U.K. gilts

[minimalistmarc]

I don’t have bonds, partly because I don’t understand them. The current U.K. base rate is 4%.

The ETF vgov (U.K. gilts) seems to have a rate < 2%

Is there an ETF which would give the 4% interest without increasing the risk?

[Pops1860]

This thread has been moved to the 'Non-US Investing' forum. Moderator Pops1860

[SafferLady]

I don’t have bonds, partly because I don’t understand them. The current U.K. base rate is 4%.

The ETF vgov (U.K. gilts) seems to have a rate < 2%

Is there an ETF which would give the 4% interest without increasing the risk?

Hi there, I don't understand bonds either and not for want of trying, so I don't have any bonds either. I am a (very) late starter so don't want the portfolio drag of holding bonds at this time, but I am assured by the posts of better-informed and more experienced Bogleheads that bonds are going to be useful in the walk of time, when SORR gets real. Also at the moment, equities are battling to yield 4%, so I wouldn't expect bonds to do any better.

I read a post once by the famed Nisiprius, which stuck with me, so I copied it into my IPS, as follows:
"Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot." Nisiprius

I know this doesn't answer your question, but I have resolved to just do it when the time comes. I know one is not supposed to invest in anything one doesn't understand, but it seems to have worked out okay for my elders and betters, so count me in. I'll probably select a global bond index fund from Vanguard UK to keep things simple and because I dig Vanguard. Good luck, may your enquiries be profitable

[Valuethinker]

I don’t have bonds, partly because I don’t understand them. The current U.K. base rate is 4%.

The ETF vgov (U.K. gilts) seems to have a rate < 2%

Is there an ETF which would give the 4% interest without increasing the risk?

Hi there, I don't understand bonds either and not for want of trying, so I don't have any bonds either. I am a (very) late starter so don't want the portfolio drag of holding bonds at this time, but I am assured by the posts of better-informed and more experienced Bogleheads that bonds are going to be useful in the walk of time, when SORR gets real. Also at the moment, equities are battling to yield 4%, so I wouldn't expect bonds to do any better.

I read a post once by the famed Nisiprius, which stuck with me, so I copied it into my IPS, as follows:
"Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot." Nisiprius

I know this doesn't answer your question, but I have resolved to just do it when the time comes. I know one is not supposed to invest in anything one doesn't understand, but it seems to have worked out okay for my elders and betters, so count me in. I'll probably select a global bond index fund from Vanguard UK to keep things simple and because I dig Vanguard. Good luck, may your enquiries be profitable

Bonds are a much older form of finance than shares.

We could trace bonds in some form back to at least the 1200s, maybe older. Since the formation of the Bank of England in 1696, they have been a key form of UK government finance.

The basic idea is you buy the instrument, the gilt, a piece of paper, and the UK government undertakes to pay you:

- a coupon, usually semi annually. So a 2% coupon on a £100 bond would pay you £1 twice a year ( DMO.gov.uk lets you look up when)

- a redemption amount (par value or face value) of £100 per £100 of value of bonds

(Index-linked gilts are more complex because they include inflation (since time of issue) in the value of the annual coupons and the redemption amount. About 25% of all UK govt borrowing is ILG).

Thus a bond has known and fixed cash flows (excepting ILGs or US TIPS). That means the market price of that bond (which can be above or below £100) is the current estimate by the market of interest rates for, say, 10 years to maturity (the "10 year gilt" which is used as a common benchmark). That's usually measured by the "Yield to Maturity" (sometimes called the Gross Redemption Yield in the gilt market). A complex mathematical calculation (something called the Internal Rate of Return) of the returns from holding the bond over its lifetime from purchase to maturity.

Bond prices move opposite to yields. So a rise in interest rates will tend to drive down bond prices and vice versa (the actual mechanism in the market is the reverse, bond investors sell bonds if they think interest rates are going to rise, that drives down prices, and increases yields).

There's also something called (Modified) Duration, measured in years. If my bond fund has a duration of 12 years (about what the gilt index fund has) then a +1% increase in interest rates will give a -12% move on the price (things are never quite so simple, but it's a good guide to sensitivity to interest rates).

That's why bonds are safe. Because, as long as the borrower pays back ("credit risk") you as an investor know exactly what you are going to get paid for holding that bond. And you know whether you are going to make a capital gain or loss on the purchase (from memory, HMRC ignores that, and treats all returns from a bond as being income, not capital gain or loss - but I'd have to check that).

