZXSpectrum48k April 29, 2020, 12:39 pm

    Mathmo. The 6% spike lower in AGBP (5.334 on 9-Mar to 5.013 on 19-Mar) is not attributable to fx hedging. The 1m GBP-USD OIS basis swap moved from -20bp to -200bp in that period. This is a massive move in basis swap terms, denoting the USD funding stress going through the market at that time. But with a 1m fx forward contract having a duration risk of 0.08 it would generate only about 0.15% in return. I care about these types of moves; you don’t need to.

    AGBP is 64% Govt vs. 36% corporate bonds. During that period, govt yields spiked higher and IG corporate spreads widened dramatically. The govt yields spiked higher due to an urgent need to liquidate collateral to raise USD cash. Corporate spreads widened due to fears of enhanced default probabilities.

    The size of moves varied, with 10-year Japanese JGBs only 20bp higher; USTs, Gilts, Bunds around 60-70bp higher; but Italian BTPs 140bp higher, given their credit like properties. US IG credit spreads widened about 150bp. Look at something like LQD US which is a US corporate bond ETF: this dropped 21.5% (albeit it’s duration is 9.24 vs. AGBP at 6.94). The need for USD was mitigated by the re-opening of Fed swap lines with other CBs and the rollover end-1Q. The widening of credit spreads was reversed again by Fed action, especially their willingness to buy corp bond ETFs.

  • 49 Sparschwein April 29, 2020, 12:39 pm

    @Naeclue (#44) – this is a good summary and I might add

    – weighting:
    The logic works for stocks: higher market cap -> stronger company (presumably)
    But more bonds issued -> stronger debtor ??

    – govt bonds vs cash:
    As retail, we can get a higher yield on FSCS-covered cash than on gilts. So basically if we buy gilts, we pay for the privilege to take interest rate risk.
    Granted that long bonds behave very differently from cash, and that the FSCS might not be as bomb-proof as it’s supposed.

    I think the whole risk-off part of the portfolio deserves more discussion.

  • 50 Sparschwein April 29, 2020, 1:04 pm

    @ZXSpectrum – thanks!
    Do I read this right that the 500k threshold is the sum across all investment accounts?

    A few rather woolly clauses there (COBS 3.5.3):
    “adequate assessment of the expertise, experience and knowledge of the client…”
    “transactions, *in significant size*, on the relevant market at an average frequency of 10 per quarter over the previous four quarters”
    So if we start trading like crazy while we still can, we might beat the system?

  • 51 Onedrew April 29, 2020, 1:33 pm

    @ZXSpectrum – thanks also!
    I see that for the same period the Vanguard intermediate Gilts etf VGOV had an even more torrid time than AGBP and VAGP, dropping from intraday high of 27.56 on Mar 9 to a low OF 23.54 ten days later, a 17% fall, following the slightly less volatile GBPUSD graph pretty faithfully.

  • 52 Mathmo April 29, 2020, 1:41 pm

    @zx – thank-you. Good to have some insight.

    I couldn’t understand why CBUG (3-7yr treasuries GBP hedged) had the same spike/drop that AGBP exhibited when OM3M (3-7yr treasuries) didn’t, so I assumed it was an artefact of the hedge.

    Appreciate the point about the ultrashort duration means that even a big shove has little yield effect — which is kinda what I’d hope for: the hedge should give me yield drag in return for lower GBP-priced volatility.

  • 53 ZXSpectrum48k April 29, 2020, 1:54 pm

    @Sparschwein. It’s never been completely clear to me whether the amount is 500k across all accounts with that firm, or across all accounts with all firms. I tend toward the former view. Personally, it’s never been relevant since I meet all three criteria for all the firms where I want this status.

    I know firms are getting less keen to allow this status since they fear FCA sanctions, bad PR and litigation from clients if anything goes wrong. They have to weigh up this compliance/legal risk vs. the actual amount of value the client might offer. That balance is constantly tipping against smaller clients.

  • 54 Naeclue April 29, 2020, 3:04 pm

    @Sparschwein, “The logic works for stocks: higher market cap -> stronger company (presumably)
    But more bonds issued -> stronger debtor ??”

    A response from a type 1 (buy the market) investor would be the same. Prices are set by active investors taking all known information into account, including the size of an issuers debts. If that becomes a concern, issued bond prices will adjust to take account of that concern. You could go underweight some issuers, overweight others, but then you are an active investor. Why do you think your opinion of the weight is better than the market? I find this very difficult to argue against, even for bond markets.

    For FSCS protected cash (and NS&I), I agree and lump it in with type 2, short dated bonds. This is an area where retail investors frequently do have an edge over the market, which is not efficient. For example, NS&I income bonds are paying substantially more than LIBOR and many instant access accounts from banks and building societies.

    I may not be active in shares/bonds, but I am very active with cash deposits.

  • 55 Neil Richardson April 29, 2020, 3:10 pm

    Another cracking Monevator article that made me sit up in my chair and re-visit my retirement asset allocation which doesn’t happen that often these days. But then a retirement allocation is for 30 years not just for Chrismas. I ran some numbers on the ever improving portfoliocharts site which folks might be interested to see.
    50% Developed World with:
    50% US intermediate treasuries SWR =3.7
    50% UK intermediate gilts SWR= 3.9
    (25% of each of above SWR=3.8)
    So the gilts have it, the gilts have it.. but wait…how about some GOLD
    25% US with 25% Gold SWR = 4.8
    25% UK with 25% Gold SWR = 5.2

    It’d be interesting to see that last mix set against the crisis windows discussed.

  • 56 Naeclue April 29, 2020, 3:21 pm

    @Sparschwein, a know a few people who have professional investor status with IB, which they use for option trading. They have told me that they did not have anything near the stipulated trading volumes, but were still accepted purely on the basis of their financial risk management experience.

  • 57 ZXSpectrum48k April 29, 2020, 3:29 pm

    @Sparschwein, “The logic works for stocks: higher market cap -> stronger company (presumably). But more bonds issued -> stronger debtor ??”

    The trend over the last three decades has been for institutional investors to move away from pure market-cap weighted bond indices to capped indices. This is to mitigate the impact of an ever increasing weighting to an issuer (sovereign or corporate) that is declining in credit quality but also to offset the reduced diversification that can result from this effect. It also can mitigate churn in the index weightings caused by issuers dropping out or re-entering the index. Remember the whole idea of a “zero net sum game” is predicated on a closed system; the more index churn, the less valid that concept is and many HY corporate bond indices can see churn > 50%/annum. These days there are also additional criteria to adjust for the impact of CB buying.

