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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Are bonds back?

Hoshang Daroga, CFA, Investment Director at Elston Consulting, explores whether and how to add back bond exposure.

Trader Source: Bloomberg

Ever since the 2008 financial crisis, the combination of Quantitative Easing and ultra-low interest rate policies, meant that yields on traditional safety assets like cash and short-dated bonds were persistently anemic.

The fact that policy rates could not go lower meant that any increase in rates for the “normalisation” of monetary policy could throw the decades-long bond bull market into reverse. For this reason, bonds were the “unexploded bomb” in traditional 60/40 portfolios going into the 2021/22 inflation crisis.

Bonds: long- or short-dated?

As Central Banks’ crank up policy rates, the casualty has been bonds (rising rates and inflation) at the same time as the equity market (falling growth). Bonds provided nowhere to hide. And unlike equities, bonds don’t bounce: if the direction of interest rates and inflation are against them, their valuation continues to get crushed, regardless of recent dire performance.

It’s too early to pile into long-dated bond exposure, whilst there is upside risk to rates and inflation, in our view. For short-dated (less rate-sensitive) bonds, yields are beginning to look attractive - at least in nominal terms.

What are the options?

We look at different short-duration bond exposures -in different currencies, for managers to match the currency of future client expenditures, or reflect any directional views.

If you don’t want currency risk, or think Sterling may stage a recovery against the Dollar, consider iShares UK Gilts 0-5yr UCITS ETF (LSE:IGLS), which offers 4.12% yield to maturity, with an effective duration of 2.27 years. For corporates, iShares £ Corp Bond 0-5yr UCITS ETF (LSE:IS15) offers 6.69% yield, with 2.53 years’ duration.

If you want to stick with a strong Dollar to diversify away from Sterling, consider iShares $ Treasury Bond 1-3yr UCITS ETF (LSE:IBTS), which offers 4.32% yield to maturity, with an effective duration of 1.86 years. For corporates, iShares $ Short Duration Corp Bond UCITS ETF (LSE:SDIG) offers 5.11% yield, with 2.27 years’ duration.

If you have any near-term Euro-denominated liabilities to match, consider iShares € Govt Bond 3-5yr UCITS ETF (LSE:IBGX), which offers 2.38% yield to maturity, with an effective duration of 3.72 years. For corporates, iShares € Corp Bond 1-5yr UCITS ETF (LSE:SE15) offers 4.01% yield, with 2.87 years’ duration.

For even shorter duration and direct relationship to Fed policy rates, consider iShares $ Floating Rate Bond UCITS ETF (LSE:FLOT), which offers 4.38% yield to maturity, with an effective duration of 0.06 years. There is also a sterling-hedged version iShares $ Floating Rate Bond UCITS ETF (GBP hedged) (LSE:FLOS).

Bonds are not yet back in vogue, but they are back on the horizon. Targeted exposures, diversified holdings and the liquid ETF format: there is no shortage of more nuanced products and providers to choose from. Credit quality, yield, duration and currency should always be the primary considerations.

(Data cited correct at time of writing).

Notices

All ETFs mentioned are London-listed ETFs and available on the IG share dealing platform.

Your capital is at risk. The value of shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in.

The views and comments are the author’s own and do not constitute a personal recommendation, advice or marketing communication.

This is not an offer of, or solicitation for, a transaction in any financial instrument. Neither the author nor IG accept responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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