Bond index funds are a little more complicated because they hold a portfolio of bonds and are always selling some bonds (that are about to expire/ mature) with new bonds. In the long run, whether you hold a bond or a bond fund, you should get similar returns - the bond will have a constantly falling time to maturity, therefore it is getting safer.

Accumulating Funds (only in ISAs & SIPPs) take away the problem of reinvestment of coupons. Otherwise as an investor you have to figure out what to do with the coupons.

Safe government bonds (US, UK, Australia, Canada, Germany - a few other countries are viewed by Credit Rating Agencies as AAA ie very safe vis a vis credit risk) have historically functioned as a diversifier against a portfolio of stocks. Tending to hold their value when stocks go down.

Unfortunately in 2022 this did not happen. A major reason for the fall in stocks was the rise in interest rates as Central Banks tried to "catch up" with inflation by raising interest rates. This is also bad for bonds. 2022 was one of the worst years of all records (back into the late 1800s) for negative performance by stocks and bonds.

Nonetheless there's no reason to think the long term picture hasn't changed. Credit risk free bonds diversify well against an equity portfolio.

(The UK was interesting. Due to the abortive budget of the short lived Truss administration, UK gilts did worse than almost any other major bond market. However the FTSE 100 stock index is full of "old economy" shares such as tobacco & oil&gas. Thus, in a market where technology stocks did particularly badly (after storming in 2020-21) the FTSE did relatively well. A weak pound also helped because FTSE companies make at least 65% of their profits outside the UK - so the GBP profits of these companies were greater, earned in USD or other currencies but translated back into more GBP).

I have written many posts on the problem with the gilt index. The duration is c 13+ years, and that's far longer than say the US Treasury Bond index (8 years?) or other major bond markets. Thus more sensitive to rising interest rates (but will make more money on falling rates, as well).

Solutions:

- hold a short term gilt index fund (but yields are much lower)
- hold a global bond fund, hedged into GBP (most UK international bond funds or ETFs are GBP hedged)

The biggest risk to bond investors in the long run is inflation-- the loss of buying power. And that does speak to holding a percentage of bonds in Index Linked Gilts or other inflation linked bonds -- as much as half of the bond weighting in a portfolio. For technical reasons, however, ILGs will be very volatile in price - unpleasant to hold. And I would argue that the Truss interregnum was one of the best times to buy ILGs that we have seen since 2008/9.

[Valuethinker]

I don’t have bonds, partly because I don’t understand them. The current U.K. base rate is 4%.

The ETF vgov (U.K. gilts) seems to have a rate < 2%

Is there an ETF which would give the 4% interest without increasing the risk?

Hi there, I don't understand bonds either and not for want of trying, so I don't have any bonds either. I am a (very) late starter so don't want the portfolio drag of holding bonds at this time, but I am assured by the posts of better-informed and more experienced Bogleheads that bonds are going to be useful in the walk of time, when SORR gets real. Also at the moment, equities are battling to yield 4%, so I wouldn't expect bonds to do any better.

I read a post once by the famed Nisiprius, which stuck with me, so I copied it into my IPS, as follows:
"Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot." Nisiprius

I know this doesn't answer your question, but I have resolved to just do it when the time comes. I know one is not supposed to invest in anything one doesn't understand, but it seems to have worked out okay for my elders and betters, so count me in. I'll probably select a global bond index fund from Vanguard UK to keep things simple and because I dig Vanguard. Good luck, may your enquiries be profitable

It's not really possible to compare the yield on bonds with that on stocks.

The thing about dividends from companies is that they can, and are, cut. Whereas a bond is a legal promise on the part of the issuer (borrower) to pay and the investor has legal remedies if the borrower defaults.

So much of the dividend paid by the FTSE100 in the leadup to 2008 came from financial stocks. Which then dropped to zero for the next 1-4 years as governments required the suspension of dividends on the part of bailed out financial institutions.

You get what is called the "crowded trade" phenomenon. All of the Income funds in the UK market own a lot of the same stocks - Imperial Tobacco, BATs, GSK etc. Which means it can be pretty unpleasant if there is a dividend cut from a major stock in that list (HSBC? Shell?) as all the fund managers run for the exit.

There are "dividend heroes" or "dividend elite" ETFs which focus on companies that have never cut their dividends. It is however a short list (in the UK) and quite concentrated as to sectors (mostly consumer stocks, pharmaceuticals, utilities). Also that property of those stocks is well known, and the yields tend to be low.