    Capping first became prevalent when Japanese government bonds became a large part of Govt bond indices in the 90s. Capped indices are now totally dominant in emerging government bond markets. Only retail use uncapped indices (they are cheaper to buy from index providers). In the biggest IG corporate bond market, the US, it’s less necessary since there are thousands of individual issuers but in smaller markets or more niche areas capping re-appears.

    Personally, for G10 govt bond markets, I only use individual country funds (so a UST fund, Gilt fund etc) so I can decide the weighting. I only use capped indices for EM sovereign govt funds; uncapped reduces the dimensionality of the portfolio too much. On IG, I’m not hugely fussed while on HY corps, I’m alaways more careful about index selection.

  • 58 MrOptimistic April 29, 2020, 3:44 pm

    @Sparschwein. I’d focus on the ‘adequate assessment’ bit. It is up to them to define adequate but on what basis would they say an adequate assessment was performed? There must be a form involved which requires evidence in probably several areas.

  • 59 SemiPassive April 29, 2020, 4:38 pm

    Thanks for a really useful article. With the benefit of hindsight I wished I’d bought a slug of US Treasuries when the 10 year was yielding 2% (keeping up with US CPI and the dividend yield on the S&P500), which wasn’t all that long ago as I was thinking at the time if I was a US investor I’d probably have 50% of my asset allocation in them.

    Gilts are a lot closer in yield now, so looking at some of the GBP-hedged ETFs for US Treasuries (iShares have a bunch of them at various durations, and also for TIPS) by the time you take the hedging costs into account there doesn’t seem to as much advantage.
    And unhedged you are basically speculating that the USD will climb vs GBP.

    I kind of get the point e-strong was making about a higher starting yield allowing for more compression, and thus more gains in times of market stress. That is assuming the bond currency is a sound one of course, like the world reserve currency and not a country with a poor credit rating.
    So if we had another equity crash now, would US Ts outperform gilts to the same degree now the rate difference is less? I guess yields could go negative – and more negative for the favoured safe haven bond, so the US T could still win out.

    In response to Petepool, on Tim Hale’s Smarter Investing he does favour long gilts, but only for equity heavy portfolios. E.g. an 80/20 would have 20% in long gilts, but a 60/40 portfolio would only have 15% in long dated gilts and 25% in index linked gilts (pref short dated ones).

    My copy of the book is a second edition from 2009, obviously since then the yield of either normal gilts or index linked ones doesn’t get close to keeping up with CPI.
    When the book was written even short dated gilts did, so bonds were not JUST for crash protection and fear of deflation, they could eke out reasonable returns.
    TBH my favourite UK government backed bond at the moment are premium bonds, that is how bad things have got.
    I have however been brainwashed by The Accumulator, thanks especially to his most recent few articles and years of me being wrong, to at least include an intermediate gilt tracker fund in my work pension. The 0.27% fee just about cancels out the yield.
    I haven’t piled in now as that would closing the door after the horse has bolted, but set up to drip feed in over time.

  • 60 Naeclue April 29, 2020, 6:13 pm

    @SemiPassive, I find this earlier

    So looks like he changed his mind in the 3rd edition and fell into the short dated camp. With the benefit of hindsight, not the best timing.

    Now I am seriously considering leaning that way, or at least heavily cutting gilts and US Treasuries in favour of cash. Undecided about a hedged government bond fund.

  • 61 Petepool April 29, 2020, 6:30 pm

    Semipassive yes I also have that 2009 version and had build my overall portfolio (70/30) with intermediate bonds VGOV and some index linkers as my defensive holdings in my SIPP.
    Outside side of my SIPP I’ve tended to hold fixed term cash deposits as my defensive assets this was partly to enable me to bridge to accessing my SIPP later this year.
    I aim to keep my overall portfolio (including ISAs, cash, Sipp and DC pension pot) at 70/30 as well.
    Having reread the Tim Hale section and Lars’s articles on defensive assets I’m minded to carry on with this approach. Looking for the gilts and linkers to balance share price falls and the cash deposits to offer security and a little return.

  • 62 The Accumulator April 29, 2020, 7:56 pm

    @ Semi – 3rd edition Hale cut back on space devoted to bonds and (from memory, so maybe doing him a disservice) he seemed to move away from long bonds and in favour of short bonds but was a little vague about who that suited. As someone else here already pointed out, he caveated that short bonds were particularly suitable for those who favoured low volatility / were closer to retirement.

    Bernstein gave an interview in which he said long bonds were for “adult’s only” given the interest rate risk. That was ooh five years or so ago.

    As the Permanent Portfolio, the Great Depression, and the historical record shows, long bonds are generally our friend during a deflationary recession but who fancied that this last decade? Not me. I compromised with intermediate gilts but interesting that ZX among others had a slug of long bonds.

    @ Neil Richardson – thank you for running those numbers. Does Portfolio Charts provide US Treasury returns in £ terms, when you switch on the UK investor option?
    Portfolio Charts has an in-built bias towards gold given its dataset start point (gold had an amazing 1970s) so you need to take that into account. I am increasingly convinced I need 5% gold in my portfolio but I wouldn’t bank on that kind of SWR uplift.

  • 63 Brod April 29, 2020, 8:02 pm

    @TA – yes, I’ve gone for 10% gold as I may or may not start drawing down my pension next year. It pays no dividend or coupon, has no major industrial uses, but it does different stuff. Weird.

  • 64 Ruby April 29, 2020, 8:36 pm

    I see that NS&I have shelved the interest rate cut on their Income Bonds which continue to pay interest of 1.15% p.a. For fixed interest thickos such as myself a Treasury backed 1.15% looks rather appealing compared to IGLS and IGLT with YTM’s of 0.09% and 0.37% respectively. What am I missing – a tiny bit of upside action from a further miniscule interest rate cut? To do ‘better’ I’ll have go longer which, as I’m already at the limit of my understanding would, I suspect, be a little rash.

  • 65 HariSeldon April 29, 2020, 9:51 pm

    Bonds are offering very little yield, short of zero to negative yields… there is little upside.

    If one holds unhedged bonds, then you are relying on a currency movement for return/safety.

    Surely we can get return and/or foreign currency exposure from our equity holdings.

    Our bonds are for safety, for a U.K. private investor then NS&I Income bonds providing almost instant access, full faith of U.K. government and a yield of 1.16%

    I find these far more attractive than a hedged global bond portfolio that contains real possibilities of defaults, for the secure safety first part of the portfolio.

