Bond Portfolio yields at the end of the first half of 2024

At inbestMe, we currently offer a full range of Bond Portfolios. By this, we mean a portfolio that is composed of 100% fixed income instruments. Previously, bonds were used in our portfolios mainly to diversify equity risks and a 100% bond portfolio was allocated only to very conservative investors.

Following the rise in official interest rates and yields over the past two years, we have seen a renewed interest in investing in bonds from our clients, and not only from those who are very risk-averse. This prompted us to complete our bond portfolio offering.

In November 2022, we launched savings portfolios, which are built with money market instruments and have proven to be a perfect instrument to park liquidity when rates rise without having to incur price declines, as is the case with other bonds. When interest rates rise, bond prices fall and the longer the maturity of the bond, the greater the loss in price terms. This does not happen with money market funds as they have an extremely short duration.

When interest rates began to stabilize, we introduced a Prudent Bond Portfolio, composed entirely of high credit quality bonds, which allowed the client to invest in instruments with slightly longer duration, but still with very low risk.

Next, we introduced a higher risk, longer duration and higher expected return Aggressive Bonds Portfolio, our Bold Bond Portfolio. This portfolio is designed for investors who have a preference for fixed income investing but are not risk-averse.

In summary, we now have three bond portfolios:

1. Savings portfolio: designed to maintain liquidity or an emergency fund and obtain a return close to official rates, with extremely low volatility.
2. Prudent Bond Portfolio: for investing in bonds with short maturities and limited interest rate risk.
3. Aggressive Bond Portfolio: for investing in bonds with more risk, but with a higher expected return.

Investors should expect very different behavior from these portfolios.

In the savings portfolio, interest accrues at a rate almost equal to the official interest rates set by the central banks. Movements are very gradual and volatility is extremely limited. The risk is that these rates fall and interest accrues more slowly, but there is no risk given the inverse relationship between yields and prices.

The Prudent Bond Portfolio shows higher volatility than the Savings Portfolio, albeit contained, while the Bold Bond Portfolio is for investors who can withstand higher volatility (but still lower than stocks anyway). For this higher risk taken, they are rewarded with a higher expected return over the long term.

The different price behavior is shown very well in the following graphs, which show the evolution of the three types of portfolios, in euros and in US dollars, from 09/15/2023 to 06/28/2024:

Why should an investor invest in the Aggressive Bond Portfolio, whose price is more volatile?

Basically, higher risk means higher expected return. In addition, now that central banks have started to lower official interest rates, this bolder portfolio has a longer duration and will benefit more if yields fall in the future. If, on the other hand, yields rise, the interest received annually will produce a sort of cushion against price losses.

For example, if yields rise by 1% in one year, the Bold Bond Portfolio will lose approximately -1.3%. If, on the other hand, yields fall by 1%, the portfolio will gain more than 10%. These gains and losses are an estimate and are subject to certain conditions (unchanged spread, flat yield curve) but are nevertheless a good benchmark to show the current asymmetry between potential gains and losses due to the effect of coupons receivable and the inverse relationship between yields and prices.

Performance of Bond Portfolios

The first half of 2024 has been a difficult period for bonds with long maturities. Both the Bloomberg Global Aggregate and the Bloomberg Euro Aggregate ended the half-year in the negative. It has been better for short-term bonds. Almost all of our portfolios ended the half year in positive territory, except for the index fund bold bond and dollar ETF bold bond portfolios, which have ended slightly negative (-0.1% and -0.3%, respectively).

Appendix: brief explanation of the table metrics

Cumulative return: total return obtained in the mentioned time interval.

APR: total return obtained in the mentioned time interval in annual terms.

YTD return: return obtained so far in 2024.

Volatility: annual volatility of daily returns.

APR/Volatility: expresses the annual return per unit of risk.

IRR: internal rate of return. It is known as Yield To Maturity (YTM). It is the weighted average yield of the bonds contained in the portfolio, at a specific date.

Duration: the portfolio’s sensitivity to changes in yields. The duration shows approximately what the change in the fund price would be for a 1% change in yields. The higher the number, the more sensitive the value of the fund is to movements in yields.