Nisiprius has shown excellent charts that show that dividend income funds don't outperform the total stock market (US data) but have higher volatility.

the argument for holding stocks in the UK rather than bonds is that we are in an inflationary period and bonds don't do well under inflation. The counterargument is that the current inflation is a blip, already accounted for in the market.

[SafferLady]

I don’t have bonds, partly because I don’t understand them. The current U.K. base rate is 4%.

The ETF vgov (U.K. gilts) seems to have a rate < 2%

Is there an ETF which would give the 4% interest without increasing the risk?

Hi there, I don't understand bonds either and not for want of trying, so I don't have any bonds either. I am a (very) late starter so don't want the portfolio drag of holding bonds at this time, but I am assured by the posts of better-informed and more experienced Bogleheads that bonds are going to be useful in the walk of time, when SORR gets real. Also at the moment, equities are battling to yield 4%, so I wouldn't expect bonds to do any better.

I read a post once by the famed Nisiprius, which stuck with me, so I copied it into my IPS, as follows:
"Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot." Nisiprius

I know this doesn't answer your question, but I have resolved to just do it when the time comes. I know one is not supposed to invest in anything one doesn't understand, but it seems to have worked out okay for my elders and betters, so count me in. I'll probably select a global bond index fund from Vanguard UK to keep things simple and because I dig Vanguard. Good luck, may your enquiries be profitable

Bonds are a much older form of finance than shares.

We could trace bonds in some form back to at least the 1200s, maybe older. Since the formation of the Bank of England in 1696, they have been a key form of UK government finance.

The basic idea is you buy the instrument, the gilt, a piece of paper, and the UK government undertakes to pay you:

- a coupon, usually semi annually. So a 2% coupon on a £100 bond would pay you £1 twice a year ( DMO.gov.uk lets you look up when)

- a redemption amount (par value or face value) of £100 per £100 of value of bonds

(Index-linked gilts are more complex because they include inflation (since time of issue) in the value of the annual coupons and the redemption amount. About 25% of all UK govt borrowing is ILG).

Thus a bond has known and fixed cash flows (excepting ILGs or US TIPS). That means the market price of that bond (which can be above or below £100) is the current estimate by the market of interest rates for, say, 10 years to maturity (the "10 year gilt" which is used as a common benchmark). That's usually measured by the "Yield to Maturity" (sometimes called the Gross Redemption Yield in the gilt market). A complex mathematical calculation (something called the Internal Rate of Return) of the returns from holding the bond over its lifetime from purchase to maturity.

Bond prices move opposite to yields. So a rise in interest rates will tend to drive down bond prices and vice versa (the actual mechanism in the market is the reverse, bond investors sell bonds if they think interest rates are going to rise, that drives down prices, and increases yields).

There's also something called (Modified) Duration, measured in years. If my bond fund has a duration of 12 years (about what the gilt index fund has) then a +1% increase in interest rates will give a -12% move on the price (things are never quite so simple, but it's a good guide to sensitivity to interest rates).

That's why bonds are safe. Because, as long as the borrower pays back ("credit risk") you as an investor know exactly what you are going to get paid for holding that bond. And you know whether you are going to make a capital gain or loss on the purchase (from memory, HMRC ignores that, and treats all returns from a bond as being income, not capital gain or loss - but I'd have to check that).

Bond index funds are a little more complicated because they hold a portfolio of bonds and are always selling some bonds (that are about to expire/ mature) with new bonds. In the long run, whether you hold a bond or a bond fund, you should get similar returns - the bond will have a constantly falling time to maturity, therefore it is getting safer.

Accumulating Funds (only in ISAs & SIPPs) take away the problem of reinvestment of coupons. Otherwise as an investor you have to figure out what to do with the coupons.

Safe government bonds (US, UK, Australia, Canada, Germany - a few other countries are viewed by Credit Rating Agencies as AAA ie very safe vis a vis credit risk) have historically functioned as a diversifier against a portfolio of stocks. Tending to hold their value when stocks go down.

Unfortunately in 2022 this did not happen. A major reason for the fall in stocks was the rise in interest rates as Central Banks tried to "catch up" with inflation by raising interest rates. This is also bad for bonds. 2022 was one of the worst years of all records (back into the late 1800s) for negative performance by stocks and bonds.

