UKC

Can anybody explain in a few sentences and very simple language what happened to the Bond market in the last year or so?

If you understand that Bonds are basically loans given to governments and big companies -- they have a price to buy, and they also pay out interest or yields.... (although maybe that is wrong?).

What basically happened in the world in the last year that made Bond funds behave differently to the last 100 years or so.

Watched a few YouTube videos but they usually assume more financial knowledge, and ChatGPT says it doesn't know anything about the world more recently than Jan 2022.

In reply to BruceM: Credit tightened compared to the last 10 years and interest rates went up

Why the last 100 years.? It's not very useful to look back that far as there's a world war, a few depressions , some amazing growth.......

In reply to BruceM:>

That’s your problem right there. You Tube is great for learning practical skills like cooking or exercising, but for anything requiring some intellectual engagement video is a terrible medium. Maybe look on Wikipedia or read The Economist, at the later people are paid a lot of money to put complex things into relatively straightforward language. 

In reply to BruceM:

A dramatic rise in interest rates over a short period of time lead to a equally dramatic collapse in bond prices due to a mass bond sell off, why would anyone hold a 10 year bond at 1 percent yield when you could now buy a similar bond with a 5 percent yield.  Bond prices have now began to rise again as it's factored in that rates have peaked and will likely start to decrease next year.  Probably not a good explainer but Basically what has happened, maybe a month a go would have been a good time to invest in bonds but probably still a good investment just now.

In reply to BruceM:

I know it knocked about 13 % in numerical terms (ie ignoring the effect of inflation) from a very modest workplace pension pot that I need to dip into.  As I'm retired and already was at the time of the TRUSSTRASH I have no ability to make up the bad time by putting cash into the pot while unit prices are low.

Frankly I wish I'd had the money in an ISA as compared to the fund managers efforts I'd be sitting pretty now with only inflationary erosion to worry about.

In reply to BruceM:

The price of a bond adjusts to reflect the official interest rate. More accurately, the expected interest rate, plus a premium for risk of default - government bonds of countries like the UK or the USA have little extra risk, whereas Greece or Sudan have a greater risk of you never getting your money back (so you will want to be paid extra for that risk)  Same as companies:  BT is not going bust anytime soon, so you will be willing to take a lower risk premium  than for, say, a mining exploration company.  Remember junk bonds?  They were bonds with a high risk premium.  

As said elsewhere in this thread, when interest rates go up, the ‘price’ (value) of the bond drops so that the ‘coupon’ (the amount you get paid) matches the % return available in the market.  So, with numbers:  £100 bond issued at 2%, has a £2 payment.  But an equivalent interest rate (plus risk) is today, say, 6%.  So the bond price will drop til the £2 makes a 6% return… so it drops from £100 to £33.33 (ignore the ‘anticipated interest rate’ but) thereby kicking a huge hole in the pensions of anyone nearing retirement who was switching into the ‘lower risk’ investment category over the past few years.  But it’s not all bad news, the financial intermediaries will still be getting paid,no matter what happens to your pension…. (A rant for another time)  

the example above talks about interest rate movements.  The same happens if risk changes:  anyone holding WeWork bonds for the last few years will be painfully aware of this.

In reply to BruceM:

Thank you.  So essentially the recent big rises in interest rates was the primary problem.

In reply to wittenham:

Haven’t you slipped up with the £33.33? You get the principle back when the bond matures, along with the coupon. So in your example wouldn’t the bond price drop to about £96 so that on maturity you get £102 which is a 6% yield?

In reply to Thugitty Jugitty:

That would only be true is the bond had one year left to maturity, wouldn't it?

In reply to lowersharpnose:

Yes. I used a one year term to make things simpler, should have said. I think with a ten year term the bond price would drop to something like £75.

In reply to Thugitty Jugitty:

thanks for the correction, that was quite the error in my original calc!

In reply to seankenny:

Hmm I do agree with you to an extent, and there's certainly a lot of crap on there (and equally, there's an awful lot of crap out there in the mainstream media that I've seen recently) but there are a few excellent youtuber's in the areas of investment, finance etc. Two channels in particular have superb in-depth videos explaining what has happened with bonds. I like the Economist, but I find wikipedia pretty awful for learning about some subjects. It's good for a very brief overview of some topics, that's about it.