  • 66 Maximus April 29, 2020, 10:16 pm

    Interesting stuff as always, but shouldn’t we try to diversify our bonds as we doeth with our equities..?
    I only have one bond fund in my portfolio: Vanguard Global Bond Index Hedged Acc GBP. Its international coverage and comfy hedged-ness has always given me a better nights sleep and 0.15% pa is a small price to pay for this I think…

  • 67 ZXSpectrum48k April 29, 2020, 10:48 pm

    The drivers to hold USTs over Gilts evolved due to a confluence of events. The first was the 2016 Brexit vote caused Gilt yields to fall. Specifically it caused Gilt real yields to collapse on the back of lower growth expectations. At the same time, the US Fed started a slow tightening cycle from 0-0.25% to 2.2.5-2.5% by end-2018.

    As a result by end-2018, long-end USTs were very attractive vs. Gilts for 3 reasons
    a) 30-year USTs offered positive real yield, when Gilts did not. Plus at a nominal yield of 3.4% this was also high enough to undermine the S&P500 and was one driver of it’s 20% fall in 4Q18.
    b) By late 2018, compared to a 20-year history, the spread between 30-year US and UK rates was at very wide levels (about 2.3 σ from the mean, or top 1%).
    c) The Fed alone had tightened policy rates and thus had more room to cut rates compared to the BoE or ECB. The fall in the S&P in late 2018 caused the Fed to do a rapid U-turn and cut rates in 2019. Their forward guidance for 2020 was explicit that they would not hike. If anything went wrong with the S&P, the Fed would cut hard again.

    So the time to buy USTs was late 2018. At current levels, the reality is different. To be fair, real yields on USTs are still more attractive than on Gilts but in outright terms level are hardly inspiring. The spread between 30-year UK and US rates is back to long-term averages. The Fed has cut to the lower bound, so the policy rate differential to the UK has collapsed. Their current guidance is that they would prefer not to take policy rates negative but would instead prefer to use other measures such as more QE or Yield Curve Control.

    So the trade has happened. Personally, I’ve cut most of my exposure in long-dated USTs (ZROZ US, TLT US, VGLT US). Some of that is simply taking profit. I’ve had a very good year so far in return terms with a combination of S&P/Nasdaq calls and long-duration USTs. It’s more, though, that I just don’t see the sort of 4:1 payout ratio that existed in late 2018. When the playing field isn’t tipped in your favour, don’t play. Clearly there are many scenarios where yields can still go lower but it’s too symmetric here.

    Moreover, while structurally I’ve been a permabull on long-duration govt bonds for over 20-years, I think it’s sensible to be cautious around crises. I find it hard to see inflation, real yields or term premia rising much with the current backdrop. At some point, however, we could see an economic regime change and crises like these are potential phase transition points.

  • 68 Maximus April 29, 2020, 10:57 pm

    Fair point about NS&I Income bonds, although the teeny 1.16% pa AER is variable of course, and will almost certainly decrease further in the nearish future; they only held off reducing it right away because of the Virus Crisis. NS&I also won’t ride to your rescue when your investment castle’s besieged, like government bonds tend to…
    I guess for me NS&I Income bonds are an alternative to instant access savings accounts rather than government bonds though.
    And it’s not quite right to say that bond returns are purely down to currency movements, especially for hedged funds! Things like yield, time to maturity, interest rates, inflation, credit ratings – not to mention World Crises – affect their value too.

  • 69 Naeclue April 29, 2020, 11:20 pm

    @HariSeldon, I understand what you mean, but who is to say gilt yields will not go to zero or negative? 30y gilt yields are down about 0.6% from 6 months ago, another 0.6% would take them near zero and deliver ~10% upside. 30y US Treasuries are on about 1.23%, down 1.1% on 6 months ago. If they went to zero that would be a gain ~30%. Down to -1% would be a gain ~70%, so plenty of potential upside there. Of course if they returned to where they were 6 months ago, that is down ~20%.

    I have had my head in the sand regarding bond yields, as every good passive investor should, but having actually started to look and think about them, everything does seem exciting. The one thing bond markets should not really be as far as I am concerned.

    This reminds me of the dot-com bubble, when people were saying how can these prices possibly make any sense, only to see them rise. Freeserve, owned by Dixons, is one I recall as I was a customer at the time. They offered free internet access, making money from a cut in the phone charge. The price they were floated at was utterly ludicrous, but they leapt over 30% on the first day of trading. I did not join in the madness, but plenty of work colleagues did, although the massive oversubscription met allocations were tiny. There were plenty of people around saying things like “you just don’t understand, we are in a new era”, doubtless there are going to be plenty of people around saying the same thing about bond yields.

    Stock market crashes, bonds go up. I know the theory and have seen it happen enough to know it works, but there is no physical law to say it must carry on working and a number of times it has not happened. So I am rapidly coming around to your point of view. Cash at 1.1%, or even at 0% is still uncorrelated with share prices.

    But I still have deep misgivings over questioning the market.

  • 70 WhiteSheep April 29, 2020, 11:23 pm

    Out of curiosity, if access to US ETFs is desired, is opening an account with a US broker no longer an option for European clients?

    I hold some US bond ETFs with a US based broker. I get regular messages about FDIC insurance ($250k, although I don’t know if it would really apply to me) and occasionally I need to file a W-8BEN form. The 15% withholding tax can be offset in my UK tax return.

    But I have had the account for quite a long time (before the GFC). Now I am wondering if this would still be possible nowadays, or if they are going to revoke my account at some point…

  • 71 Mathmo April 29, 2020, 11:52 pm

    @zxspectrum – as ever, thanks for sharing your insight so clearly.

    @Hari – bonds are a place to hold wealth while equities get (relatively) cheap — for that reason I like them in a wrapper with my equities (SIPP / ISA etc) so that I can swap between them. This is (just one of many recently) of the issues I’ve found by holding P2P loans as part of my FI allocation, for example.

  • 72 Naeclue April 30, 2020, 12:02 am

    The Accumulator mentioned Bernstein. I guess that is William (?), but this article, written in August last year, shows how the best laid plans and thoughts about future movements in the bond market can so easily be overtaken by events:


  • 73 xxd09 April 30, 2020, 12:43 am

    I am with Maximus on this-only one Bond Fund in my Portfolio
    The Vanguard one he mentioned
    Produced average 4.3% pa return since 2009
    After doing all that a Bond should do in my Portfolio ie preserve value of portfolio,reduce volatility et etc -this level of return is a very acceptable
    Simple to follow, cheap and easy to understand for a 73 year old
    Does it for me

  • 74 Naeclue April 30, 2020, 1:51 am

    @xxd09, The thing is, for that rate of return to continue some very strange things are going to have to happen in the bond market. I bought a 14 year gilt a little over 6 years ago. The internal rate of return on that bond has been about 6%. Let’s say I want only 3% now on a 14 year gilt held for 7 years. For that to happen, I would need 7 year gilts to be yielding about -2.5% in 7 years time. If I wanted only 1%, which I could probably get on cash if I locked in a 5 year deposit rate now, 7 year gilts would need to yield below zero, somewhere around -0.2%. Could happen of course, but how likely is it?

