User Tools

Site Tools


bonds

Bonds

Bonds are fundamentally different from shares because the yield is known in advance (the so-called yield to maturity (YTM)). Corporate bonds have a higher risk to default than government bonds, and hence often have a higher yield. In the current market, the YTM is almost the same as government bonds though. This is due to the various government buying programs. As a result, the extra risk is now completely out of proportion to the extra return.

The bond duration partly determines the yield (longer duration typically means higher yield), but also how sensitive the price will be to changes in interest rates. From a duration of ~8 years, the curve flattens and you get relatively little extra return per extra year of commitment. With the extremely low interest rates at the moment, you could opt for a shorter duration, but then you will start market times again. Everyone expects interest rates to rise quickly, but countries like Japan have had low interest rates for decades. So you never know how it goes, that's why it's good to have international exposure.

Corporate bonds are NOT a good hedge to remove volatility, because they move significantly with shares and certainly also in the event of a crash. If you want more return, you better allocate a larger percentage of shares. If you want less volatility, you do that with government bonds. Corporate bonds are sort of in between, and hence can be better avoided.

bonds.txt · Last modified: 2020/06/14 10:32 by dreas