Bond fund, why such high returns?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Nielsva
Posts: 32
Joined: Wed Oct 08, 2014 1:52 pm

Bond fund, why such high returns?

Post by Nielsva »

I was planning to invest in the following european bond fund:

https://www.justetf.com/ch-en/etf-profi ... rom=search

Something I do not understand is why the return in this fund changes so much year to year and why it can be so high (+8% this year). Are the returns on bonds not at an all time low?

I always thought that if you buy a bond you have a fixed rate of return that does not change...
User avatar
Chan_va
Posts: 869
Joined: Wed Dec 05, 2012 6:15 pm

Re: Bond fund, why such high returns?

Post by Chan_va »

You are confusing bond coupon with yield. See here.

It's true that a bond typically has a fixed coupon rate that does not change. However, what you see on the charts is yield, which is a function of price the bond was bought at and the initial coupon. The price of a bond varies daily with interest rates, sentiment etc.

Why are you considering investing in this ETF? Are you looking for higher yield from your fixed income? I would not do it till you have a much clearer understanding of the concepts, and the risk/reward tradeoffs.
hlfo718
Posts: 808
Joined: Wed Dec 01, 2010 8:17 am
Location: NYC

Re: Bond fund, why such high returns?

Post by hlfo718 »

Is an EU gov't bond index fund. I am assuming you are residing in Europe since you can't normally purchase UCITS in the US. The return looks reasonable since the short rates in Europe is now negative.
kenner
Posts: 3128
Joined: Sat Mar 01, 2008 7:45 am

Re: Bond fund, why such high returns?

Post by kenner »

Nielsva wrote:I was planning to invest in the following european bond fund:

https://www.justetf.com/ch-en/etf-profi ... rom=search

Something I do not understand is why the return in this fund changes so much year to year and why it can be so high (+8% this year). Are the returns on bonds not at an all time low?

I always thought that if you buy a bond you have a fixed rate of return that does not change...
The main drivers of such bond fund NAVs tend to be interest rates (NAV changes can be estimated by fund duration and magnitude of interest rate change), creditworthiness of the underlying bond issuers, and currency value fluctuations. Please note that the fund lost about 23.3% three years ago - pretty volatile, I'd say.
Last edited by kenner on Wed Oct 22, 2014 12:46 pm, edited 1 time in total.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Bond fund, why such high returns?

Post by abuss368 »

Nielsva wrote:I was planning to invest in the following european bond fund:

https://www.justetf.com/ch-en/etf-profi ... rom=search

Something I do not understand is why the return in this fund changes so much year to year and why it can be so high (+8% this year). Are the returns on bonds not at an all time low?

I always thought that if you buy a bond you have a fixed rate of return that does not change...
Hi Nielsva,

It is important to remember that with bonds, higher yield almost always means higher risks which may or may not show up.

Bond returns are a function or credit and term.

Bonds provide safety and income to a portfolio.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
Nielsva
Posts: 32
Joined: Wed Oct 08, 2014 1:52 pm

Re: Bond fund, why such high returns?

Post by Nielsva »

Thanks for all the responses. The more I read about it the more confusing it gets...

I would like to invest in a bond fund with as less risk as possible but I have no idea which fund is best. Should I take a fund that only has longterm bonds or one with short term bonds? Why is the fund in my post up 8%? What did they do right?
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Bond fund, why such high returns?

Post by ogd »

Nielsva wrote:Thanks for all the responses. The more I read about it the more confusing it gets...

I would like to invest in a bond fund with as less risk as possible but I have no idea which fund is best. Should I take a fund that only has longterm bonds or one with short term bonds? Why is the fund in my post up 8%? What did they do right?
Nielsva wrote:I always thought that if you buy a bond you have a fixed rate of return that does not change...
This is true in the long term (roughly, the fund duration), but what you are missing is that in the short term the fund's price reacts to market yields.

In this case, market yields dropped and the fund shares (which you can think of as containing the "old" yields) became more valuable. In effect, the fund's price delivered the yield difference times the fund's duration over the relatively short YTD period, with the rest due to be delivered at the now lower yields. The bad news is that this movement makes the fund less attractive than it was at the beginning of the year.

The same happens in reverse when market yields drop increase, fund price drops, fund yields increase, fund is more attractive going forward.