    Also, why would I want to take the risk of gilt yields not continuing to drop, which I will need to happen to get a better return than that available now on cash, but actually rising? If in 7 years time 7 year gilts were yielding 1% I would make virtually nothing. Above 1% and I would actually lose money.

    This is the kind of dilemma that bondholders are facing now and with the best will in the world it seems very unlikely that your bond fund’s future returns will come close to the returns you have experienced. So is it worth continuing to hold compared with just holding cash, which has zero downside risk?

    Not saying I know what the right answer is, just pointing out what we are up against with such historically low rates.

  • 75 The Accumulator April 30, 2020, 8:49 am

    @ Naeclue – thank you for the link. Yes I was referring to William.

    To me there’s only a dilemma if I insist on optimising every aspect of my portfolio and jockeying for return. I can’t. ZXSpectrum’s fascinating insights only serve to show how outgunned we are as retail investors. We’re not agile enough.

    Therefore I need some cash. I need some conventional bonds. I need linkers. And some of that weird yellow metal that does its own thing. Some part of the mix will always cause me pain – like a stone in the shoe – but another part will prove invaluable when the next crisis happens along.

    I wonder what kind of crisis that will be?

  • 76 Neil Richardson April 30, 2020, 9:19 am

    Morning Accumulator, I believe that the portfoliocharts UK setting adjust all assets to Sterling and UK inflation applicable at the time but I’m just going by the guidance on the site. Do you know otherwise? I ran the numbers for US investors and the SWR with gold is still 5.2.
    Interestingly the 30-year SWRs that I posted are not rooted in any of the 40-year runs starting 1970-1980 but rather on projections of more recent start points. So perhaps it’s a close enough match to the 1986 start point for historical data that you chose.
    I would also note that the safe withdrawal rates for all windows considered are in a tighter range with Gold, approximately 5-7% rather that 4-10% without so diversifying with Gold (acknowledging it’s only backtest) reduces volatility at the expense of upside as well as downside protection. So why not rely on this same protection in the future? I really agonised on whether to include Gold in my asset allocation decision especially when it’s been a drag on returns until now and its elevation to star performer. Its strength is its role in a portfolio and especially a retirement portfolio where volatility reduction really matters. I would note that I think more frequent or threshold rebalancing seems to work best with this volatile asset.
    Anyway thanks for a great article.

  • 77 Passive Pete April 30, 2020, 9:41 am

    Thanks @TA for another great article. I’ve gleaned most of my understanding of bonds from your articles and @ZXSpectrum’s comments. My simplified view of bonds is that there are many varieties that can serve three main purposes. The first being a counter-balance to equity that you discuss in the article. The second, such as short dated UK gilts, being to store value similar to cash and the third, such as emerging markets government bonds, that provide a reasonable cash yield. I hold a mix of all three types.
    I’m a little more worried about inflation, given the unusually generous cash hand-outs from governments that might cause a demand-push type inflation. Mix that with a ‘live for today’ attitude that might result from the current experience could see a spike in prices in the next few years. Therefore I think I’ll increase my holdings of short dated type bonds to wait and see what happens. I’m not saying that’s the most likely scenario, which is why I’m not moving into Linkers, as deflation seems to be the major concern which might have a negative impact on those values.

  • 78 xxd09 April 30, 2020, 11:17 am

    I long ago gave up trying to master the Bond market after extensive reading and dabbling in Bond ladders etc
    Now I have the one fund only-Vanguard Global Bond Index Tracker hedged to the Pound and that is it
    I am older(73) so not so interested in trading here and there for a small percentage gain
    I am sure if the ordinary investor did the same and then concentrated their major efforts in their day job where they can make money ( and live frugally!) they would do better than most in the long run
    Who knows what the Bond market will do?
    Don’t search for needles in haystacks-buy the haystack and let the market do the heavy lifting
    Then stay the course
    Cheaper, easy to follow and understand and does the job-for me anyway

  • 79 Factor April 30, 2020, 12:34 pm

    Off topic but after the “Down with Dividends” topic here a few weeks or so ago, I undertook to report back on how my upcoming and normally metronomically regular quarterly investment trust dividends were faring. The answer is now available, and for the four separate dividends that were due on different dates during April each has been paid on the due date and in full.

    For info, as part of my funding in retirement I have a basket of fully ISA’d income generating ITs, and I regard them as my thinking man’s annuity. Yes, their capital values move but in all honesty this is barely even of tertiary interest to me, the income itself is the most important thing followed by its reliable quartile frequency.

  • 80 TheIFA April 30, 2020, 1:30 pm

    I think it’s key to stress test your portfolio in as many ways as you can think and use as much historical data as possible. Not sure if you’ve looked at this (you might be able to find a more recent version)


  • 81 Grumpy Old Paul April 30, 2020, 1:32 pm

    @HariSeldon, @Naeclue, you are making me think hard about things. I notice that the NSandI Income Bonds are variable rate unlike the issue that I bagged in early 2018! I also observe that you can get a fixed rate of 1.45%/1.55% with Ford Savings 1/2 year Fixed Saver Accounts. You can do slightly better with some lesser known organisations.

    Fascinating post from @The Accumulator and thought-provoking comments. I’m left full of uncertainty.

  • 82 Sparschwein April 30, 2020, 1:46 pm

    @ZXSpectrum, @Naeclue, @MrOptimistic –
    Thanks for your comments about the professional investor status.

    This would be a good topic for a Monevator article. There may be an opportunity here to buy stuff in the SIPP, short the same in an investment account, acquire pro credentials for both with limited risk. Added benefit *if* we get the market direction right: some net withdrawal from the SIPP.

    COBS 3.5.3 (2) with its more onerous criteria (esp. the 500k threshold) applies to “MiFID business or the equivalent business of a third country investment firm.”
    Seems to indicate that UK-domiciled and non-UK investment products are treated differently?

  • 83 Ecomiser April 30, 2020, 2:04 pm

    @Factor. Thanks for that, my ITs are doing the same.
    However, the cash for those dividends were already in, the fun comes in future quarters, when the trust’s income has fallen with the dividends of the companies it owns. Does the board use the reserves to keep the dividend steady, or say we’ve less coming in, so we’re paying out less too?

  • 84 MrOptimistic April 30, 2020, 2:14 pm

    @TA. Re Hale, 3rd edition. Yes he doesn’t recommend long duration bonds. Page 111 ‘ The question that needs to be answered is whether or not this maturity or interest rate risk is adequately compensated. In short the answer is not adequately enough – shorter dated bonds are preferred….’

