Coming back to this topic with a general question: are there easy to follow simple steps for beginning bond investors?
I find bonds more complex to understand. I'll try to explain what I know; naturally, if I make any mistakes, please correct me:
There are various types of bonds and different ways to approach them. Each system serves a completely different purpose. For us in Switzerland, since Confederation bonds are not accessible to us common mortals, there are iShares ETFs, as far as I know: 0-3, 3-7, and 7-15 years.
Swiss bonds generally have the lowest yields, making them quite tax-efficient. However, tax efficiency is secondary; first, you need the right instrument.
0-3
Very short maturities act like money market funds (theoretically, money markets are under one year). This can be a way to park liquidity when interest rates are high. In practice, it should maintain value, though with some volatility since it includes bonds up to 3 years... Unfortunately, I don't think there are true CHF money market ETFs available.
3-7 / 7-15
The other two categories (3-7 and 7-15) are used to reduce portfolio volatility. Essentially, the more years remaining until maturity, the higher the premium you get (above the risk-free rate), but also the higher the volatility. Being safe-haven assets, and given that central banks tend to lower interest rates during crises, these ETFs tend to increase in value during a crisis; this volatility balances that of equities. The longer the time to maturity, the more these effects are leveraged. For instance, if the SNB lowers rates by 0.25%, the 3-7 ETF (which has an average duration of 5.11 years, according to the iShares website) would theoretically rise in price by 0.25% x 5.11 = 1.27%. The 7-15 ETF, with an average duration of 10.2 years, would rise by about 2.55%. These calculations are never exact because the market tries to anticipate the next rate move, but they serve as an indication of how it works.
It's also worth noting that not all crises play out the same way. When inflation rises and rates increase, as in 2022 or the 1970s, bonds offered no protection; in those cases, gold was the protector. So, if bonds fail, gold might be the alternative.
Now, suppose you buy the 3-7 ETF and the central bank raises rates by 0.25% and keeps them there forever. You would lose 1.27% initially, but since the yield is higher than the risk-free rate, you would gradually recover what you lost. This is usually calculated as 2x the ETF's duration, so 5.11 x 2 = 10.22 years (this is a very rough calculation just to give an idea of how long you could be underwater).
If you look at the portfolio as a whole, volatility decreases as the bond duration increases. However, if you look at a single ETF, its individual volatility increases with duration. So, their usefulness depends on how you view your portfolio.
+10
For other currencies (Euro and USD), there are much longer durations available. In these cases, central bank interest rates become less important, and the credit rating or perceived safety of a nation becomes more critical. For example, Germany recently announced an increase in public debt, which devalued long-term bonds but had no effect on short-term ones.
High Yield
Regarding Corporate and High Yield bonds... I find them uninteresting except perhaps as a money market substitute with a higher yield... but that would be a money market with volatility too. In my opinion, they are too correlated with equities to be interesting.
Personally, I don't hold any bonds; I preferred other instruments to protect my portfolio. For example, CAOS: it acts like a money market fund but also sells PUT options, so it rises significantly when the market crashes quickly. The downside is that it is denominated in USD.
