Corporate Bonds
Discussion
Hi All.
Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
DibblyDobbler said:
Hi All.
Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
Why would you not invest in a bond fund and get massive diversification benefits?Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
Hmm - a valid point, thanks for the reply. I've read a few things which have put me off bond funds - some seem to believe they could be due a correction in the same way as equity funds? - so my thinking was to get a guarantee (or at least near as dammit) by holding an individual bond to maturity.
There are some big and presumably safe companies which are offering bonds which on the face of it would get me around 5% if held to maturity which seems good (maybe even too good!?) in the circumstances...
There are some big and presumably safe companies which are offering bonds which on the face of it would get me around 5% if held to maturity which seems good (maybe even too good!?) in the circumstances...
DibblyDobbler said:
Hmm - a valid point, thanks for the reply. I've read a few things which have put me off bond funds - some seem to believe they could be due a correction in the same way as equity funds? - so my thinking was to get a guarantee (or at least near as dammit) by holding an individual bond to maturity.
There are some big and presumably safe companies which are offering bonds which on the face of it would get me around 5% if held to maturity which seems good (maybe even too good!?) in the circumstances...
I can understand the logic of holiding bonds directly - to get the 'pull to par' effect - rather than bond funds which will be continually refreshing and managed against an index.There are some big and presumably safe companies which are offering bonds which on the face of it would get me around 5% if held to maturity which seems good (maybe even too good!?) in the circumstances...
I'd still want to be holding 10+ bonds to manage my risks.
DibblyDobbler said:
sidicks said:
I can understand the logic of holiding bonds directly - to get the 'pull to par' effect - rather than bond funds which will be continually refreshing and managed against an index.
I'd still want to be holding 10+ bonds to manage my risks.
That seems sensible - thanks.I'd still want to be holding 10+ bonds to manage my risks.
sidicks said:
The amount of due diligence that is required to properly understand these bonds is immense if you are going to do it properly.
Hmm - I have no intention or capability of doing it 'properly'! I would just attempt to choose big blue chip companies which I don't expect to go bust then crack on from there. May not bother at all - just pondering 
DibblyDobbler said:
Hmm - I have no intention or capability of doing it 'properly'! I would just attempt to choose big blue chip companies which I don't expect to go bust then crack on from there. May not bother at all - just pondering
These things aren’t risk free! The reason the yield is higher than an equivalent risk-free bond is partly due to illiquidity and partly due to credit risk.If you don’t need to sell prior to maturity then you can capture that illiquidity premium.
Investment grade bonds do default (and can face significant price volatility).
If you have 100 bonds and a default rate of 2% pa with 50% expected recovery rate then your experienced return is likely to be around 4% (5% gross less 50% x 2%).
If you only have 5 bonds, you might be lucky and have no defaults, but if you get 1 default over the 5 year period then your average return over the period falls to 3% (5% - (20% x 50%)/5.
Etc
I’d add to Sid’s points, which are all valid, with the observation that as interest rates start to rise, already happened in the US and will before long in the UK, Corporate Bond prices are likely to be impacted. They have an inverse correlation. Maybe not the time to be too punchy with bonds as a rule.
The only fixed interest sector we have any faith in at the minute is High Yield and EM debt.
The only fixed interest sector we have any faith in at the minute is High Yield and EM debt.
ellroy said:
I’d add to Sid’s points, which are all valid, with the observation that as interest rates start to rise, already happened in the US and will before long in the UK, Corporate Bond prices are likely to be impacted. They have an inverse correlation. Maybe not the time to be too punchy with bonds as a rule.
I think that's why he's fixed on buying and holding bonds to maturity - to achieve a known yield (subject to defaults) rather than buying into a bond fund.ellroy said:
The only fixed interest sector we have any faith in at the minute is High Yield and EM debt.
Won't rising rates affect high yield bonds too (and hard currency EMD)?You are unlikely to find a retail bond from a real "blue chip" company paying 5%, at least not on a yield-to-maturity basis. Many are paying much less - the higher yielding bonds tend to be at the much riskier end of the spectrum, although that could spark a debate about the price of the various forms of bank subordinated debt some of which i think isnt badly priced. The tesco 2029 bond isnt a million miles away from 5% (coupon is 6, it is trading about 115) but am not sure i'd call tesco blue chip and twelve years seems like a long time (although you can of course sell before maturity).
DibblyDobbler said:
Hi All.
Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
Earlier this year I took a punt on a bond/loan note. Been looking into the above and was considering investing some of my SIPP directly into a corporate bond (ie rather than a bond fund) and holding it until maturity (say over a 4/5 year period).
I have a moderate understanding of these things and as far as I can see I could invest in a big blue chip company and get a total return of around 5% per year which is guaranteed unless the company goes bust. Which seems pretty good to me especially as stock markets are high and arguably due a correction.
Any thoughts as to whether this is a bad idea or anything I should consider?
Cheers.
During part of the "research" I turned this up:
http://forums.moneysavingexpert.com/showthread.php...
As you can see, 'professional' opinion was 100% aligned against the idea.
However, the thread runs for some years and last year an interesting post was made: "Has anyone heard of anyone who HASN'T been paid as promised"?