    Personally I wonder if we are going to see materially higher interest rates in the next decade.

  • 85 Factor April 30, 2020, 6:15 pm

    @Ecomiser #83

    Mine all came through the GFC unscathed, dividends as steady as a rock, so whilst there are obviously no guarantees I have no great anxiety about the immediate future for them; the worst that might happen could perhaps be no more than a period of dividend stasis.

    FWIW I have two IT dividends due in May, and one each in June and July, so I’ll come back with a further update after that.

  • 86 Vanguardfan May 1, 2020, 7:38 am

    @factor, surely it’s too soon to expect IT dividends to be cut? If they make quarterly payments, then April payments will have been earned in the three months prior, so any loss of earnings will hardly have filtered through. Tell us in 2021.

  • 87 Naeclue May 1, 2020, 8:14 am

    @MrOptimistic, ‘ The question that needs to be answered is whether or not this maturity or interest rate risk is adequately compensated. In short the answer is not adequately enough – shorter dated bonds are preferred….’

    That neatly expresses my concerns. As yields drop, interest rate risk rises. A 3% 30y gilt is about 90% more sensitive to yield changes when trading on 0.5% yield than it is when trading at par (3%). Even a 10y 3% gilt is 30% more sensitive.

  • 88 ZXSpectrum48k May 1, 2020, 8:56 am

    @Sparschwein. I’ve actually been do the opposite of what you are implying for the last decade or so, to transfer some capital gains out of my pension into my ISA. I’ve been selling OTM calls on the S&P500 in my SIPP (effectively capping the gain to a few percent per annum) to buy the same calls in my and my partner’s ISA. This is perfectly easy to do in the SIPP with the correct status. The ISA is problematic since (another dumb FCA rule) they cannot trade options, so it’s requires the calls to be embedded into a note which is then the only asset of a fund with the correct reporting status.

    This is allowing me to still benefit from the fact I bought over £450k of S&P in Mar09/Apr09 using my 08/09 and 09/10 pension allowances but transfer the value of the gain into the ISA. It massively levers the £20k ISA allowance, while keeping me well below my £1.8mm LTA.

  • 89 The Accumulator May 1, 2020, 9:00 am

    @ Neil Richardson – the reason I distrust SWRs that high – particularly where gold is concerned – is because the picture becomes very uncertain when longer-term datasets have been used. Two studies spring to mind:

    Michael McClung – his conclusion was that gold conferred no reliable benefit.

    Early Retirement Now – he was pretty ambivalent about the worth of gold in a deaccumulation portfolio. It did make a big difference during certain term frames but other times not so much.

    What I’ve taken from this, is that I can’t afford to assume gold will improve my SWR. The evidence is mixed, but my lifetime may come to resemble one of those ‘unlucky periods’ in the backtests. So I won’t rely on the Golden Butterfly effect.

    But there is good evidence that gold works at times when nothing else does. And I’m most vulnerable to sequence of returns risk in the first 10 to 15 years. So I’ve come round to the idea of holding 5% or so gold during that vulnerable period. If I go through a period when ‘nothing else works’ then I’ll live off the gold and probably never replace it.
    That’s how I’m trying to resolve the tension between the diversification benefits of gold and the danger of being stuck with an unproductive asset for decades.

    I tried to articulate some of that here:

    I’m not criticising your position btw, I’m just walking through my thinking. I love debating this kind of thing.

    I don’t know any different about whether Portfolio Charts translates US Treasuries returns into £s. I was just wondering. I wasn’t sure if Tyler had that data or not. I was going to use Portfolio Charts to look at the behaviours discussed in this article from another angle but I ran out of time.

  • 90 Naeclue May 1, 2020, 9:10 am

    @xxd09, “Who knows what the Bond market will do?
    Don’t search for needles in haystacks-buy the haystack and let the market do the heavy lifting”

    Completely agree that nobody knows what the bond market will do, any more than anyone knows what the stock market will do. I am certainly not going to start speculating on it. I agree that your “buy the haystack” approach is an option well worth considering. The only thing that is gnawing at me is that the bond component is supposed to add stability to the portfolio, but with bond yields on the floor, bonds are potentially much more volatile than they were 10+ years ago when they were at 3-4%. This is something that is of much less concern to advocates of the short dated only approach like Bernstein and Hale.

    We invested in a 60/40 equity/bond portfolio while accumulating and carried right on without when we started decumulating. With more time on our hands, we are now having a proper detailed review of spending, etc. We probably should have done this when we started decumulating, instead of the back of the envelope job I did at the time which basically said spend about 3%. Reviewing our investment portfolio is part of that. Should it be 60/40, or something else? Or something that varies as we age and if so how? The old school “age in bonds” is no longer set in stone and “glide paths with rising equity”, etc. are recommended by some experts.

    Equities are no problem – global tracker, albeit scattered across multiple funds. But what bonds? Short, long, whole of market, index linked, sterling only (or hedged) or multi-currency? Or just hold cash? While we are at it, should I consider gold? Never have in the past, but now is a time to question old beliefs.

    Our review of spending was very illuminating and much lower than I thought it would be. Unless we have missed something, after setting aside cash for likely one-off large expenditures over the next 5 years and cash to see us through to state pensions, it turns out that we only need a drawdown rate of 1.2% to live life as we did prior to lockdown. We plan to give more cash away to help the kids with their housing, so we can choose what drawdown rate to go for and I think that drawdown rate may influence what strategy we eventually adopt. We need to consider IHT as part of the review as well. Once we have figured out our strategy, we will stick to it until personal circumstances dictate otherwise.

  • 91 The Accumulator May 1, 2020, 9:10 am

    @ Passive Pete – the fourth role being the best defence against inflation in the shape of inflation-linked bonds. I know it doesn’t look like rampant inflation is a danger – and it hasn’t been for a while – but it’s potentially devastating and a big part of the reason why the historical worst-case for US retirees hits the 1967/68 cohort. Their equities go nowhere for the first half decade, their portfolios get eaten away by stagflation in the 70s and the 80s boom comes along to0 late.

    ZX isn’t worried about inflation for the foreseeable but he’d probably see it coming in plenty of time anyway. Me, not so well informed, I gotta be ready for anything so I hold linkers with negative real rates and take the pain. Better that than the chance of a catastrophic failure.

  • 92 The Accumulator May 1, 2020, 9:12 am
  • 93 TheIFA May 1, 2020, 9:18 am

    Re Tim Hale’s 3rd edition and his movement towards shorter dated bonds, this may well have been driven by the work Dimensional had done regarding being rewarded (or not) for taking term exposure and him incorporating their offerings into the portfolios he helps construct for clients.


