Bonds

[justakiwi]

Is there any point/logic in someone like me (very small beginner investor) investing in bonds (eg: Smartshares Gobal Bond Fund) or would I be better to just focus on building on the small portfolio I have for now, until I have a decent total investment balance? I’m only pondering it as I am aware my portfolio is 100% aggressive so wondering if I should add something like this to spread my risk a little.

Waste of time for such a minuscule investment balance?

[macduffy]

Personally, justakiwi, I wouldn't be interested in bonds if in a portfolio-building mode, and particularly not in a global bond fund, given the generally lower offshore rates plus the exchange rate risk. I'd stick to growth equities at this stage. Just IMO.

:)

[peat]

the point of bonds is to smooth your returns and reduce volatility as they (supposedly) perform opposite to equities - though this isnt the case in more recent times when EVERYTHING is going up.
At the very small portfolio level you could as macduffy suggests avoid bonds and if you can accept the bad years that equities that may have just run with that.
However I personally think fixed interest investments are useful. I tend to use T/D's instead of bonds although these don't have capital gains/losses as bonds do. One of the problems with buying and selling bonds is that transaction fees are quite high especially for small investors. You may b e able to avoid these in funds but fees there will tend to destroy returns.
An amount of cash (possibly as you save towards further equity investments ) could act as a smoother of portfolio returns in that it wont go down when the equity market does during these early stages of wealth generation.

[justakiwi]

This makes good sense to me. Thank you :)


the point of bonds is to smooth your returns and reduce volatility as they (supposedly) perform opposite to equities - though this isnt the case in more recent times when EVERYTHING is going up.
At the very small portfolio level you could as macduffy suggests avoid bonds and if you can accept the bad years that equities that may have just run with that.
However I personally think fixed interest investments are useful. I tend to use T/D's instead of bonds although these don't have capital gains/losses as bonds do. One of the problems with buying and selling bonds is that transaction fees are quite high especially for small investors. You may b e able to avoid these in funds but fees there will tend to destroy returns.
An amount of cash (possibly as you save towards further equity investments ) could act as a smoother of portfolio returns in that it wont go down when the equity market does during these early stages of wealth generation.

[justakiwi]

Thank you. Appreciate the good advice :)


Personally, justakiwi, I wouldn't be interested in bonds if in a portfolio-building mode, and particularly not in a global bond fund, given the generally lower offshore rates plus the exchange rate risk. I'd stick to growth equities at this stage. Just IMO.

:)

[SBQ]

Is there any point/logic in someone like me (very small beginner investor) investing in bonds (eg: Smartshares Gobal Bond Fund) or would I be better to just focus on building on the small portfolio I have for now, until I have a decent total investment balance? I’m only pondering it as I am aware my portfolio is 100% aggressive so wondering if I should add something like this to spread my risk a little.

Waste of time for such a minuscule investment balance?

IMO if you follow the great investors abroad, bond investments are a waste of time to the individual. In the US there are municipal bonds that attract some individuals who want a fixed return without the risk of owning shares. But that's because such bonds are tax free ; something we don't have in NZ. In this respect, why are Kiwi Saver funds presenting themselves with different levels of risk (ie. conservative, moderate, aggressive) SOLELY on the % they divide the asset pool? (that is an aggressive fund would have little or not bonds or fixed income assets vs a conservative fund will have a lot put in bonds). Anyways IMO, the % of the fund's portfolio put into bonds should NOT be the moderator of risk levels in the portfolio. This is old school thinking from the CAPM days.

BTW, it was the manipulation of bonds in the 80s that lead on to the GFC we saw in 2008. Because bonds were boring, they've found ways to turn them into 'derivatives', synthetic investments, bundling the bond assets into different ways to disguise the bond asset. Have a read here:

https://www.thebalance.com/role-of-derivatives-in-creating-mortgage-crisis-3970477

[Joshuatree]

BNZ offering re 5.5% 5year tradeable bond,I've applied for some in this very forward looking mkt.

[GTM 3442]

Eastpack have some 5 year notes with a starting rate of 8.9%, but regular rate resets to a floor of 8.5%. Wholesale and retail welcome

Caveat Emptor - not interested.

https://www.syndex.exchange/investment-opportunities/eastpack-notes

[Aaron]

Do you know what are the main ratios or z scores to check for company viability. Interest times covered, Debt to Equity etc. should be a lot less work for bond buyers compared to equity buyers I would have thought.

P.s. couple of additional thoughts do the NZX companies or their bonds get rated by a credit rating agency and if so how do you check this?

Is there an ASXDX list like the NZXDX one.

[Aaron]

Another thought at what point are you in the business of buying and selling bonds?

Most of the yield buying on the secondary market is purchasing the bonds for less than $1. When matured the full $1 is paid out and the difference is treated as income using the base price adjustment which deems the extra money received "interest".

The IRD say that when this deemed "interest" is a loss it is not deductible as it does not relate to the income earning process. Sounds like a lot of bollocks to me but interested to know others views.

To satisfy the general permission there must be a sufficient relationship between the repayment of the interest and the earning of assessable income. The Commissioner considers the relationship between the repayment and the interest income earned under the term deposit is insufficient to satisfy s DA 1(1)(a). As the amount of the repaid interest is not deductible at the time of repayment, it falls to be dealt with through the BPA on maturity of the deposit. However, the Commissioner considers that, where the expenditure has been incurred in carrying on a business, a deduction may be available under s DA 1(1)(b). Whether the repayment of interest satisfies the nexus test for a business will depend on the facts of each case.

