Corporate Bonds....anyone bought these

swift1_2 · 12 December 2008 at 1:16AM

Hi folks,

I've never really come across corporate bonds before, but recently, been reading a few articles on them. Given that savings rates are falling off a cliff (those that haven't, it looks quite clear that rates will be dropping in the near future), I'm looking to diversify (I already hold shares).

It would be interesting to see which bonds people are buying or thinking of buying.
Is there any that are particularly good value?
my understanding is that as interest rates fall, bond prices rise. So if I do buy them and want to sell before maturity - is the idea to sell them when interest rates are about to start to rise again?

I'm probably more interested in buying corporate bonds of companies direct rather than funds (as you know when the maturity is and exactly how much the yield is)

Thanks,

Reaper · 12 December 2008 at 12:32PM

There were some previous threads on the subject. Try this one for starters or use the forum search for others.

http://forums.moneysavingexpert.com/showthread.html?t=1188435

swift1_2 · 12 December 2008 at 1:44PM

Yes, I did a search before I posted, I did read that thread and others. My post was regarding if anyone has bought any of late or thinking about buying and which ones the were looking into.

Corporate bonds are completely new to me, so it would helpful to find out what others are doing in this area and what their rationale is.

Corporate bonds seem to be a lot more elusive than shares - buying shares is relatively straight-forward process, but corporate bonds - just trying to find information on them - whats available, prices, how to buy them etc - it appears there are only a handful of sites/brokers that deal in them - I've been looking at sefltrade.

What got my interest was that I read in an article that vodafone were releasing a bond with a 9% coupon - which seem like a really good offer given that vodafone has been fairly immune to the whole credit crunch.

LongTermLurker · 12 December 2008 at 2:41PM

swift1 wrote: »

Hi folks,

my understanding is that as interest rates fall, bond prices rise. So if I do buy them and want to sell before maturity - is the idea to sell them when interest rates are about to start to rise again?

Pretty much, but it's not so clear cut. The reason the bond prices rise is partly because savers can't get good savings rates so they turn to bonds, which being suddenly popular go up in price (supply/demand). Conversely, when interest rates rise (among other factors), people get rid of the bonds because they can get high returns on "risk-free" deposit. However, there are many other factors at play and just because interest rates drop doesn't mean the prices WILL rise, and v.v.

I'm probably more interested in buying corporate bonds of companies direct rather than funds (as you know when the maturity is and exactly how much the yield is)

Looking at it from another point of view, you might pick the next Woolworths. Bonds have different risk factors and are rated AAA, AA, A, BBB.... C and unrated! To get the high coupon you have to take a perceived high risk to your capital. I've a couple of bond funds and they're down around 20% in the year. You've already said you can't find a lot of information and unless you intend to buy a lot of different-rated bonds and take a keen interest in researching your investments, I would suggest life will be a whole lot easier with a fund.

Remember as well, buy into a S&S ISA because Bond income is tax free within an ISA.

swift1_2 · 12 December 2008 at 5:56PM

LongtermLurker thx for your post,

you mentioned that a couple of your bond funds are down 20% in a year - do you know why they went down? is it because inflation was rising at the time and only in the past few months has come down - as I understand it, rising inflation kills bonds. However, low inflation - which we're in right now and could be for the foreseeable future - is good for bonds.

Given that the Northern Rock is now guarenteed by the gov't, the following caught my eye:
Nrock 5.625 13 Jan 2015 ENR0 73.55 Thu 13/01/2015 7.65% 37.04% +3.01%
73.55 to buy
7.65% income yield
37.04% gross redemption yield - is the yield you get if you hold till maturity?
This matures in 2015 - it looks like a good place to keep my long term savings - knowing that I will be getting a good annual rate and then on maturity a nice capital gain too! So not too fussed about what happens to the bond price in the interim as I can hold till maturity. Would like your thoughts - am I missing something - just seems a bit too good to be true!

Thats the prob with bond funds is that there is no maturity so you don't know what the end game is - seems to be more like share prices.