Nonetheless there's no reason to think the long term picture hasn't changed. Credit risk free bonds diversify well against an equity portfolio.

(The UK was interesting. Due to the abortive budget of the short lived Truss administration, UK gilts did worse than almost any other major bond market. However the FTSE 100 stock index is full of "old economy" shares such as tobacco & oil&gas. Thus, in a market where technology stocks did particularly badly (after storming in 2020-21) the FTSE did relatively well. A weak pound also helped because FTSE companies make at least 65% of their profits outside the UK - so the GBP profits of these companies were greater, earned in USD or other currencies but translated back into more GBP).

I have written many posts on the problem with the gilt index. The duration is c 13+ years, and that's far longer than say the US Treasury Bond index (8 years?) or other major bond markets. Thus more sensitive to rising interest rates (but will make more money on falling rates, as well).

Solutions:

- hold a short term gilt index fund (but yields are much lower)
- hold a global bond fund, hedged into GBP (most UK international bond funds or ETFs are GBP hedged)

The biggest risk to bond investors in the long run is inflation-- the loss of buying power. And that does speak to holding a percentage of bonds in Index Linked Gilts or other inflation linked bonds -- as much as half of the bond weighting in a portfolio. For technical reasons, however, ILGs will be very volatile in price - unpleasant to hold. And I would argue that the Truss interregnum was one of the best times to buy ILGs that we have seen since 2008/9.

Thanks Valuthinker, that's a great explanation and makes how bonds function a lot easier to understand.

[seajay]

Years ago, money used to be gold and silver, coins worth their weight. The state (king) would borrow such gold when money was needed in return for paying more gold back. Banks would borrow gold (money) and pay interest so that they had money to lend to others. As gold was finite, broadly inflation averaged 0% such that the real (after inflation) return that the state/king/banks paid (interest) was a decent amount, often 4% or more. Savers/investors had no real need for stocks, 'bonds' (lending) was good enough.

From the 1930's that ended, first Pound notes that promised to pay the bearer the sum of one pound (a sovereign gold coin that was also accepted currency) convertibility ended; The common usage of sovereigns (gold) for international trade faded to instead be replaced by the US dollar, where the US promised to peg that dollar to gold, but that in the late 1960's that pegging also broke (President Nixon, a former actor, decoupled the US dollar from gold as a means to help pay down the cost of the Vietnam war).

As part of that transition the state no longer really needed to borrow other peoples money, it could simply print and spend money. Banks also transitioned over to where they no longer needed to borrow, they had permission to simply credit a borrowers account with 'money' rather than having to match borrowed and lent money. Under such circumstances the tendency is for the state and banks to pay less out on deposits/loans to them, as they have no real need for such. Inflation became more of a taxation factor, each new note printed/spent devalues all other notes in circulation. Combined inflation and taxation being inclined to compare to the rate of interest that the state/banks pay, such that bonds became more inclined to just pace inflation, 0% real expectancy, or maybe even negative (lenders in effect paying to deposit money with the state/banks). Pension funds by law are obligated to hold government bonds, have to buy them, which opens up the potential for the state to 'tax' that large pool of money as/when it see so fit.

Conventional bonds/gilts, aren't a good buy, as the value declines over time due to inflation (one form of taxation) in addition to regular taxation (of interest). You're lending to someone who can set the interest rate, direct inflation (print/spend), adjust taxation rates. They used to be great, pre 1930's (gold standard) but no more. Their main use is as a safe store of money for relatively short periods of time. Better than banks as with bank deposits your deposited money becomes the banks money once deposited, free for it to do whatever it likes (within regulations) with that money and where its tempting for banks to play heads they win, tails and taxpayers bail them out game-plays. Other choices of assets, stocks, gold, whatever tend to be volatile, so aren't really appropriate for shorter term deposits/investments, but that do tend to rewards more than Gilts/bonds over the mid to longer term. Gilts can also be used by speculators. Generally short dated, a few years out before maturity when the loan is repaid tend to have price stability. Long dated, such as 20 year Gilts and the prices are much wilder as they in effect reflect the sum of interest payments over many years such that even small changes in inflation/interest rates moves the prices of long dated gilts by a lot, to where they can be as if not even more volatile than stocks.