In reply to GEd_83:

I find Wikipedia quite tedious on most topics.  Too many words.  Tries to be too rigorous.

Not good when I'm not a great reader.  Words get lost somewhere within me and I have to reread sections multiple times. 

However I can interpret vocal and graphic information better. So video is perfect for me.

Youtube is generally great.  But it has ballooned, and is now heavily commercialized.  So you have to be much more selective than 5+ years ago.  As per the web in general which was awesome about the turn of the century.

In reply to wercat:

Who knew DB pension schemes would end up leveraging bond investments to meet the daft valuation requirements? Who predicted Truss would really stress test that risk and come close to crashing the entire DB UK market....and more mundanely who predicted central banks would add risk as they fight to control inflation.

In reply to BruceM:

 

This is entirely normal with something that’s difficult and new to you, no?

In reply to BruceM:

So I guess, the real question is: how are bonds any different from bank cash term investments?

With term investments, you lock in your money for a fixed time until you get your principle back.  Until then, the bank promises to pay you a fixed interest rate at fixed intervals.

During recent interest rate rises, I considered cancelling a few 1.5% term deposits, taking a fractional penalty loss, and reinvesting them in better 5.5% rates.  (In the end I didn't need to as luckily many of terms matured this year and I was able to reinvest at 5+% and lock in for a long time.)

Had the maturity dates of these terms been further into the future, I probably would have cancelled the low-rate terms and reinvested.

From the discussions above, it seems that this is what happened with bonds.  Everybody cancelled their longer-term poor return bonds and reinvested at higher rates.  The result was that all of the remaining existing bonds still held within bonds investment funds weren't very desirable, and therefore weren't worth much to buy and sell.  So the bond funds lost a lot of value.

So how ARE bonds any different from bank cash term investments?

In reply to BruceM:

They're tradeable. Thats the main difference. As a side point though, you can't cancel a bond in the way you can a term deposit, usually. The issuer can offer to buy it back from you, but you don't as a holder generally have a unilateral right to demand your money back before the end of the term.

From a long term perspective (i.e. if you hold them to maturity) they look much the same.

(You've ignored things like the risk of default of either bank or bond issuer in your post; I have done the same. That could be another difference depending on where the investments are.)

In reply to AJM:

Excellent.  Thanks.

So unlike cash investments, bonds can be traded (even though they have not matured), and may also offer less risk than banks. 

In reply to BruceM:

Cash investment often will be less risk, although it obviously depends on exactly which bank and which bond issuer:

- FSCS or similar schemes protecting cash deposits

- you can generally surrender term deposits for a known-at-outset penalty, unlike with bonds where early cash out is dependent on market price

- in general, cash deposits could (/should?)have more forms of protection around them because the information and knowledge gap is greater for a layperson vs their bank than it is with bond trading where it's more likely that there's an informed professional at both ends of the transaction. That disadvantage is generally a thing that regulation would try to compensate for.

In reply to AJM:

Great.  Cheers.

In reply to GEd_83:

On stuff I know about I often find it covers the key points fairly well, and probably more than a brief overview. It’s not ideal for learning because it’s not a textbook, but for example had many posters on the recent “growth” thread bothered to read a bit of Wikipedia they would have been much better informed. 

In reply to seankenny:

I do use Wikipedia quite a bit, I find it good for some things for sure. Just disagree with your wholesale dismissal of Youtube. Yes, there's as much crap on there as there is good stuff, so you do need to be careful (but that's the same wherever you're getting your info from really) but there are definitely some really excellent channels on there for personal finances and investment etc. PensionCraft is generally excellent, and another channel by James Shack is very good too (he's a chartered wealth manager). Both channels I find are very good at explaining for example what has happened with bonds recently, much better than something like Wikipedia I find.