Why did yields drop? Central banks continued to keep interest low, even lengthening expectations of when they might be increased. On top of this, credit risk in corporate bonds has generally been trending lower, i.e. they are viewed as safer.

It's nothing the fund did. A passive fund like this does not do, it just is.

As to what you should do, as I advised in another thread Euro yields are so low that IMHO you should be looking at bank accounts right now.
kenner
Posts: 3128
Joined: Sat Mar 01, 2008 7:45 am

Re: Bond fund, why such high returns?

Post by kenner »

[quote="Nielsva"
Nielsva wrote:
I always thought that if you buy a bond you have a fixed rate of return that does not change...
It sounds like you may be confusing a single, invidual bond with a bond fund that holds many single bonds that may have varying investment characteristics.

Lowest risk bond funds tend to be those with highest quality (i. e., US government bonds) and shortest average maturities and durations. Check the information on the Vanguard website and compare bond funds.
Topic Author
Nielsva
Posts: 32
Joined: Wed Oct 08, 2014 1:52 pm

Re: Bond fund, why such high returns?

Post by Nielsva »

Thanks for all the responses.

I think i understand it now. So lets say you would buy a bond with a value of 1000 and a return of 10% over a period of 10 years. You hold it for 5 years and that year bonds with a value of a 1000 are issued at a 5% return rate for 5 years. You can sell your bond now for a much higher value on the market since you still get 10% over te remaining 5 years. I am trying to do the maths to calculate for how much you could theoretically sell it but I have not figured that out yet...

So the long term bonds in the fund have increased in value because the interest has become much lower over the years. So when interest goes up again you would be screwed... right?
Call_Me_Op
Posts: 9872
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Bond fund, why such high returns?

Post by Call_Me_Op »

Nielsva wrote:I was planning to invest in the following european bond fund:

https://www.justetf.com/ch-en/etf-profi ... rom=search

Something I do not understand is why the return in this fund changes so much year to year and why it can be so high (+8% this year). Are the returns on bonds not at an all time low?

I always thought that if you buy a bond you have a fixed rate of return that does not change...
Based upon this question, it is clear that you do not (yet) have a solid understanding of bonds and bond funds. You should be careful to understand what you are investing in before you jump in.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Topic Author
Nielsva
Posts: 32
Joined: Wed Oct 08, 2014 1:52 pm

Re: Bond fund, why such high returns?

Post by Nielsva »

I totally agree but I think my understanding has improved (see my last post).
User avatar
Chan_va
Posts: 869
Joined: Wed Dec 05, 2012 6:15 pm

Re: Bond fund, why such high returns?

Post by Chan_va »

Nielsva wrote:Thanks for all the responses.

I think i understand it now. So lets say you would buy a bond with a value of 1000 and a return of 10% over a period of 10 years. You hold it for 5 years and that year bonds with a value of a 1000 are issued at a 5% return rate for 5 years. You can sell your bond now for a much higher value on the market since you still get 10% over te remaining 5 years. I am trying to do the maths to calculate for how much you could theoretically sell it but I have not figured that out yet...

So the long term bonds in the fund have increased in value because the interest has become much lower over the years. So when interest goes up again you would be screwed... right?
Yes. Bond prices move inversely with interest rates. But... interest rates could stay low for a long time. Even when rates move up, your bond fund is buying new bonds at the higher rate, so you will make up your initial loss (look up a concept called bond duration). Don't try timing the bond market any more than timing the stock market. If you are in the accumulation stage of your career, buy high quality intermediate term bonds, and forget about it.
Topic Author
Nielsva
Posts: 32
Joined: Wed Oct 08, 2014 1:52 pm

Re: Bond fund, why such high returns?

Post by Nielsva »

If you would hold a bond fund which buys high quality bonds for lets say, a duration of 10 years. Would it be theoretically possible to have a negative return if you would held the fund for a duration of 10 years?
richard
Posts: 7961
Joined: Tue Feb 20, 2007 2:38 pm
Contact:

Re: Bond fund, why such high returns?

Post by richard »

Nielsva wrote:If you would hold a bond fund which buys high quality bonds for lets say, a duration of 10 years. Would it be theoretically possible to have a negative return if you would held the fund for a duration of 10 years?
Interest rates might rise, and the fund's value therefore fall, in the tenth year.

Lowest risk would likely be a TIPS fund (or combination of funds), not held in taxable, with an average maturity that matches your investment horizon (the point where you might sell).
Post Reply