I recall going over this back in the GFC when the finance companies were collapsing.

[mcdongle]

I took this from the term sheet of Air NZ bonds. this is where you should find the credit rating for the bond / bonds you are looking at.

"Air New Zealand’s Credit Rating Baa2 (Stable) by Moody’s Investors Service1Expected Issue Credit Rating of the Bonds Baa2 by Moody’s Investors Service"

Australia's bond market is more geared to institutions

[GTM 3442]

Credit ratings cost money to get, and not everyone wants to pay to get rated. Infratil is a case in point.

And after the debacle of dodgy credit ratings exposed in the GFC. . .

And in a global context-yes, the NZDX seems very open to individual investors. Personally I think it’s a good thing.

[Bjauck]

Another thought at what point are you in the business of buying and selling bonds?

Most of the yield buying on the secondary market is purchasing the bonds for less than $1. When matured the full $1 is paid out and the difference is treated as income using the base price adjustment which deems the extra money received "interest".

The IRD say that when this deemed "interest" is a loss it is not deductible as it does not relate to the income earning process. Sounds like a lot of bollocks to me but interested to know others views.

To satisfy the general permission there must be a sufficient relationship between the repayment of the interest and the earning of assessable income. The Commissioner considers the relationship between the repayment and the interest income earned under the term deposit is insufficient to satisfy s DA 1(1)(a). As the amount of the repaid interest is not deductible at the time of repayment, it falls to be dealt with through the BPA on maturity of the deposit. However, the Commissioner considers that, where the expenditure has been incurred in carrying on a business, a deduction may be available under s DA 1(1)(b). Whether the repayment of interest satisfies the nexus test for a business will depend on the facts of each case.

I recall going over this back in the GFC when the finance companies were collapsing.Taxed on all gains, not allowed losses if you don’t your capital back. Another reason why Kiwi boomers put their nest egg money into earning untaxed gains from housing!

[Aaron]

https://www.interest.co.nz/bonds/122919/kiwibank-economists-think-there-should-be-fall-new-zealands-wholesale-interest-rates
We think short end rates are too high, and too expensive. We think wholesale rates should fall back to where they were.

Not sure why bank economists dictate expected yields for investors.

What is inflation at the moment 6.7%?? That makes the current yields pretty shi*ty IMO.

Also not related to the article, but here is a trap for new beginners in the secondary bond market. I was wondering why the yields were so high on bonds just about to mature compared to the longer dated bonds.

I have since realised that the ASB commission on purchase of .07% is the same no matter the duration of the bond so don't forget to include the fee when working out your yield as it is much more significant over three months than say 3 years.

Another reason not to follow anything I say or do.

[Aaron]

Good news I will get repaid my IFT210 these were at 5.25% I bought above 7% and hope that I will get roughly 7% on maturity.

https://www.nzx.com/announcements/417539

I wonder what the interest rate on the new lot will be. A slow process raising rates but a bit more financial pain being added to companies.

I guess in a world of unlimited capital I should not worry about debt being rolled over.

[Aaron]

Good news cash is no longer trash according to Ray Dalio.

https://www.linkedin.com/pulse/thinking-behind-why-cash-now-good-trash-ray-dalio/

[iceman]

Good news cash is no longer trash according to Ray Dalio.

https://www.linkedin.com/pulse/thinking-behind-why-cash-now-good-trash-ray-dalio/

You must be happy to have been sitting on it for the last 20 odd years, staying mostly out of the markets ! I congratulate you for your wise decision.

[Aaron]

You must be happy to have been sitting on it for the last 20 odd years, staying mostly out of the markets ! I congratulate you for your wise decision.

You obviously don't read Ray Dalio's stuff. He has only just changed from saying cash is trash.

I feel sort of vindicated after buying some short term (2year or less) bonds on the NZDX recently. Did not buy enough, too conservative once again (now that I have Ray's endorsement) and got less than what my Rabo account could do on some Infratil Bonds recently as anything less than a one year maturity needs to take account of the fact the fees stay the same no matter what the maturity. Also not sure that I am understanding correctly the figures. Now my Infratil bonds have matured I need to go back over the actual result to work out the annualised yield including fees as I may still have things ar*e about face.

More importantly I should be trying to understand Ray's reasoning for his change of heart.

If you are having a go because of my suggestion where you might fit on the political grid. I never got an answer, does that mean I was right?

[Daytr]

You obviously don't read Ray Dalio's stuff. He has only just changed from saying cash is trash.

I feel sort of vindicated after buying some short term (2year or less) bonds on the NZDX recently. Did not buy enough, too conservative once again (now that I have Ray's endorsement) and got less than what my Rabo account could do on some Infratil Bonds recently as anything less than a one year maturity needs to take account of the fact the fees stay the same no matter what the maturity. Also not sure that I am understanding correctly the figures. Now my Infratil bonds have matured I need to go back over the actual result to work out the annualised yield including fees as I may still have things ar*e about face.

More importantly I should be trying to understand Ray's reasoning for his change of heart.

If you are having a go because of my suggestion where you might fit on the political grid. I never got an answer, does that mean I was right?

Hey Aaron, He's six months too late imo. Although cash / bonds may have more upside potential I think the majority of that has already been seen.
Cash is easier for mine than bonds, the exit in bonds once things turn could be nasty imo, but that's probably not until midish 2024.