In reply to BruceM:

If I bought a number of '5 year bonds' at £100 4 years ago with a 2% return, in a years time when they mature do I get paid £102, or so I get paid what a 5 year bond costs at that time?  If it's the former, then although people's pots have reduced due to the trading value of the bonds, should the bonds be allowed to mature there is no problem, surely?  Any decent fund manager will have ensured that the bonds in the fund mature at the right time to pay the pension payments due at that time.

In reply to Toerag:

You get paid £102. The coupons and redemption payments are contractual and fixed.

Yes, if you don't need to actually sell them it's just timing. The problem is that a lot of people may need to.

In reply to wercat:

Whether you decide to invest or not to invest and whatever you decide to invest in, there will _always_ be times when you think "why the *%$£ did I do that?!!". You can't be on a winner the whole time and the danger in keeping looking in on your investments is that you get tempted to change approach or self off when there is a dip, it's human nature and will absolutely be bad news for you if you give in to it.

Having said that, I have no idea what funds you are investing in so I am just assuming that you have a balanced and sensibly invested retirement pot.

In reply to GEd_83:

I vastly prefer the written word for learning anything intellectual. Obviously it’s different if I want to learn a new recipe (video really helps) but for anything requiring thought, I find the dictated pace of video just doesn’t work. My issue isn’t particular individuals but the medium itself. 

In reply to seankenny:

This is a much fairer way of putting it than your initial total dismissal of YouTube for all "intellectual" learning, because it leans closer to acknowledging that it's largely a matter of personal preference. There are some topics that lend themselves particularly well or particularly badly to specific mediums. But in most cases, the dominant factor is the taste of the person seeking the information. Personally, like you, I almost always prefer text for consuming any significant info, but I can see that not everybody does.

In reply to seankenny:

Ah ok that's fair enough, each to their own then in that respect I guess. I'm the opposite, I learn best by watching and/or doing, I struggle learning by reading unless it's something non technical. I just seem to forget what I've read very shortly after I've read it, and like someone else mentioned above, for technical subjects I have to read, then re-read the same words to try and get it to sink in. 

In reply to AJM:

And in the case of Funds _comprised_of_bonds_ (rather than individual bonds), I gather from your earlier info, that those funds will try to trade the bonds before their maturity.  And the current low value of those component bonds on the trading market will mean that the fund overall will have lower value.

If the bond fund managers, and all the people invested in the fund just sat tight and waited it out -- without buying and selling -- it wouldn't be a problem, no?

In reply to GEd_83:

Well it depends on the subject matter no? Obviously for anything mathematical it’s an awful lot of doing, but how can one learn about literature, history or politics without reading? 

Isn’t that because reading is only the first stage of learning? Just like watching a video to learn something is only the first stage of learning by watching?

In reply to henwardian:

It is, as I stated, a very modest workplace pension pot from a place that disposed of a number of us a decade ago and the trustees relatively recently transferred the funds to a new provider.  I am investing nothing new as I am retired and could not afford to anyway .  Basically trapped with a pension pot I need to dip into but can't without realising an unaffordable loss.

I think what has happened to a lot of us in this situation (I believe some people have pots at the point of needing them that have fallen 20% or more) has been under reported.  Not talking about those cushioned on DB either.

Still, I suppose it is just a repeat of the Endowment mortgage problem that was a big hit for many of us a couple of decades ago.

It does not take too many hits like these and property crashes for it to be too many in a lifetime for a comfortable future.

In reply to BruceM:

If nobody in the market sold, bought or issued new debt, then in theory yes - if you hold to maturity the only risk you're exposed to is default.

But in practice that's an impossible condition, because it means nobody can issue a new loan or roll over an existing loan.

And not everyone wants to hold to maturity - for example coming up to retirement if you intend to take an annuity it could make sense in some ways to be invested in fairly long dated bonds, because that will mirror the assets the annuity will be priced relative to. A lot of managed investment strategies migrate people towards a set of assets like that as they approach retirement for that reason (hence why bond funds may try to target holding bonds of a certain duration rather than holding bonds to maturity).

In reply to Luke90:

In my view the preference sits at the point of choice over what to learn. Not one thinks even half seriously about a range of subjects without doing some reading, as per my reply above (and see this for an even more hardcore approach https://scholars-stage.org/a-study-guide-for-human-society-part-i/ ). If you want to learn by doing, you’re probably not going to sit down with a book and some papers. 

