Corporate bonds

[Russwhitehouse]

Gents.
Anyone have any experience with these? I am selling a couple of rental properties I own and have been doing some digging into where best to put the money.Corporate bonds normally seem to be the domain of institutions, but there are companies offering access to private investors, albeit with a pretty hefty punt. One i've been looking at is Geneve invest. Glossy website, usual assurances and warnings and a minimum punt of £50,000. I'm looking for a hands off passive income payable quarterly or six monthly which on the face of it, this could provide. Opinions anyone?

[Zigster]

Not something I've looked at from a personal investing perspective, but capital values of corporate bonds are very sensitive to interest rates.

Not a problem if you intend to hold until redemption, but could be a problem if you sell before then. With interest rates as low as they are at the moment, there is a pretty good chance they will rise (and capital values of bonds fall as interest rates rise).

[Russwhitehouse]

Very true and something I have given thought to as well. Interesting to see how Brexit will affect rates given that it will happen during the duration of the bonds. Crystal ball anyone?

[sidicks]

Russwhitehouse said:

Very true and something I have given thought to as well. Interesting to see how Brexit will affect rates given that it will happen during the duration of the bonds. Crystal ball anyone?

Are you planning on holding corporate bonds to maturity or trading bonds?
Are you planning on buying a bond fund or individual bonds?

[Taxman10]

i have a couple - paying a coupon of 10 and 11% - you cant trade out of them though you have to let them run to term, which can be as long as 5 years.

[sidicks]

Taxman10 said:

i have a couple - paying a coupon of 10 and 11% - you cant trade out of them though you have to let them run to term, which can be as long as 5 years.

1. The coupon isn’t the full story, the yield to maturity is more meaningful (compared to the yield when you bought it!)
2. The credit rating is also important
3. Corporate bonds can have maturities of 30 years or longer
4. Most IG corporate bonds are tradeable

[BluePurpleRed]

Research Bond Laddering and Portfolio Duration (hint it is not how long something lasts - it is sensitivity to interest rates )

http://amzn.to/2ALOkau - The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More

http://amzn.to/2meOyBC - Investment Traps Exposed: Navigating Investor Mistakes and Behavioral Biases

Or get a years subscription to Investors Chronicle to read on the loo.


Short Version: If you buy in the secondary market you can find one you like the credit worthiness of that only has X years to run with a "Yield to Maturity" of the correct rate. This is based on the Price you buy it at (likely not 100 ) and the amount of coupons you will get. At the end you get coupons + 100 back. You need to consider that you could have invested your "100" and got interest as your measure of "outperformance" over a savings account by using Corp Bonds.

Laddering: You buy the ones you like that mature in 1,2,3,4 etc years so you don't have massive price sensitivity. This introduces what people call "re-investment risk" where you have to go shopping again. Bad if you bought loads in early 2000s at 6%-9% and now you have your capital / principal back but only can invest at 1%-2% but you at least don't have to wait 12 more years to get your cash if you would need it with any retirement / spending coming up.

So it is a balance of locking it away for the better rate ( with more risk there is more time for the company to default on you ) and if you need to sell you have to at the market rate not 100.

Hope this helps.

Edited by BluePurpleRed on Wednesday 10th January 13:23

[sidicks]

BluePurpleRed said:

Research Bond Laddering and Portfolio Duration (hint it is not how long something lasts - it is sensitivity to interest rates )

http://amzn.to/2ALOkau - The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More

http://amzn.to/2meOyBC - Investment Traps Exposed: Navigating Investor Mistakes and Behavioral Biases

Or get a years subscription to Investors Chronicle to read on the loo.


Short Version: If you buy in the secondary market you can find one you like the credit worthiness of that only has X years to run with a "Yield to Maturity" of the correct rate. This is based on the Price you buy it at (likely not 100 ) and the amount of coupons you will get. At the end you get coupons + 100 back. You need to consider that you could have invested your "100" and got interest as your measure of "outperformance" over a savings account by using Corp Bonds.

Laddering: You buy the ones you like that mature in 1,2,3,4 etc years so you don't have massive price sensitivity. This introduces what people call "re-investment risk" where you have to go shopping again. Bad if you bought loads in early 2000s at 6%-9% and now you have your capital / principal back but only can invest at 1%-2% but you at least don't have to wait 12 more years to get your cash if you would need it with any retirement / spending coming up.

So it is a balance of locking it away for the better rate ( with more risk there is more time for the company to default on you ) and if you need to sell you have to at the market rate not 100.

Hope this helps.

