RetireJapan

Dear All,
Has anyone considered the relative merits of buying bonds directly versus buying bond funds,
especially with respect to current market conditions ?
I am currently investigating bond investments for a NISA, particularly considering foreign bonds,
and it couldn't escape my attention that the price of all the low-cost bond funds I investigated
(e.g. ニッセイ外国債券インデックスファンド , ｉＦｒｅｅ　外国債券インデックス) had fallen over the past year.
This seems to be in line with expectations since in a 'low-interest rate with interest rates beginning to rise'
bond prices can be expected to fall (as newer issued bonds offer higher rates of interest, see
https://www.thebalance.com/bonds-vs-bond-funds-2466790 etc.).

Conversely a corporate bond from a well-rated company gives a guaranteed rate of interest every year,
and will return the principal value of the investment at the end of the bond period (except in the unlikely
event the company goes bankrupt).For example, at the moment Apple Inc. offer a 4 1/2 year bond
paying 2.4 % per year. Or Barclays offer a 2 year bond at 7.35% .
While a bond fund offers the advantages of diversification and the ability to sell the fund
(although in a NISA if one's investment limit has been reached the proceeds cannot be used
to invest back in NISA), and maybe better long-term performance (?),
conversely a single bond offer a (almost) guaranteed positive rate of return.
Just at the present time (low interest rates rising a little ?) can individual bonds be considered
a viable option ? Does anyone have any thoughts / experience ?

I am not aware that you can easily buy individual bonds via a broker in Japan. Do you have a link to a broker page allowing purchase?

As for the bond funds falling last year, well, they're becoming cheaper! If anything that's a buy signal to me.

I'm just going to paraphrase "how a second grader beats wall street"

In addition to diversification issues, while with a normal single bond it may not feel like you've lost anything there's still the lost opportunity cost of being stuck in with a single bond as well as liquidity issues with significant bid-ask spreads. Essentially if you have a low paying bond and the rates go up a) that bond is worth less due to the lost opportunity costs and b) you pay extra costs when trying to sell it off.

Due to efficiencies of scale, the bond funds have much lower bid-ask spreads and you can buy/sell whenever(though it only goes through at the end of the trading day).

Allan Roth in the book says you should just go with funds over individual bonds and I feel his logic is sensible.

Also, 7.3% sounds like junk bond level returns, not all bonds are safe stores of value, "If it sounds too good to be true, it probably is"

You can look at the average years to maturity of the bond etf - the rough rule ,as I understand it, is that so long as you are good to hold the etf for the period of the average years to maturity you will not lose money (the increased interest payments should make up for declines in the value of the etf share price). Another advantage is the risk of default is spread out in an ETF whereas if you hold individual bonds and the issuer defaults you end up with nothing. One final advantage of the etf is it is always tradeable - meaning if stocks tank, you can sell bond etf shares to re-balance into stocks. With individual bonds you are locked in for the duration and so you lose this arbitrage advantage.

Finally, have you considered a fixed term deposit at a bank - I have noticed that some banks have started increasing their interest rates on US Dollar fixed term deposits. This could potentially be a viable alternative (though I don't know if you can do this inside NISA).

N00bster wrote: ↑Fri Sep 14, 2018 1:11 am I am not aware that you can easily buy individual bonds via a broker in Japan. Do you have a link to a broker page allowing purchase?

As for the bond funds falling last year, well, they're becoming cheaper! If anything that's a buy signal to me.

Hi Noobster,
If you go to
the monex homepage and then select the 債券 link :
https://mst.monex.co.jp/mst/servlet/ITS/ucu/BondTopGST
They appear to be offering individual bonds (unless I am somehow misreading the Japanese (wouldn't be the first time!)).
However, your point about a falling price maybe signalling that we could be approaching a good time is probably very wise though.

Many thanks for the sensible advice above.

jcc wrote: ↑Fri Sep 14, 2018 1:14 am Also, 7.3% sounds like junk bond level returns, not all bonds are safe stores of value, "If it sounds too good to be true, it probably is"

Re: this bond your adage is probably correct! I have had a little look into the details, and while I haven't got through all the documentation
it seems like it is a 'structured bond', where the repayment amount, rather than simply returning the principal as for a normal bond, may depend on the share price of the company (昭和電工株式会社).