 

I’m of the view that consuming certain types of information from video is worse than suboptimal - it’s actually quite risky to the learner. 

In reply to AJM:

Thanks for your explanations.  I can definitely see the differences from term deposits now.

In reply to wercat:

Personally the loss of control that goes with any communal pension fund is something that goes against the grain with me. I'd much rather the freedom to manage it myself or choose unto whom I assign such responsibility.

is DB disability benefit?

How financially literate are you? If you have a good level of understanding of investments, funds and financial products I'd suggest asking some hard questions of your trustees - I'm presuming the pot wasn't running a high risk, high return strategy so the main question would be why the trustees failed to hedge against rising interest rates? And if they try to fall back on some sort of explanation of the interest rates having been so low for so long that there was no reason to see them rising, give them a good hard slap in the face and force them to copy out that disclaimer about past performance, future results and things going down as well as up in value 100 times. In their own blood.

A pension pot that is being drawn down and is meagre in size should be running a very, very low risk strategy.

I am sorry that it looks like that for you. Maybe have a brainstorming session with mrs/mr Wercat and or other relatives and see if there are ways to spend less in the short term and/or borrow a little for the short term to avoid dipping into the pension while it is so low.

In reply to henwardian:

Defined benefit!

In reply to AJM:

And there are lots of different types of bonds . Are we talking of corporate or government with different ranges of risks. 

In reply to henwardian:

If wercats scheme  defaults it will go into the pension protection fund. If wwecat is already taking a pension from the scheme then existing pensioners are then fully protected.

so I would suggest to wercat he may be over worrying.   

In reply to henwardian:

I would disagree with the suggestiin on a low risk strategy when coming close to retirement. That fund still has to last a good many years. You still need to have good growth to keep the fund going . Most IFAs will point this out. 
 

It’s no longer viewed as necessarily a good idea to “ de risk” 

In reply to BruceM:

It all started when Daniel Craig left

In reply to seankenny:

"Well it depends on the subject matter no?"

Yes, that's exactly what I've said in my previous posts. I use Wikipedia. I also read too. I also use Youtube for certain things, based on the subject. My whole response was aimed at your initial outright dismissal of youtube as a resource. I simply pointed out that it can be a very good resource, and I stand by that. In general, I learn better by doing stuff, rather than reading. The key words there being "in general", which means that yes, it does depend on the subject matter.

"Obviously for anything mathematical it’s an awful lot of doing, but how can one learn about literature, history or politics without reading?" 

If you read my post above properly, I said "I struggle learning by reading unless it's something non technical". I don't consider history or politics technical subjects, so yes, I can and do read about those subjects. 

In reply to GEd_83:

As did I: “You Tube is great for learning practical skills like cooking or exercising, but for anything requiring some intellectual engagement video is a terrible medium.”

I literally said it was great! And use it all the time. If you think that’s “outright dismissal” then there is a comprehension problem.

I think you are making a big deal out of really non-existent learning styles. Which iirc have been shown to be nonsense…

You say you have to re-read to understand technical subjects. On day one, lecture one of my maths degree we were told to expect to spend several weeks or months re-reading a couple of lines of some theorems in order to understand them. I don’t think you’re talking about a problem with reading, just some stuff is hard!

In reply to seankenny:

Thinking about this further, I reckon the learning by doing vs learning by reading dichotomy is a false one. Even for subject matter that has to be read, the reading is only half the learning. The other half (>half) is the doing: writing an essay, giving a talk, taking the subject of study into a court, a newspaper, an academic paper, Parliament, whatever. It’s easy to fudge that you know what you think and you’ve absorbed something until you have to put it into your own words. That’s no different to me than going from watching a video of how your Hollandaise can split to actually splitting it yourself. 

In reply to henwardian:

DB = Defined Benefit

yes your last point - I'm definitely not intending to draw anything just yet if I can possibly help it.  The next few months might prove interesting if rates gradually fall.

The weekly valuations I was recording show a very stark story round the time of the Thrush "government" and afterwards

In reply to seankenny:

"As did I: “You Tube is great for learning practical skills like cooking or exercising, but for anything requiring some intellectual engagement video is a terrible medium.”"