Edited by BluePurpleRed on Wednesday 10th January 13:23

A good summary.

But doing robust due diligence on the issuer is fundamental and most private investors won’t be able to that properly!

Edited by sidicks on Wednesday 10th January 13:49

[BluePurpleRed]

sidicks said:

A good summary.

But doing robust due diligence on the issuer is fundamental and most private investors won’t be able to that properly!

Edited by sidicks on Wednesday 10th January 13:49

True. But I would advocate Blue Chip names. So Tesco, BP ... FTSE 100 stuff starting out. So their equity may move about (i.e. BP) but their likelihood to credit default is small?

Am I being over confident. When was the last time a serious Corp defaulted on Bond Debt?

[sidicks]

BluePurpleRed said:

True. But I would advocate Blue Chip names. So Tesco, BP ... FTSE 100 stuff starting out. So their equity may move about (i.e. BP) but their likelihood to credit default is small?

Am I being over confident. When was the last time a serious Corp defaulted on Bond Debt?

I agree that the risk is relative low - but the credit spread (on the highest quality names) you can pick up is also very low:

A 5-year Santander bond has a yield of circa 1.3%, for example. That’s a long way from the 10-11% quoted above!

We have had a very benign period for credit in the last 10 years. The next 10 years could be somewhat different!

[Russwhitehouse]

sidicks said:

Russwhitehouse said:

Very true and something I have given thought to as well. Interesting to see how Brexit will affect rates given that it will happen during the duration of the bonds. Crystal ball anyone?

Are you planning on holding corporate bonds to maturity or trading bonds?
Are you planning on buying a bond fund or individual bonds?

Plan is to hold and probably buy a fund. By the way, forget what I said about Geneve invest. A little subversive digging has shown them to be dodgy, so I won't be touching them with a bargepole!

[sidicks]

Russwhitehouse said:

Plan is to hold and probably buy a fund. By the way, forget what I said about Geneve invest. A little subversive digging has shown them to be dodgy, so I won't be touching them with a bargepole!

But a fund won’t be holding them. They will be trading them to try and outperform a bond benchmark.

And if the benchmark index falls, even if your bond manager does a great job and outperforms the index, you could still lose money.

[Russwhitehouse]

sidicks said:

Russwhitehouse said:

Plan is to hold and probably buy a fund. By the way, forget what I said about Geneve invest. A little subversive digging has shown them to be dodgy, so I won't be touching them with a bargepole!

But a fund won’t be holding them. They will be trading them to try and outperform a bond benchmark.

And if the benchmark index falls, even if your bond manager does a great job and outperforms the index, you could still lose money.

Sorry, not making myself clear. I don't intend to buy and sell but rather buy a fund and let an "expert" do the dealing for me.

[sidicks]

Russwhitehouse said:

Sorry, not making myself clear. I don't intend to buy and sell but rather buy a fund and let an "expert" do the dealing for me.

That’s wise.

But my point stands - you need to be sure that buying into a corporate bond fund is what you want to do, given the (negative) exposure that you will have to interest rates rising and to credit spreads widening!

[Russwhitehouse]

sidicks said:

Russwhitehouse said:

Sorry, not making myself clear. I don't intend to buy and sell but rather buy a fund and let an "expert" do the dealing for me.

That’s wise.

But my point stands - you need to be sure that buying into a corporate bond fund is what you want to do, given the (negative) exposure that you will have to interest rates rising and to credit spreads widening!

Yes that's understood, hence my OP to get an idea how people far better qualified than me such as yourself feel.

[BluePurpleRed]

sidicks said:

I agree that the risk is relative low - but the credit spread (on the highest quality names) you can pick up is also very low:

A 5-year Santander bond has a yield of circa 1.3%, for example. That’s a long way from the 10-11% quoted above!

We have had a very benign period for credit in the last 10 years. The next 10 years could be somewhat different!

I am not sure if you are referring to any examples of mine but I was meaning that back in the day when Bank Rates were north of 6% you may have been able to get hold of a 10 or 15 year bond at a decent rate. Using laddering you have the risk that although you get your capital back sooner you have the risk of the world changing and getting no where near the rate you had.

Your example is a great example of this. If you'd had a 15y bond at a great rate and they hand back your money.. you have very few options (actually none at all in reality) to get the same yield for the same low risk as the backdrop has changed.

A fund may be a good idea but I don't like them due to their changing duration and fannying about. Perhaps a well judged historically proven Investment Trust with a decent yield may suit the OP?

