Corporate bonds: the only 'hot' story in town

Julian Knight reports on why the returns from firms needing to raise money could offer an antidote to meagre savings rates and turmoil on stock markets

Good news is thin on the ground for investors. Only brave hearts would look at getting back into the stock market at the moment, as it is still unclear whether we are headed for a worldwide recession or depression.

Meanwhile, British savers are living off scraps, as the Bank of England base rate was cut again last week to just 1.5 per cent. For savers it has been a quick transformation from feast to famine, with "best buy" account rates falling in the past three months from the 7 per cent mark to around 4 per cent.

Meanwhile, the hundreds of thousands of Britons who saw property as their passport to investment riches are licking their wounds as UK house prices have just had their worst year on record, plunging by more than 15 per cent. Commercial property has been a basket case for even longer, with many funds actually stopping investors from withdrawing their money.

So any area of investment that promises growth is going to spark more than a little interest. And it's the unglamorous world of corporate bonds that is catching the attention of those in the know. These bonds, it seems, are the one potentially "hot" investment of 2009. "They represent the opportunity of a generation, offering both capital growth and relatively high income," says Meera Patel, senior analyst at independent financial adviser (IFA) Hargreaves Lansdown.

Corporate bonds are a relatively simple concept. Firms needing to raise money issue bonds that promise to pay the buyer a fixed rate of interest, and at the end of the term the loan amount is repaid. Things do get more complex as there is a huge global market in the trading of bonds, but basically the rate that bonds pay is dependent on the underlying financial strength of the company issuing them.

Adrian Lowcock from IFA Bestinvest says: "You can divide firms issuing into three categories. You have the strong, well-funded ones – big names if you like – and then you have middle-tier companies, which have strength but may have some vulnerability to a downturn. Finally, you have riskier enterprises. The higher the risk of business failure, the higher the interest that has to be paid to get people to buy the bonds. It's a complex market, with analysts and rating agencies poring over the minutiae of the issuing firms, deciding who stands where."

But with the world economy speeding downwards, companies that were once thought ultra-safe are now being forced to offer higher returns to investors: "Bond rates are factoring in business failures and thereby defaults equivalent to or even worse than the great depression. So even big, well-funded firms are having to pay around 8 per cent interest a year to shift their bonds," says Ms Patel.

And firms that aren't in the top rank have to pay even more. "Rates around 10 per cent are now becoming common," says Mr Lowcock. "Set these against savings rates, shares and property prices and you can see why many people are getting excited."

However, he adds a note of caution: "We are likely to see a substantial number of business failures over the coming recession, though probably not as many as the markets are factoring into bond prices."

Chris Bowie, the head of credit at fund manager Ignis, agrees that the bond markets have overestimated business failures and therefore loan defaults: "During the worst five years of the 1930s depression, 5 per cent of bonds were defaulted upon. Even if that were to happen now, with current rates of between 8 and 10 per cent, investors would still get decent returns."

But he does have one reservation: "If the Government starts to print money to boost the economy, this could in the long term have an upwards effect on inflation, which could make the annual interest paid on bonds a bit less attractive."

Buying a fund, which invests in a large number of corporate bonds, is a way of spreading risk, Ms Patel points out. "There are a lot of good bond funds out there which do not have high initial charges. What's more, the funds can be held within an individual savings account, which means growth is tax-free."

Mr Lowcock recommends investors look at three funds in particular. "The Fidelity Moneybuilder invests in high- grade bonds from big companies but is currently paying 5.8 per cent a year even after fees. For people willing to take a touch more risk, the M&G Optimal Income fund is paying 6.95 per cent with no initial charge. The braver still could look at the Legal & General High Income fund, which is offering a return of 10.2 per cent."

Iniciado por Malditos_Usureros

Como quiero un 2009 tranquilito pero a la vez sacar algo mas que los miserables intereses que dan ahora los bancos, he metido un pico en un fondo de bonos. El rendimiento al precio actual me sale a entre 7% y 8%, mucho mejor que los depositos bancarios.

El que acabo de pillar tiene los siguientes "holdings" (entre otros):

