I don’t expect you to grow, Mr Bond, I expect you to yield

So, no sooner have I completed my trade – topping up a bond ETF – and duly entered it into my blog’s diary, than I see Monevator has just published a post announcing the bond crash. No wonder I observed that my bond ETF is trading near 3 year lows; have I just caught a falling knife?

I don’t expect you to grow, Mr Bond, I expect you to yield.  I have held Bond, JNK Bond ETF to be precise (SPDR’s ETF of US high yield bonds), for years.  It has weathered the occasional storm extremely well.  It has spat out dividends of over 6%, with cashflow occurring every month.  And its share price has stayed within a very tight range – $38 to $42 – almost entirely over several years.   Some of my holding here has been in a leveraged US bank account, where I am paying <2% for my margin.  Receiving 6% while paying <2% is obviously free money, but I am running higher risk; given this risk I particularly value the low volatility on the ETF price.

I topped up thanks to a fairly mechanistic decision process, in which one brokerage account has just reached my ‘lot size’ at which point I reinvest; I checked which of my asset classes I am most underweight on; US Fixed Income is the most underweight, at about 2.5% vs a target 5% of my investment portfolio; I checked quickly relative pricing of my core US Fixed Income ETFs and saw that JNK is trading under $39, not far above its 3 year lows, and decided now was a good time to topup.

Then I read Monevator’s piece.  A typically excellent piece setting out the arguments from both the passive (chaste) and the active (deviant, wild 😉 perspective. Broadly summarised, my passive investing trade today is not the wrong answer, even if the bond market takes quite a tumble.

I’d add two points to Monevator’s piece.

One is that high yield bonds are not government bonds.  For high yield to go badly south, a lot of companies need to default.  I don’t see any clear reason why this should happen.  Recent US payroll data suggests its economy is in robust health.  I think high yield bonds have suffered from an unfair reputation for a few years and don’t see what’s changed.

Secondly, I don’t fully believe in central bank independence.  Certainly not in the UK, and to some extent also in the US.  What suits the government influences the central bankers.  And what suits the UK and US governments right now are very low interest rates for a very long time indeed.  The UK is still borrowing almost £100bn fresh debt per year.  It has £1.6trn of debt outstanding; every 1% increase in interest rates therefore costs £16bn per year; this is almost half of the defence budget.  It is of paramount importance interest rates stay low, and this limits the potential for bond yields to spiral upwards.

So have I made a big mistake buying JNK today?  Dr No.