On that basis, a reasonable general asset allocation might be to hold some shorter term Gilts for price stability and shorter term needs, some stocks for their mid/longer term benefits, maybe some gold as portfolio insurance (if stocks dive a lot, gold tends to do well). Blended/weighted as per requirements, for instance someone who was still accumulating/saving and a long way from retirement might have no need for gilts or gold. As they approached retirement their need for growth might be much less and wealth preservation becoming more a priority - less stocks, some gilt and gold. Well into retirement, with few years remaining, and they might again revert more to stock-heavy with heirs in mind.

[baron_greenback]

Years ago, money used to be gold and silver, coins worth their weight.

Well, sort of. Official debasement of the coinage was occasionally a thing in ye olden times. Successive Tudor kings minted their coins with decreasing percentages of silver, hoping no one would notice. Only merchants did notice; inflation and the hoarding of older, higher-quality coins duly followed.

As part of that transition the state no longer really needed to borrow other peoples money, it could simply print and spend money.

True, but only to a point - being seen to do this on a large scale calls into question the value of your currency. This was a major factor in the infamous crash of the Zimbabwe Dollar in the 2000s.

For an absurdly brain-melting explanation of the power of the (British) state to borrow and print money, listen to the first segment of this podcast interview with economist Richard Murphy. (Though be warned that Murphy sounds like something of an oddball, sitting with Liz Truss and Jeremy Corbyn outside the economic mainstream.)

President Nixon, a former actor,

Surely you're confusing him with Reagan?

Conventional bonds/gilts, aren't a good buy, as the value declines over time due to inflation (one form of taxation) in addition to regular taxation (of interest). You're lending to someone who can set the interest rate, direct inflation (print/spend), adjust taxation rates. They used to be great, pre 1930's (gold standard) but no more. Their main use is as a safe store of money for relatively short periods of time.

I'm not so bearish on bonds in general. Over the long term equities are the way to growth, but bonds in a portfolio improve overall yield by letting you rebalance into equities in down markets; and of course if you need your money in less than 5-10 years bonds are more stable.

Though personally I take the minority view of tilting towards investment-grade corporate bond funds rather than government bonds. Partly chasing yield, but mostly on philosophical grounds. (Would you lend more than enough to buy lunch to most politicians?!)

(if stocks dive a lot, gold tends to do well)

But the rest of the time, gold does this while fluctuating around in value a hell of a lot, reflecting the fact that it's heavily traded by speculators. Gold is thought of as an inflation hedge - if you're an average Joe/Jane who just wants to beat inflation, probably better to stick with index-linked gilts, in the interest of ending up with somewhat fewer ulcers.

[seajay]

Years ago, money used to be gold and silver, coins worth their weight.

Well, sort of. Official debasement of the coinage was occasionally a thing in ye olden times. Successive Tudor kings minted their coins with decreasing percentages of silver, hoping no one would notice. Only merchants did notice; inflation and the hoarding of older, higher-quality coins duly followed.

Old copper nose (where silver plated copper coins introduced by Henry VIII had the silver on his face impression on the coin wear away to reveal the copper beneath, particularly on the nose)

President Nixon, a former actor,

Surely you're confusing him with Reagan?

(if stocks dive a lot, gold tends to do well)

But the rest of the time, gold does this while fluctuating around in value a hell of a lot, reflecting the fact that it's heavily traded by speculators. Gold is thought of as an inflation hedge - if you're an average Joe/Jane who just wants to beat inflation, probably better to stick with index-linked gilts, in the interest of ending up with somewhat fewer ulcers.

Stock and gold pairing forms a barbell, a central bullet combination similar to how a barbell of 1 and 20 year Gilts combine to a central 10 year bullet. More volatile, and periodic rebalancing "trades" that volatility. Can be interesting to see the swings, for instance 1980 to 1999 inclusive) and you needed a larger safe as the amount of gold being held increased over 7 fold (7.3 fold for FTAS/Gold 50/50 yearly rebalanced).

1980 to 2003 did see a Gilt barbell > stock/gold barbell, as yields transitioned from very high to low. Since 2003 and stock/gold barbell > Gilt barbell, recently back to around break-even whether you held either. Excluding taxes, where Gilt taxation is a greater drag factor than stock/gold taxation. Prior to that, from after 1931 when gold/money were no longer directly convertible, and the stock/gold barbell > Gilt barbell (2.5% type slope), excepting the 1970's when the slope increased sharply.

Yes more volatile, for example US data - but that can be diluted down by including some bonds 25/25/50 stock/gold/10yrT that near-as had the exact same yearly standard deviation as 10yrT alone. Or if you like, hold a 1 and 20 year barbell for the bonds instead of the 10yrT bullet, 25/25/25/25 stock/gold/1yrT/10yr T ... a.k.a PP (Permanent Portfolio).