Deafening silence. Which I've come to interpret as "you know what, we got it wrong. It's a good opportunity to invest in something very unlikely to fall flat - as illustrated not least by its continuation years after we so vehemently put it down".
True, like anything, it COULD fall apart. But, I've bet that it won't. And if I were you I'd base my decision on bond investing more on what I knew about the company's operations than on whether or not investing in it is covered by FSCS 'guarantees'.
williaa68 said:
You are unlikely to find a retail bond from a real "blue chip" company paying 5%, at least not on a yield-to-maturity basis. Many are paying much less - the higher yielding bonds tend to be at the much riskier end of the spectrum, although that could spark a debate about the price of the various forms of bank subordinated debt some of which i think isnt badly priced. The tesco 2029 bond isnt a million miles away from 5% (coupon is 6, it is trading about 115) but am not sure i'd call tesco blue chip and twelve years seems like a long time (although you can of course sell before maturity).
Well I only have schoolboy maths at my disposal but this Barclays one for instance is 9.5% at 125 surely can't be far off? http://www.hl.co.uk/shares/shares-search-results/b...And they're not very likely to go bust I would suggest...?
drainbrain said:
Earlier this year I took a punt on a bond/loan note.
During part of the "research" I turned this up:
http://forums.moneysavingexpert.com/showthread.php...
As you can see, 'professional' opinion was 100% aligned against the idea.
However, the thread runs for some years and last year an interesting post was made: "Has anyone heard of anyone who HASN'T been paid as promised"?
Deafening silence. Which I've come to interpret as "you know what, we got it wrong. It's a good opportunity to invest in something very unlikely to fall flat - as illustrated not least by its continuation years after we so vehemently put it down".
True, like anything, it COULD fall apart. But, I've bet that it won't. And if I were you I'd base my decision on bond investing more on what I knew about the company's operations than on whether or not investing in it is covered by FSCS 'guarantees'.
Thanks - my thinking is along similar lines.During part of the "research" I turned this up:
http://forums.moneysavingexpert.com/showthread.php...
As you can see, 'professional' opinion was 100% aligned against the idea.
However, the thread runs for some years and last year an interesting post was made: "Has anyone heard of anyone who HASN'T been paid as promised"?
Deafening silence. Which I've come to interpret as "you know what, we got it wrong. It's a good opportunity to invest in something very unlikely to fall flat - as illustrated not least by its continuation years after we so vehemently put it down".
True, like anything, it COULD fall apart. But, I've bet that it won't. And if I were you I'd base my decision on bond investing more on what I knew about the company's operations than on whether or not investing in it is covered by FSCS 'guarantees'.
DibblyDobbler said:
Well I only have schoolboy maths at my disposal but this Barclays one for instance is 9.5% at 125 surely can't be far off? http://www.hl.co.uk/shares/shares-search-results/b...
And they're not very likely to go bust I would suggest...?
This is a 4-year bond (close enough).And they're not very likely to go bust I would suggest...?
So buying at 125 you will have a 25 capital loss (=20% / 4 years = 5% per year).
The running yields is around 7.5%, so your gross return (before tax) is circa 2.5%.
Is that what you expect?
sidicks said:
DibblyDobbler said:
Well I only have schoolboy maths at my disposal but this Barclays one for instance is 9.5% at 125 surely can't be far off? http://www.hl.co.uk/shares/shares-search-results/b...
And they're not very likely to go bust I would suggest...?
This is a 4-year bond (close enough).And they're not very likely to go bust I would suggest...?
So buying at 125 you will have a 25 capital loss (=20% / 4 years = 5% per year).
The running yields is around 7.5%, so your gross return (before tax) is circa 2.5%.
Is that what you expect?
Surely we assume returns are compounded? Which gives 4-5%.
sidicks said:
This is a 4-year bond (close enough).
So buying at 125 you will have a 25 capital loss (=20% / 4 years = 5% per year).
The running yields is around 7.5%, so your gross return (before tax) is circa 2.5%.
Is that what you expect?
Hmm - maybe this is why schoolboys are not allowed to make investment decisions!So buying at 125 you will have a 25 capital loss (=20% / 4 years = 5% per year).
The running yields is around 7.5%, so your gross return (before tax) is circa 2.5%.
Is that what you expect?
What about one with no end date - eg http://www.hl.co.uk/shares/shares-search-results/b...
I could get >5% per year on that then take a small loss on the capital when I'd had enough - also a bad idea?
DibblyDobbler said:
Hmm - maybe this is why schoolboys are not allowed to make investment decisions!
What about one with no end date - eg http://www.hl.co.uk/shares/shares-search-results/b...
I could get >5% per year on that then take a small loss on the capital when I'd had enough - also a bad idea?
'Small capital loss' - how do you know what the price will be when you come to sell? What happens if, as expected, interest rates have risen significantly when you come to sell?What about one with no end date - eg http://www.hl.co.uk/shares/shares-search-results/b...
I could get >5% per year on that then take a small loss on the capital when I'd had enough - also a bad idea?
Why would one Barclays bond have massively different returns to another Barclays bond (depending on seniority and term).
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