For context, I am based in the UK and I'm 27 so I'm looking at this through a long-term lens.
I started seriously investing in mid-2019 and since then, I've always thought that bonds did not really offer that good of a risk/reward ratio. Obviously, bonds skyrocketed in 2020 once interest rates were cut down since price obviously moves opposite to yield. We saw possibly the most expensive bonds ever in the UK, US and EU.
Since then, I've actively avoided bonds and only had a veeery tiny exposure for monitoring purposes. However, now, it seems that we may be hitting the bottom for bond prices. The Federal Reserve have signaled they will most likely avoid raising rates further or, at most, do another couple of raises of up to 6% at the most (even that may be unlikely given the banking situation). The Bank of England is in a slightly different situation, but I imagine they won't be raising rates that much higher either as things will simply start breaking.
My point here is this: bonds are starting to offer returns comparable to stocks (in my eyes). Up until now, my investment allocation in my ISA (for those not in the UK, this is basically an investment vehicle which allows you to invest up to £20,000 every year tax-free, e.g. capital gains and dividends received there are not taxable) is around 90% stocks, 7% gold and 3% bonds. I use Moneybox (a passive investing ISA app) so the 2 bond funds (both are denominated in GBP, too) available to me are:
I'm considering putting 20-25% of all my future contributions (I won't be selling any existing positions) to these bonds with 15% to government and 5-10% to corporate bonds. The way I see it is that if we're approaching the end of the rate hike cycle for the Fed/BoE/ECB, then prices of bonds will soon start to rise and, even if they don't, then the yield will still be good enough to keep them around. Plus, the longer rates stay higher, the bigger dividend these funds will start paying as they will be able to buy/replace more notes/bonds with higher coupon rates.
Obviously, sticky inflation and other issues can change that. There is also talk of potential debt defaults and all that - we've seen the bank problems recently, but I don't know how much of this is FUD and how much is really possible. To me, the default risk is really the highest which is why I want to buy more government bonds since I don't think they will default - they may print more money and increase inflation, but the default is off the table (in my eyes).
What are your thoughts on bonds right now? Is it worth buying [more of] them? Am I missing something really obvious here?
Submitted April 08, 2023 at 04:23AM by TheNewbieInvestor https://ift.tt/KHofDPv