Personally all in 10yrT, or PP ... is too conservative for me, and I'm tolerant of the higher volatility/reward of stock/gold over that of gilts/bonds. 33/67 stock/bonds is more appropriate, or with the stock/gold barbell instead of bonds = 67/33 stock/gold. I'd also rather hold a 33/67 small cap value/bond (67/33 SCV/gold) than total stock market for the stocks as the volatilities better match. US data. FT250/gold 67/33 for UK investors rather than 33/67 FT All Share/Gilts. A nice element there is that its Martingale. 67/33 FT250/Gold and if 67 stock halves to 33 whilst 33 gold doubles to 66, then rebalancing back to 67/33 has you holding twice as many shares as before. If each time stocks halve you double up on the number of shares being held = Martingale betting sequence. 6% SWR since 1932 (UK). Same in the US ... excepting 1937 start year (5.3%), and assuming they were naughty and held/traded gold in London/Swiss vaults following its 1933 prohibition.

[Valuethinker]

I think the discussion of gold & silver in this thread has gone way off topic.

I don't necessarily agree with the statements of historic "fact". It's worth knowing that the Gold Standard, as a mechanism for regulating international finance, was really only in place in the late 19th century as a result of Britain's primacy in economic & military power.

Also that returning Britain to the Gold Standard in 1924 was what Churchill recalled as "my worst mistake ever". And that a Conservative government finally abandoned it in 1931 (at which point, Britain's recovery from the Great Depression began - the British economy actually performed the best (after Germany) of the major world economies in the 1930s). The Bretton Woods period 1946-1971 was an era of fixed exchange rates, but again with the adjustment mechanisms one saw under such systems-- countries devalued when they had to. You needed a strong central currency (the US dollar), a willingness to run constant deficits by a single, dominant, monetary and economic power (again the USA). Gold standards are the result of concentration of power and economic stability, rather than causing it.

I am not going to argue the above other than to note it. I did academic work in economic history, so I don't think what I say there would be questioned by the mainstream of that subject (it might be disagreed with, but I am not spouting esoteric internet theories).

There's an ample debate about the role of gold in a portfolio. William Bernstein makes the only credible case I have seen:

http://www.efficientfrontier.com/ef/adhoc/gold.htm

Back to the original post. The role of bonds/ bond funds in a portfolio is to provide stability & to exploit the benefits of rebalancing. Bond funds with low credit risk (eg government bonds) tend to have low correlation with equities - but the past year this was not the case.

- nominal bonds give high certainty of a nominal return (in the long run, approximated by the average Yield to Maturity of the bond portfolio)

- fixed rate bank deposits are a reasonable proxy for Short Term bonds (ie up to 5 years to maturity)

- index linked bonds (such as index linked gilts or TIPS bonds in America) give certainty of buying power (before taxation effects, which matter less for ILGs). However because such funds tend to be long duration (and sensitive to moves in *real* not nominal rates) they tend to be quite volatile in price

- all bond funds are subject to volatility due to changes in interest rates, and this is roughly measured by modified duration

Bonds are thus largely about providing stability in a portfolio. Investors tend to underestimate the volatility of stocks, and also to overestimate their ability to bear the risk of that.

I would say most investors would be better off with a minimum of 20% in bonds.

Most bond funds hedge currency. Given the fall in sterling, this has hurt. Equities have actually outperformed bonds for a sterling investor, because of the fall in GBP. Most equity funds do not hedge currency.

Because of the long duration (ie high interest rate sensitivity) of UK gilts index, I tend to use a global bond index hedged into GBP instead-- it has lower duration. It still hurt, but a bit less so.

The Liz Truss-Kwasi Kwarteng abortive Budget Statement hit gilts very hard. The problem was a structure known as Liability Driven Investing, which was being used by over £1 trillion of UK pension fund money. You saw pricing moves of 30% in some long-dated gilts (Gilts run up to 50 years in maturity). That effect has mostly, but not entirely, passed from bond markets.

[Valuethinker]

Thanks Valuthinker, that's a great explanation and makes how bonds function a lot easier to understand.

https://monevator.com/how-to-choose-a-bond-fund/

Monevator is a great blog for UK investors motivated to follow the Bogleheads style of investing (passive funds, low cost)