That's the precise statement I disagree with. You're arguing that Youtube is useless for learning about bonds in this case, presumably because you class personal investment (incl. bonds) to be 'too intellectual' a subject for youtube. I disagree. So no comprehension problem on my part.

"I think you are making a big deal out of really non-existent learning styles. Which iirc have been shown to be nonsense…"

Only on UKC could you get into an argument with someone you've never me about what type of learning style works best for me. We'll leave it here, I think I know myself slightly better than some pedant who I've never met.

In reply to GEd_83:

Well if clearly didn’t work for the OP… 

More broadly I’m sceptical that just watching a video is a really good way of gaining knowledge of some sorts. The world is full of people who’ve “seen it on YouTube” and talk nonsense. 

 

I’m not talking about what learning style works for you, I’m suggesting the idea of learning styles is perhaps nonsense! Methinks you’re a little sensitive. 

In reply to seankenny:

Being sceptical of youtube is fine, and sensible, of course there's lots of crap on there mixed in with some good stuff, and I've made this point above. For the final time, I was simply responding to your very specific point that youtube is useless for anything intellectual. That statement implies that it's useless for learning about investing (including bonds). That's simply not a true statement. I know it's not true, because it's a subject I know a very decent amount about, and I know for a fact that there's some excellent channels on there in the area of personal finance and investment, a couple of which have very recent and very good videos going in-depth on the very subject of the bond market crash. Just as with other sources of information, you've got to sift out the good from the bad. That's the same with mainstream media (you see some awful advice in the media, especially recently), and with books (there are lots of awful books out there), and wikipedia can be edited by anyone. So using Youtube is no different.

"I’m not talking about what learning style works for you, I’m suggesting the idea of learning styles is perhaps nonsense! Methinks you’re a little sensitive."

"Perhaps nonsense". Perhaps not nonsense then? Personally, I don't think it's nonsense, but either way, I'm not interested on your opinion of this, I don't remember asking for it.

You can think I'm sensitive if you want. I think your being extremely nit picky and acting like a bit of a know-it-all, for no particular reason. 

PS For what it's worth, I think you're a very good poster, I usually enjoy all of your thoughtful posts on a variety of subjects, but in this case, I feel you're going waaaaaay overboard in response to me simple disagreeing with your original statement that youtube is useless for anything intellectual. I simply said I disagreed, and why. There was nothing more to discuss after that really. We don't need to be going off on a ridiculous tangent and debating about whether learning styles are nonsense or not.

In reply to GEd_83:

My experience of trying to learn something is that the more you know, the less you feel you know a very decent amount about it!

A sub-optimal medium can still have good examples within it; it’s just they may be much less effective than another medium.
 

Perhaps as in I was going by memory rather than looking it up. As it happens…

https://en.wikipedia.org/wiki/Learning_styles

“Many educational psychologists have shown that there is little evidence for the efficacy of most learning style models, and furthermore, that the models often rest on dubious theoretical grounds.[54][55] According to professor of education Steven Stahl, there has been an "utter failure to find that assessing children's learning styles and matching to instructional methods has any effect on their learning."[56]”

Oh stop being so silly, it’s an open forum on the internet!

 

Thank you, sir. 

It’s called debating. If you don’t want a debate, don’t post! Or ignore replies if you do - there is a poster on here that I never reply to as it’s always unpleasant dealing with him. 

Your response is actually kind of unusual. I’m interested in why you are so keen to shut down debate on this topic. What nerve did I touch? Is being a “visual learner” an important part of your identity in some way? 

In reply to seankenny:

"Your response is actually kind of unusual. I’m interested in why you are so keen to shut down debate on this topic. What nerve did I touch? Is being a “visual learner” an important part of your identity in some way?"

Shut down debate?! Jesus wept. I made a super quick, concise comment disagreeing with a very specific point you made (that Youtube is useless for all intellectual topics) last night, and here I am 24 hours later going around in the same circles, getting dragged into pointless arguments about learning styles. If that's shutting down debate, I'd hate to get into an actual debate with you. I'd have to quit my job and live on here.

