Cash vs Bonds in a downtrending market

[lou]

The last couple of days I have been in cash :-)

My question for the form is would of I been better of in bonds. Assuming no or little transaction costs.

How do bonds react in a downtrending market.

[ENP]

If interest rates you up, you wish you hadn't bought bonds.

If interest rates go down, you will be glad you bought them.

As long as the government/company issuing the bonds doesn't go into default of course.

[lou]

It is a bit dubious at the moment when the market dips like this it is ushally on uncertianty over government bonds meaning interest rates go up.

But then if the market goes down governments lower the OCR pushing rates down.

[Lizard]

Depends what kind of bonds?

Before the 2007/08 meltdown, I'd moved lots of money out of shares and into cash and then into fixed interest.... which failed me miserably. Corporate bonds fell badly as debt concerns and risk aversion hit and investors demanded more premium for risk. Many of my bonds ended up being virtually unsaleable as markets froze. And, of course, some of the money I'd put into debentures did even worse. The only real successes were the term deposits that matured at regular intervals and gave me the cash needed to bet on the market at the lows and recover my funds. The bonds issued during the downturn (FCG010 and CEN010) turned out to be a reasonable bet too.

But all in all, I find the terms around corporate bonds are mostly too complex and allow corporates a win-win set-up - especially those where the entities were attempting to get quasi-equity status for the funds.

Although I still hold a few corporate bonds, I've come to the conclusion that I am better off with a mix of on-line saver accounts, the odd term deposit and the rest in shares. At least it is possible to look for lower risk businesses, whereas those with bonds will almost always be leveraged and often more vulnerable.

Not sure about government bonds. I have never invested in those - not sure how accessible they are. Never seemed enough in it to pick them over banks.

Having said all that, this time might be different. There are probably still better premia available on bonds than there was going into the last downturn and buying indexed bonds at the current discounts could give a margin of safety as well as being a better bet when things start to turn around and interest rates rise.

[OldRider]

Lizard

I have similar thoughts to you, and still own a few bonds. Have kept sufficient together with term deposits to give a regular
cash flow for living expenses. Hold a few Bluestar, and the experience with these is leading me to reduce fixed interest.

Now that ASX Lic's are able to pay regular dividends, even in a loss year so long as they are solvent they seem a better bet, I am planning to shift
present bondholdings into these, presuming their dividend policies will be consistent in the future.