A few days ago, when the market conditions were not good, a fan asked Lao K in the background: 『Old K, is it better to buy bond ETFs in the current market? 』
Actually, more than one person has asked about this question, I will talk about it today.
Bond ETF is a basket of bonds traded on exchanges, so this type of fund also has good liquidity and is easier to trade. Bond ETFs may hold different types of fixed income securities, including treasury bonds, local bonds, corporate bonds, , etc.
『What is a national debt? What is local debt? '
Generally speaking, bonds are vouchers for borrowing money, and in layman's terms it is an "IOU" .
For example, Lao Wang next door lends you 30,000 yuan, and you send a IOU to Lao Wang, agree on a certain interest, and pay back the money in one year. This is a kind of debt relationship between individuals.
If the country lends money from you and gives you a debt certificate, it can be called treasury .
Similarly, local debts are borrowed from the people by the local government.
So the first thing to understand is that local debt does not equal national debt, because in theory they are different legal entities.
For example, the relationship between the state and central government in the United States is relatively loose.
Therefore, in terms of security and credit, the security of treasury bonds is higher than that of local debts, because treasury bonds are endorsed by national credit.
However, it is precisely because the risk of treasury bonds is very low, so the benefits you can usually get are not too high.
and local debt is guaranteed by the local government as credit, although local debt is more risky than treasury bonds in terms of security.
But local bonds are usually priced based on the yield of treasury bonds in the same period. For example, the 300 million yuan local bond issued by a certain region has an interest rate of treasury bonds that rises in the same period.
From this we can see that the interest rate level of local bonds has relatively certain self-advantage compared with that of government bonds, which means we need to note that there may be a small number of local bonds that will default.
What you need to know is that bond ETFs may also be hybrid structure fund , which means that ETFs hold bonds, stocks and other categories of assets, such as real estate investment trusts or commodities.
US 10-year Treasury yield weekly line, picture source: Investing.com
Moreover, 『Bonds are usually less correlated with stocks. ' Many investors also rely on bonds to earn profits. In early January, the U.S. 10-year Treasury yield reached its highest level since the end of March 2020, exceeding 1%. And about a year ago, U.S. government bonds fell to their lowest point since the outbreak. By comparison, when Trump took office as US President, the yield on Treasury bonds was as high as 2.5%. Investors know that the yield on Treasury bonds is inversely proportional to the price.
In addition, whether it is treasury bonds or local bonds, there is a general risk that is inflation risk .
To put it simply, it is the risk that the currency will begin to depreciate due to inflation, causing investors' actual returns to decline.
is actually not just a government bond, all low-risk/low-yield products have this kind of risk.
So if you predict that inflation will occur, you should try to choose short-term products to avoid long-term products to reduce investment losses.
and short-term bonds and ultra-short-term bond funds mainly invest in short-term bonds for about one year. They are less affected by interest rates and can also be used as a substitute for money funds.
In addition, since these bonds are generally traded in the interbank market or Shanghai and Shenzhen Stock Exchanges, their prices will also fluctuate due to changes in liquidity, market interest rates, credit conditions, etc.
Generally speaking, interest rate rises, bond prices fall; interest rates fall, bond prices rise. Therefore, according to the changes in the secondary market price of the bond, you can also earn the difference by buying low and selling high.
We often say that investing in bond funds only has relatively high certainty in two extreme situations: 『The yield on the 10-year Treasury bonds deviates upward by nearly 4%, and the downward by nearly 2.5%.'
When it is close to 4%, gradually increase the duration of bond funds and increase the proportion of long-term bond funds; when it is close to 2.5%, reverse operations are performed to reduce the duration of bond funds.
Why do this?
Because the longer the bond fund has a greater increase in the process of falling interest rates (returns), and the greater the decline in the process of rising interest rates (returns).
Of course this is for index fund portfolio. If it is an active fund portfolio, choose an active bond fund, and the fund manager will make this adjustment for you.
Nowadays, analysts often discuss where Treasury yields will go, but it should be noted that although there is uncertainty in the yield outlook, we still believe that bond ETFs can find a good position in investors' portfolios and supplement core stock positions.
Moreover, the credit risk of corporate bonds means that their returns will be higher than government bonds, so investors who also invest in corporate bonds will usually get higher returns.
Finally, if you are interested in bond ETFs, Lao K’s previous Dragon and Tiger List lists in detail the current bond ETFs in the A-share market, which are available in various types. I personally recommend Treasury bond ETF . I don’t know what you think.
This article is from the King of ETF
