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What to do with bonds?
Average yield on VDO (including companies with credit ratings below BBB) reached 30%. Average yield on reasonably rated corporate bonds is in the range of 18-22%. Near the base interest rate... The RGBI index (government bonds) fell from 105 points to 100 points in a month.
Bond yields already include expectations that the rate will rise to 20% at the next meeting and creep up again.
But there is another side to the growth of fixed-coupon bond yields. The value of the bond itself falls. That is, the yield increases due to the decrease in the value of the bond's body. Many securities are now traded at 80-85% of the face value.
🔽People who bought bonds a year ago will now see their portfolios in red. This causes both psychological discomfort (it is uncomfortable to lose) and legitimate questions. What about selling all your fixed-rate bonds and converting them into floating bonds?
Ultimately, the floating coupon grows along with the base interest rate, so the duration of the bond price itself is minimal (i.e. it changes little). And here everything is fine. The portfolio will not lose value and the yield will start to grow along with the core.
In fact, the best option is not to sell, but to buy more. The fact is that the yield rate on bonds with a constant coupon is already fixed and does not depend on the value of the bond itself.
The reason is simple. Bonds are redeemed at par value. So, if you buy a bond worth 95% of its value, you will definitely receive interest when it is redeemed (in addition to the coupon). And even if the price of your bond falls on the stock exchange, your income will not change. You will receive all the amounts due.
However, if you start buying more, your average purchase price will decrease and the yield to maturity will simultaneously increase. In this case, the yield to maturity is spread over the entire holding period of the bond.
Let me explain with an example. You bought a bond worth 1,000 rubles for 950 rubles and will receive 1,000 rubles upon redemption. Yield: 50/1,000 = 5%. If the bond falls to 850 rubles, you will still receive 5% income. The purchase price was 950 rubles. However, if you average and buy different bonds, your yield to redemption will increase. The average purchase price is 900 rubles, the yield to redemption is already 10%.
And the cheaper you buy a bond, the higher its yield to maturity.
❗️So, during periods of falling key interest rates (which will happen soon), your super-high yield will stay with you. For floating bonds, the yield on bonds falls along with their height. Of course, the big question is: when will this happen? But that's not what we're talking about now.
So if you're just getting into the bond market, it might be wiser to buy floating bonds (so you can safely exit and move into fixed income bonds at the first sign of a key decline).
If you already own bonds with a certain coupon, you may want to continue buying those bonds to increase your yield to maturity, or invest in floating bonds to build a second portfolio. No selling required.
I hope this makes everything clear. If you have any questions, feel free to ask them in the comments and we'll be happy to answer them. And don't forget to subscribe!
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