LongTermLurker · 12 December 2008 at 7:14PM

I take your point on the last bit, but I still think you should aim for diversity. I believe bondholders have legal precedance to assets should a company go under, but there's still no hard and fast guarantee. Although NR have been nationalised, that's only temporary and a future government may choose to re-privatise it and not bale it out a second time, should that happen before 2015.

To be honest, I'm not that much of a bond expert so I'd mostly be guessing at some of your questions, but someone will be along soon, I suspect. I haven't looked into why the funds have dropped because I've only had them a few months so not paying too much attention atm - for example, not much income will have been added yet (I'm not taking any income from the funds). One is a bit higher risk than the other.

Day_Trader · 12 December 2008 at 10:08PM

As a general guide corporate bonds are showing good value at the moment. Yields are good but the default rate on bonds is as high now as it was in the great depression across all ratings. This means either loads of companies are going to go bust so you will lose your money or some companies will go bust and if you are diversified well enough then you should make a gain. Bondholders take precedence over shareholders and buying one corporate bond is more risky than say buying into several and given the current climate it is best to diversify. Gross redemption yield is if you hold to maturity and covers income and capital gain - 37% over 6 years is just over 6% p.a average (expected but this can change due to defaults etc). Bond funds are useful for diversification and are traded as funds but do not react the same as shares but there is no set maturity you hold for as long as you like!

gozomark · 13 December 2008 at 4:53AM

Day_Trader wrote: »

Yields are good but the default rate on bonds is as high now as it was in the great depression across all ratings.

do you mean implied default rates rather than actual ?

Richard_DandR · 13 December 2008 at 9:05AM

swift1 wrote: »

LongtermLurker thx for your post,

you mentioned that a couple of your bond funds are down 20% in a year - do you know why they went down? is it because inflation was rising at the time and only in the past few months has come down - as I understand it, rising inflation kills bonds. However, low inflation - which we're in right now and could be for the foreseeable future - is good for bonds.

Given that the Northern Rock is now guarenteed by the gov't, the following caught my eye:
Nrock 5.625 13 Jan 2015 ENR0 73.55 Thu 13/01/2015 7.65% 37.04% +3.01%
73.55 to buy
7.65% income yield
37.04% gross redemption yield - is the yield you get if you hold till maturity?
This matures in 2015 - it looks like a good place to keep my long term savings - knowing that I will be getting a good annual rate and then on maturity a nice capital gain too! So not too fussed about what happens to the bond price in the interim as I can hold till maturity. Would like your thoughts - am I missing something - just seems a bit too good to be true!

Thats the prob with bond funds is that there is no maturity so you don't know what the end game is - seems to be more like share prices.

The gross redemption yield assumes redemption on 13 Jan 2010. The GRY to 13 Jan 2015 is around 11.5% (edit - the earlier 14% was only to Jan 2013).

THe Northern Rock accounts show this stock as not redeemable before 2010 - page 83.
http://companyinfo.northernrock.co.uk/downloads/2007_annual_report.pdf

alaneg · 13 December 2008 at 9:31AM

I have recently bought into a few bond funds. If you also decide to do so remember if possible to put them in an ISA. If like me you have a few thousand pounds held in equity funds in an isa it is worth selling these and rebuying outside the isa wrapper so that the proceeds can be put into the bond funds.
The only advantage, I think, of holding the equities in the isa is to elliminate capital gains tax but on my investments this is not likely to trouble me, wheras on the bond investments there is an immediate advantage as the tax paid is refunded about two months after the dividend (interest) payments. On a fund giving an 8% yield an extra 2% is refunded giving an effective yield of 10% which is pretty good if you are looking for income from your investments.

oldandgrumpy · 13 December 2008 at 2:09PM

My IFA was always harping on about my Artemis High Income ISA's being more risky because the pie chart showed a high proportion of bonds being invested in. I suppose the increased interest in bonds account for the quarterly yield going up, counteracting the fund value falling.

Corporate Bonds....anyone bought these

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