  • 94 Naeclue May 1, 2020, 9:28 am

    @ZXSpectrum48k, I am intrigued about your SIPP to ISA transfer mechanism. I looked into this years ago and came up against the problem you mentioned – options not allowed in ISAs. I looked for other products as a substitute, such as warrants, but found they were not allowed either. Some kinds of structured products were allowed, but I could not find any suitable ones. Where did you find notes you mentioned?

  • 95 Ruby May 1, 2020, 9:41 am

    I’ve really enjoyed this thread and it’s been a bit of an education; thanks to all.
    Prior to reading it I was holding both Vanguard Global Bond and iShares Global Aggregate Bond and, while I like to spread investments across different providers, there seemed to be a good deal of duplication here. I have therefore sold the AGBP and replaced it with IGLS, the iShares Gilt 0-5 etf. My fixed interest holdings now comprise Vanguard Global, IGLS, IGLT (the intermediate ishares etf), good old NSI ILSC’c and a dollop of cash. Not being constrained by any FI expertise, I admit there is not a huge amount of science behind all this but it seems to cover all the bases. While I don’t expect much in the way of return , I’m a year or two from drawdown and hopefully they will provide portfolio ballast and won’t be too painful to watch. I haven’t worked it out precisely but think ~ 60% of allocation is now in short gilts.

  • 96 The Accumulator May 1, 2020, 1:12 pm

    @ TheIFA – thank you for the link. For sure, much of Hale’s data in his books comes from Dimensional.

  • 97 xxd09 May 1, 2020, 1:16 pm

    I am older I think than you(73) -retd at 57
    I had made my pile and did not want to lose it-therefore more not less bonds required -60/65%
    Withdrawal rate slightly over 3%
    Never going to be less than 30% equities
    No IHT considerations
    Kids all married and settled-accidents can happen of course but don’t need money
    Most of our serious long distance travelling is done-just got out of Argentina on March 13th !
    It looks like all returns will be low going forward -bonds and equities but who knows
    I wanted exposure to US so world trackers for equities and bonds were for me-2 fund portfolio
    Cheap,simple and easy to understand and manage-important when older
    Done the business so far for me
    At 1+% withdrawal rate 60/40 seems OK for you-very sustainable withdrawal rate
    Why change your investments if they have done the job so far?

  • 98 Naeclue May 1, 2020, 1:53 pm

    @xxd09, provided withdrawal rate is less than about 3%, historically it seems safe enough whether you have anything between 10% or 90% bonds. The primary difference it seems is with the expected size of the legacy. The more in equities, the higher the expected legacy, but with a wider dispersion. So yes, 60/40 probably would do, but while we are reviewing we may as well think about this as well.

    We would much prefer to help out the kids and later grand kids, nieces, nephews, impoverished relatives, etc. while we are alive, even if that increases our own financial risk. We could just go for annuities, by far the safest option for ourselves, but the one that provides least for others. Taking on more risk means we would hope to be able to offer more help to others. We feel we ought to try to make best use of the assets we have been lucky to accumulate.

  • 99 TheIFA May 1, 2020, 2:09 pm

    “@ The Accumulator – the reason I distrust SWRs that high – particularly where gold is concerned – is because the picture becomes very uncertain when longer-term datasets have been used. Two studies spring to mind:”

    Did you have a chance to run different options through Timeline? Might be the best source for Uk investors.

    “provided withdrawal rate is less than about 3%, historically it seems safe enough whether you have anything between 10% or 90% bonds”

    Which dataset are you using for this? Depending on starting age, fees/slippage might give a different outcome

    “options not allowed in ISAs. I looked for other products as a substitute, such as warrants, but found they were not allowed either. Some kinds of structured products were allowed, but I could not find any suitable ones. Where did you find notes you mentioned?”

    Having worked with options, structured credit/notes in a previous life I’m not clear what purpose they would serve in a typical portfolio – I like boring simplicity 🙂

  • 100 Sparschwein May 1, 2020, 2:56 pm

    This is a great thread, good to read others’ thoughts about the issues I’ve been struggling with. The risk-on allocation came rather easy, risk-off has been a headache (courtesy of CBs and their financial repression; in the good old days before the GFC I used to buy Bunds and be done with it).


    I look for a mix that stabilises my portfolio in various economic scenarios. It’s a dangerous assumption that the conditions that drove stocks & bonds up in unison will continue forever. This historic experiment in monetary policy that we’re in right now gives me a sense of foreboding.

    I find the 4 quadrants model (growth up/down, inflation up/down) useful. E.g. the simple 60/40 is very vulnerable against growth down/inflation up.

    After looking into asset class correlations a few years back I removed all corp bonds, EM bonds and mixed funds including these. Limited upside and too much correlation with stocks. If I wanted to trade higher risk for higher potential return, I’d rather increase % of stocks.

    I’ve got a good chunk in TIPS, mostly short duration (TP05) and no UK linkers because of their long duration and negative yields (from memory, a few years ago).

    Avoiding duration was obviously a mistake, in hindsight. Like others here I think that horse has bolted. Cash and short govt bonds it is.

    Only single-country funds to keep control over the allocation. E.g. Eurozone ETFs contain a lot of Southern Europe sovereigns and that’s not really risk-off, is it…
    All funds are un-hedged because I want currency diversification.

    Gold is somewhat useful in both growth-down quadrants. According to one of Bernstein’s books, gold was historically better in deflation than inflation actually. Gold held as physical outside of the financial system doubles up as a hedge against some tail risks. I’m 10% in gold and more would feel better now, but reason says not buy at all-time highs.

    I’d have added long-volatility and credit spread hedges last year, had I found a practical way to invest. Another horse that’s bolted now I suppose.

  • 101 Passive Pete May 1, 2020, 3:17 pm

    @ TA, I agree that inflation is certainly possible and therefore Linkers will likely react positively in that scenario. However, for me there’s an equally possible risk of deflation, where Linkers might under-perform. My thoughts for covering off inflation is to rely on equities with a weighting towards commodities (I know, still risky – but at least they pay dividends in the meantime).

    @TheIFA and @ TA, To be fair to Hale, he also lists Vanguard LifeStrategy Funds and similar Dimensional Multi-Factor Funds that will have a mix of bonds, not just short-dated. In fact, the passive element of my portfolio is in the LS60 and so I will hold around 3.5% UK Linkers as part of that fund. I’ve just looked at the book and its interesting to note the LS KIID scores have changed from 2013 (from 4 – 6 to 3 – 5) as well as the reduction in ongoing charges.

    @ Ruby, My short dated gilts performed as expected in the recent turmoil – they hardly flickered (as far as I could tell, as I wasn’t watching them constantly), but they still have around the same value now as they did before.