I can't be bothered responding to your other points. I concede, you are indeed a know-it-all fountain of knowledge, truly an expert on all subjects. Despite me knowing that I tend to, on balance, learn better by doing stuff or visually, I concede that you are in fact correct, and that I am talking boll***s.

Enjoy your evening 

PS Just my opinion, but a lot of your comments, on this thread at least, come across as pretty condescending, including your original comment to the OP (which prompted my original reply in the first place), so maybe something to reflect on yourself.

In reply to GEd_83:

I said you were keen to do so, not that you were successful! Comments like:

There was nothing more to discuss

I'm not interested on your opinion of this, 

We don't need to be going off on a ridiculous tangent 

Strong “let’s not talk about this” vibe and yet, as you say, you can’t keep away. Interesting, at the very least.

You could have looked on Wikipedia too before posting! 

But I’m not saying you don’t learn better that way. I’m saying your claim, ie “I’m a visual learner” does not, on my view, follow from “because I have to re-read technical things”. A friend of mine who is a very visual person never reads anything, hasn’t been to further education, etc etc, but is a total genius craftsman, very skilled sportsman, cook, etc. Needing to re-read technical text just strikes me as… kinda normal? And reading things and forgetting them? I’m very much a book learner and spent my bedtime last night reading… the exact same three pages I read the night before! Happens all the time. Nothing to do with learning styles, as I said, hard stuff is hard. If you’re tired and not receptive, even easy stuff can be hard…

Yes they do. Do you crave my respect? Over and above the base line of respect that every poster gets, ie reading what you write and considering it. 

In reply to BruceM:

For the visual/graphical learners amongst us, the first 2.5 minutes of this succinct 6 min video was the key bit of info about bonds that I was missing:

youtube.com/watch?v=IlkjCb7v4xQ&

Thanks for the discussion above.  It makes more sense now alongside these graphics.

In reply to GEd_83:

FWIW, I'm a secondary school teacher and from the point of view of education - a world which tends to be rather slow at applying research it seems - after learning all about learning styles doing my PGCE 9 years ago, and told to try and integrate those ideas into lesson planning, we are now told there is really little evidence behind the ideas and not to bother. Much the same as differentiated tasks in lessons.

There's a collection of the critical research here: https://en.wikipedia.org/wiki/Learning_styles#Criticism

In reply to wercat:

So the question is, how is your fund intended to work? Are you managing it, or is someone doing it for you?  The valuations you've been recording refer to the market value of the bonds in your fund, not the maturity value.  One would assume that whoever has been managing your fund has it entirely invested in cash and/or bonds, and has been buying bonds so that they mature at various points in time - For example, if the fund is expecting to pay out £5k a year, then each year you want £5k's worth of bonds to mature and give you the cash to pay you £5k.  If all the fund has been invested like this and the total payout time period is covered by bond maturities, then there is no cause for concern - your bonds will continue to mature as expected and will cover the pension payments you have planned.  If this is not the case i.e. you have bonds due to mature over the next 10 years, but plan to drawdown for 20, then one assumes you will have a whack of bonds maturing in 10 years that will need reinvesting at that point.....which is also not really worth worrying about at present.  Your only potential cause for concern is if your fund manager has bought long-term bonds with a view to cashing them in or trading them before maturity at market value at the time, but I can't think why they would want to do that when they could just have bought shorter term bonds - perhaps long-term ones give higher interest than short term and they've decided the potential upsides of trading / cashing in before maturity are worth the risk? Or perhaps other more liquid investments have done badly and they need to sell bonds sooner than intended to cover a shortfall?

In reply to BruceM:

"Pensioncraft" man, Ramin, (one of the most popular and informative investment channels on youtube), obvious hangs out here!  He has just released a good overview of how bond funds work.  And why they were decimated recently.

youtube.com/watch?v=DiEiQhHYzI8&

Once you understand how bonds differ from bank investments (the fact that bonds are tradable before maturity!), then this video explains the recent problem.

In reply to BruceM:

Yeah PensionCraft is a good channel for personal investing. I like the one by James Shack as well.