[ellroy]

Russwhitehouse said:

Sorry, not making myself clear. I don't intend to buy and sell but rather buy a fund and let an "expert" do the dealing for me.

Good.

In which case the minimum you quoted earlier, £50k, is inordinately high.

There are many generally available retail corporate bond funds available for significantly less than that, look at Hargreaves or Barclays Stockbrokers (smart investor) for example, they’ll have plenty of choice.

As an aside though the long bull run in debt markets is closer to the end than the beginning and normalisation of interest rates, US increased, UK increased, a slow down of QE in Japan this week etc, will have an impact on corporate bond capital prices. Not sure I’d be rushing to be placing large amounts in them at the present.

Seek advice, but broadly speaking diversify your cash over several assets that generate an income is a better, longer term bet.

[sidicks]

BluePurpleRed said:

I am not sure if you are referring to any examples of mine but I was meaning that back in the day when Bank Rates were north of 6% you may have been able to get hold of a 10 or 15 year bond at a decent rate. Using laddering you have the risk that although you get your capital back sooner you have the risk of the world changing and getting no where near the rate you had.

Your example is a great example of this. If you'd had a 15y bond at a great rate and they hand back your money.. you have very few options (actually none at all in reality) to get the same yield for the same low risk as the backdrop has changed.

I was referring to the guy above who was talking about 10-11% coupons, but ignoring what the actual yield was on those bonds - much lower than 10-11% I’m sure!

Of course if you bought bonds at a high yield and then interest rates fall substantially then the value of your bond increase accordingly. Only at maturity can the issuer hand your money back!

BluePurpleRed said:

A fund may be a good idea but I don't like them due to their changing duration and fannying about. Perhaps a well judged historically proven Investment Trust with a decent yield may suit the OP?

Given a fund is typically managed against a bond benchmark (and the duration of the benchmark won’t change that much over time) then the fund’s duration shouldn’t change that much. And the manager will be positioning the portfolio slightly long or short of the benchmark in order to benefit from interest rate rises / falls to try and outperform the benchmark.

And the other changes will be to sell bonds deemed to be expensive and replaced by those deemed to be cheaper.

What sort of ‘fancying about’ are you referring to?

If you don’t want an active fund you can also buy a passive index replication fund / exchange traded fund.

[ringram]

Sign up to LSE ORB email list and get info on new IPO of bonds.

You can also look at the SLXX ETF which holds corp's not yielding a lot at present. But it will roll over as rates change. I bought in at 7% yield so capital value has risen... I expect that will start to reverse, but we will see.

I prefer buying new bond issues generally you only need buy in lots of £500 or so via your preferred platform. YouInvest, HL etc.

IMO keep away from the Mini bonds you are better off in equity at that level.

[Taxman10]

sidicks said:

BluePurpleRed said:

I am not sure if you are referring to any examples of mine but I was meaning that back in the day when Bank Rates were north of 6% you may have been able to get hold of a 10 or 15 year bond at a decent rate. Using laddering you have the risk that although you get your capital back sooner you have the risk of the world changing and getting no where near the rate you had.

Your example is a great example of this. If you'd had a 15y bond at a great rate and they hand back your money.. you have very few options (actually none at all in reality) to get the same yield for the same low risk as the backdrop has changed.

I was referring to the guy above who was talking about 10-11% coupons, but ignoring what the actual yield was on those bonds - much lower than 10-11% I’m sure!

Of course if you bought bonds at a high yield and then interest rates fall substantially then the value of your bond increase accordingly. Only at maturity can the issuer hand your money back!

BluePurpleRed said:

A fund may be a good idea but I don't like them due to their changing duration and fannying about. Perhaps a well judged historically proven Investment Trust with a decent yield may suit the OP?

Given a fund is typically managed against a bond benchmark (and the duration of the benchmark won’t change that much over time) then the fund’s duration shouldn’t change that much. And the manager will be positioning the portfolio slightly long or short of the benchmark in order to benefit from interest rate rises / falls to try and outperform the benchmark.

And the other changes will be to sell bonds deemed to be expensive and replaced by those deemed to be cheaper.

What sort of ‘fancying about’ are you referring to?

If you don’t want an active fund you can also buy a passive index replication fund / exchange traded fund.

Apologies I probably wasnt clear - the bonds I have are "short term" between 3 and 5 years. They are property backed and pay interest quarterly and obviously the principal back at the end of the term - they arent publicly traded. Given they are property backed it feels unlikely that the principal wouldnt get paid in full at the end of the term.

to be able to invest you need to be a HNW individual and minimum investment tends to be between 10 and 50k