  • 102 Naeclue May 1, 2020, 3:25 pm

    @TheIFA, I was just being approximate. Whatever the drawdown rate and equity/bonds balance I am sure there will be a dataset somewhere for which it failed. We are thinking in terms of 2% drawdown and giving away the rest. Giving the rest away not easy though without incurring CGT or raiding ISAs, so would plan to run down over a few years. What is Timeline by the way?

    Regarding the options/structured products thing, I was considering doing just what @ZX has done to reduce our SIPPs and so mitigate the LTA charge. Selling OTM options in the SIPP, buying in the ISA (although I would likely have done the opposite and with puts). I never went through with it as I could not find any appropriate ISA qualifying securities for that side of the trade and there were a few people I discussed this with who thought it might be illegal anyway. It would also have meant transferring our SIPPs to a full SIPP provider as HL do not allow options in SIPPs. Risky of course, because it could backfire and end up boosting the SIPP, but you can make the risk asymmetric so most of the time the SIPP loses to the ISA. I abandoned all thoughts of this in the end when I realised I would probably end up being hit for 40% IHT on the money going into the ISA, so may as well just suffer the LTA charge.

  • 103 ZXSpectrum48k May 1, 2020, 3:41 pm

    @Naeclue. Sorry to say the structure I use to do options in an ISA is only available to the employees/ex-employees of the investment bank I worked for. It’s very limited in it’s flexibility in that it can only do options on S&P500 or Nasdaq and only specific expiries and strikes (via a plethora of share classes). It was built for the much larger US workforce, not really for the UK.

    I suppose these days anyone can buy levered ETFs on the S&P. Nonetheless, I find options a cleaner way to manifest the view and without all the frictional costs and oddities in their behaviour that those ETFs sometimes bring along as unwarranted baggage.

  • 104 Sparschwein May 1, 2020, 5:24 pm

    @ZXSpectrum – thanks for the explanation. I can do options in my general account but not in the pension and ISA accounts. Covered warrants seem to be available in the SIPP.

  • 105 TheIFA May 1, 2020, 6:06 pm

    Timeline is a tool produced by Finalytiq that allows you to test the success % of a given withdrawal rate based on historical returns. It was suggested on here a while back that private investors may be able to get a trial.


    It covers a reasonable number of rotten periods


  • 106 TheIFA May 1, 2020, 6:10 pm

    @Passive Pete The Dimensional equity/bond funds are short dated as far as I am aware


  • 107 Seeking Fire May 1, 2020, 8:53 pm

    All. Great thread. I agree with Sparschwein in terms of the four quadrant model although I am pretty light in low growth / deflation that appears to be likely right now. I appreciate inflation doesn’t feel likely in the short term but with govt debt to gdp ratios rising it feels hard to see how ongoing financial repression isn’t the more likely outcome medium term in which case cash or short dated bonds long term doesn’t seem sensible for a substantial part of your portfolio. FWIW I see no reason bond yields can’t go further negative from here, albeit the risks of holding long duration bonds are pretty high I guess. It does feel as if gold is increasing sensible component of your portfolio albeit it would nice to see a pull back from year. I understand the rationale for cash, short dated bonds as part of your liquidity or in a de-accumulation strategy albeit with rates very close to 0% it’s hard to understand how they get you anywhere near anything but a very low SWR. If it was in my 70’s then I’d hold a fair amount of short dated bonds clearly.

  • 108 The Accumulator May 2, 2020, 8:13 am

    @ Passive Pete – for deflationary scenarios I have my gilts and cash. It’s OK for the linkers to underperform, they’re on hand to protect me against inflation. I can’t predict what will happen so I need both.

    @ Sparschwein – interesting what you say about gold as a deflationary hedge. That rings a bell and ultimately I guess gold is capable of anything.

    Piece on the four quadrant portfolio concept:

    @ IFA – I have looked at gold in Timeline before (I’ve used up my trial option now) and I don’t remember it giving me much juice. To game Timeline and get a great SWR you mostly just need to load up on small and value equities. Would I rely on small / value working so well in the future? No. It’ll probably be some other asset class that I can only know about in retrospect. That really highlights the limits of historical models. You can force it to give you the answer you want, it doesn’t mean to say that’s the right answer.

  • 109 Passive Pete May 2, 2020, 9:34 am

    @TheIFA, ah yes, Dimensional are short dated bonds. It’s some years since I read the book and made my decision to buy the LS fund, so my memory of their similarity was incorrect.

  • 110 Naeclue May 2, 2020, 9:36 am

    @TheIFA, thanks for the links to the Timeline stuff, I will definitely try it out in due course. I am wary over over fitted strategies, so might work out a plan first using other resources then give it a final thrashing in Timeline.

    The Early Retirement Now site is very good if anyone out there wants a more comprehensive starting point. US only though and most strategies seem to work out better when run in US dollars, with US inflation.

  • 111 two shillings and sixpence May 2, 2020, 11:07 am

    My concern with uk government bonds is that you are putting all you eggs in one basket the UK government. I appreciate that the government is unlikely to fail or probably no more likely than other government in the developed world. I have add a gobal bond index mostly because of my concerns of brexit. I understand that this might be a little more risky as the index also includes some commercial bonds.

    Do any of you share my concerns regarding say the UK government . I recall Monevator did do an article on this some time ago but recent development such as Brexit and the government taking on more debt has made me more concerned

    The amount of money i have invested is small however this site has helped me greatly in learning how i can get a better return on it.

    Keep up the good work. Thanks for the interesting discussion as ever

  • 112 JamesGoesSocial May 2, 2020, 11:14 am

    Interesting article and research, thank you. Whilst not an ETF, Vanguard U.K. Long Duration Gilt Index has performed well over the last few years and particularly well in the last couple of months. Five year return is around 60% and YTD is 17.8%. Having said that, it is probably a case of the horse having bolted at this stage. It is now close to the 52 week high, although if we have another market correction…

  • 113 The Accumulator May 2, 2020, 1:26 pm

    @ Two shillings – Diversification is a matter of how far you’re prepared to go to hedge against risk. So sure, I can picture a scenario where the UK goes off the rails and I’d be glad to hold global bonds. The question is how complicated you want to make your life and which risks you want to guard against.

    Brexit and loading up on debt don’t suggest to me we’re about to turn into a basket case. Other countries are expanding their balance sheets too and we managed a staggering debt after WW2. These burdens will have consequences but it doesn’t look historically bad to me.

    IGLH is a global government bond ETF hedged to £.

  • 114 TheIFA May 2, 2020, 2:54 pm

    @The Accumulator
    Yes agreed on the small cap value tilts giving great historical outcomes but not being that confident on their future “outperformance”. There’s a debate ongoing on Twitter at the moment re Dimensional/small cap value with Abraham (who tilts in his Betafolio offering).