Top ten holdings08/01/09 Currency: GBP

Security Coupon Maturity Price Country % Weight
1 BANCA INTESA SPA 5.5% DEC 19 2016-11 5.50 19/12/16 98.09 Italy 4.34
2 WAL-MART STORES 4.875% Jan 19 2039 4.88 19/01/39 86.86 United States 4.03
3 GLAXOSMITHKLINE 5.25% Apr 10 2042 5.25 10/04/42 89.50 United Kingdom 3.99
4 UBS AG LONDON 6.625% Apr 11 2018 N/A 11/04/18 106.83 Switzerland 3.89
5 BARCLAYS BK PLC 8.25% DEC 15 2049 N/A 28/02/49 85.14 United Kingdom 3.58
6 LLOYDS TSB BANK 6.9625% May 29 2020 N/A 29/05/20 101.76 United Kingdom 3.41
7 ING BANK NV 6.875% May 29 2023 N/A 29/05/23 95.65 Netherlands 3.40
8 BP CAPITAL PLC 5.75% NOV 8 2010 N/A 08/11/10 106.00 United Kingdom 3.28
9 RABOBANK 4.625% May 31 2012 4.62 31/05/12 104.50 Netherlands 3.14
10 CITIGROUP INC 6.8% Jun 25 2038 N/A 25/06/38 94.09 United States 3.06


Alguien mas tiene experiencia en este tipo de fondos? Las comisiones de este son bastante bajas (0.2% anual). A la misma vez lo tengo bajo un "ISA wrapper" por lo que esta exento de impuestos.

Os pongo de paso aqui un articulillo sobre los bonos:

Corporate bonds: the only 'hot' story in town - Invest & Save, Money - The Independent

Iniciado por ventolino

¿Que fondo es: Gestora, nombre del fondo y comercializadora en España?

Iniciado por Malditos_Usureros

Es un ETF, iShares £ Corporate Bond (SLXX). iShares Exchange Traded Funds (ETFs)

En ese link tienes toda la informacion. Cotiza en la bolsa de Londres con el ticker SLXX. El manager del fondo es Barclays Global Investors Limited.

Al final me he decidido por este ETF en lugar de un fondo-fondo por tener comisiones mas bajas, mayor liquidez y poder comprar/vender de manera inmediata (sin tener que esperar un dia).

Iniciado por bullish consensus

la proxima burbuja en estallar es la de los bonos. de hecho ya esta dando señales de pirarse desde hace unos dias.
igual te descubro algo si digo que en la renta fija se puede perder dinero¿?

Corporate Bonds: Discounting Depression

With the TIPS market discounting maybe 5 years of deflation, and government bonds generally oblivious to the ultimate success of heroic reflation efforts, the corporate bond market remains in deep freeze. Spreads on Baa credits at an unprecedented 640 bp, or 3.5 times the average spread prevailing over the past four decades, and the highest levels since the 1930s (when US GDP fell 25% peak to trough). Their previous record peak was in the depths of the early 1980' recession at well under 500bp.

To put this in perspective, the peak default rate on investment grade bonds during the Depression was 4%, and 21% for all credits; we're currently discounting almost a 30% default rate. That just isn't going to happen, and the current valuation extreme has been driven largely by forced deleveraging by financial institutions and chaos in the CDS market. As retail investors seek income in a global ZIRP environment and financial markets stabilise, I suspect we will see a sharp rally in 2009. The broad Barclays U.S. Corporate Bond Index is currently yielding 8.1%, or almost 6% above 10 year Treasuries (which absent a multi year and deep global slump are now a spectacular bubble). This index has suffered its worst performance since 1981 this year. Speculative bond spreads are now at 16% over ten-year Treasuries, up from just 6% in September (although I'd expect defaults among speculative credits to come in at over 20% by end 2010, and they benefit least from government intervention.)

The chart indicates the disparity between equity and bond performance recently. It seems anamolous that we've seen the S&P rally 21% from the Nov 20 lows in equities (as I predicted) and yet seen little respite in bonds, despite the fact that over the last 20 years, the S&P 500 Index has returned just 2% over investment grade corporate bonds but accompanied by nearly 3x the associated volatility ie in risk adjusted terms, corporate bonds have been a great investment. Unless default rates are dramatically higher than seen in the early 1980s or even during the 1930s, current spreads suggest a portfolio of investment grade bonds will prove highly profitable medium term from these levels. Indeed, as the Fed expands its unconventional activities in the credit markets, it can't be long before it becomes a buyer of investment grade bonds to unclog the market and allow US corporates access to refinancing.

Bank bonds look particularly mis-priced, yielding 5% over comparable Treasuries when blue chip US bank bonds are de facto the new Agency Debt, and indeed bank debt in all developed economies now carries an implicit government guarantee. For risk averse investors, who can't stomach the ongoing volatility that the bottoming process in equities entails, a broadly spread investment grade bond fund offers upside exposure to an inevitable US recovery with limited downside risk.

The ratio of the S&P earnings yield to investment grade bond spreads is at levels not seen since the 1930s ie bonds are far cheaper than equities as an exposure to economic recovery. Spreads on AA rated credits are already coming in and stand at just under 500 bp; I'd expect a move to the 420-450 range in coming months. For risk lovers who enjoy a wild ride on the latest momentum trade, go buy 10 year Treasuries at 2% and expect to lose your hair and your shirt over the next couple of years.