    My belief is that you take as little equity exposure as possible to give a successful outcome (e.g. to not to run out of money before you die) using the worst historical outcomes to stress test. If future returns aren’t as bad as the historical worse case outcomes we can consider reducing equity exposure as the years progress. Timeline is pretty good for that as long as you don’t (as mentioned above) specifically create a portfolio which gives the best historical outcome.

    Must admit I struggle to see how UK long duration index linked gilt funds fit into a portfolio. It’s (typically) not much less volatile than global equities (and if you look at the Vanguard fund around 19th March it plummeted around 15% in the space of a week) so doesn’t add much portfolio dampening. If you need greater returns why not take more equity exposure?

  • 115 Mathmo May 2, 2020, 3:07 pm

    IGLH very interesting, thanks, @TA. Shows the spike that AGBP did as well, but could be purer defensive play than AGBP (even if the corporate bonds there are investment grade).

  • 116 JamesGoesSocial May 2, 2020, 6:09 pm

    @TheIFA – long duration gilts are negatively correlated with equities. When the market crashed, long duration gilts increased. The subsequent drop was due to a sell off to realise profit. They act as a hedge.

  • 117 Sparschwein May 2, 2020, 6:48 pm

    @TA, thanks for the link. Could have saved me months of study and just read the conclusions here 🙂

    I think it’s a good time to add some inflation protection, while inflation expectations are low. Probably the consensus is right (who knows) but at least insurance should be relatively cheap.

    According to those better informed than me, commodity futures ETFs indeed have some structural flaws, so case closed finally. Instead I added some shares in commodity producers and a bit of silver & platinum ETFs, which depend on industrial demand hence should benefit in the growth up/inflation up scenario.

    Gold is quite different from other commodities and would probably warrant a separate entry in that schematic.

  • 118 The Accumulator May 2, 2020, 7:31 pm

    @ Jamesgoes… TheIFA was referring to long duration index-linked gilts rather than long duration gilts. The linkers have been historically much less reliable as a hedge in a recession: https://monevator.com/how-to-protect-your-portfolio-in-a-crisis/

    Also, there may be other problems with long linker funds:

    @ Sparschwein – came to similar conclusion on commodity future funds. I’m not touching them. The timberland funds I’ve looked at haven’t been too clever either.

  • 119 Sparschwein May 2, 2020, 8:36 pm

    @TA – what was the issue with the timberland funds?
    There are also farmland REITs. (I havent done research on either yet.)

  • 120 Al Cam May 3, 2020, 9:54 am

    @everybody – a really great thread with: lots of perspectives/viewpoints; a lot of clear explanations; and many learning points too!

    @TA – has anything herein caused you to review your conclusion that for liability matching of up to eight years this is best held as cash with an additional sum to allow for inflation?

  • 121 The Accumulator May 3, 2020, 12:25 pm

    @ Sparschwein – poor returns and strong correlation with equities. I dug into it a little here: https://monevator.com/10-year-retrospective-investing-in-the-future-with-specialist-funds/

    @ Al Cam – No, although I really need to write that article and present my thinking so others can challenge it.

  • 122 Al Cam May 3, 2020, 2:07 pm

    @TA – thanks for the very speedy reply.
    I look forward to reading that article – I reached a very similar conclusion some time back and have been living it for a while now too.

  • 123 Algernond May 3, 2020, 7:47 pm

    I wonder why it is that none of the Global bond funds include linkers?
    (I’ve cheked AGBP / VAGP / IGLH and others).
    Seems like to get a global bond-like fund that includes them, Lifestrategy 20% may be the best bet…

  • 124 The Accumulator May 4, 2020, 12:19 pm

    There are a few global linker funds hedged to £. I discuss two of them here:


  • 125 Algernond May 4, 2020, 2:16 pm

    Hi @TA – Yes, I’ve seen those.
    I was wondering why the Total bond market funds (Global or country specific) don’t include linkers in them.

  • 126 Neil Richardson May 5, 2020, 9:43 am

    @TA back to Gold for a moment. That Big Ern link is an absolute classic and has served as another very useful test for me to apply to my portfolio strategy. I can’t believe I haven’t read more and I will now make my way through his SWR series. I do think the post-1970 or maybe post-1980 is more relevant to today; recency bias of a kind I know and insights into more distant history are still very useful.

    Congratulations on stimulating such a lengthy series of comments too and it’s still going strong. Cheers, Nearlyrich

  • 127 William May 31, 2020, 8:55 pm

    Looking at a 50% Equity / 50% Bond portfolio. Mindful of Lars Kroijer writing in respect of a global equity index and domestic government bond fund portfolio, I wonder whether a S&P500 index fund/etf (given US percentage contained within a global equity fund) would act as a good proxy investment coupled with a US Government bond index fund (hedged to GBP). Thinking Vanguard VUSA and VUTY (both TER 0.07%). Would welcome comments.

  • 128 xxd09 May 31, 2020, 11:36 pm

    Why make life difficult for yourself
    A Global Equities Index Tracker Fund and a Global Bond Index Tracker Fund hedged to the Pound or ETF equivalents should do the trick and be enough

  • 129 007Bond August 30, 2021, 2:33 pm

    Why not just do 50% UK 50% US for your minimal risk asset? Intermediate funds and hedged in the case of the T-Bonds. It surely makes sense to diversify?

  • 130 The Accumulator August 31, 2021, 12:53 pm

    Greetings Mr Bond,

    There is a case for diversification, especially in a large portfolio. To some extent what you’re suggesting is like adding a global bond fund to your portfolio.

  • 131 007Bond August 31, 2021, 9:51 pm

    Exactly TA, like most of your readers I have wrestled with the bond allocation in my SIPP which is 40%. You are spot on… as I feel uncomfortable allocating 160k all to the one (albeit excellent) fund i.e. Vanguard’s UK Government Bond Index fund. I have read with interest your other posts around US Treasuries and subscribe to Lars’s investment philosophy. My bond allocation with Vanguard rightly or wrongly therefore looks like:
    15% UK Government Bond fund
    15% US UK Government Bond fund
    10% Global Credit Bond fund (Active but don’t hold that against me 🙂
    Comments welcome!

  • 132 Lonli-Lokli September 26, 2021, 10:22 pm

    I still not sure why you dont include hedged bonds in selection, bonds are supposed to be less risky


    It’s 20y+ so still the question why focus only on 7-10y notes?

    One more bonds to be considered, VUTY https://www.justetf.com/uk/etf-profile.html?cmode=compare&groupField=none&sortField=yearReturn3GBP&sortOrder=desc&from=search&isin=IE00BZ163M45

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