11% interest on Barclays Bank bonds

tradetime

baby_boomer wrote: »

Exactly.

There is a risk of the yield falling to 0%.

At that point you would also suffer severe loss of capital as the value of the bond plummeted.

It's not interest - it's a yield. There is no obligation for the bank to pay out if it is in financial difficulties.

Appoligies if this does not make sense, I'm not really into bonds so my knowledge is very limited, but is the yield not inversely proportional to the price, there fore for the bond yield to fall dramatically in a normal course of events, it would have to be due to diminished perception of risk and the price of the bonds would have traded up, thus what you had lost in yield you would have made up on increae in the bond price and could simply trade out of the position?

As to risk, as others have said the yield is a function of perceived risk on the part of the market, S&P ratings have just downgraded a dozen banks spread between US and Europe, and I believe BARC is one of them. If the bank was to become troubled bond holders rank above shareholders in order of payment, however there is significant risk that in a government bailout as would almost certainly occur for Barclays debt would likely be restructured, resulting in the time honored expression of "the bond holders taking a haircut" ie you would be offered maybe 20 - 30p on the pound, watch GM bond holder news for an idea of this in action

baby_boomer

eeja wrote: »

The only way to lose out is if Barclays Bank goes belly up and were that to happen it would surely be rescued as too big to fail.
Agreed ?

Agreed - but the terms of the rescue would probably be 0% yield & capital losses for the bondholders!

tradetime wrote: »

thus what you had lost in yield you would have made up on increae in the bond price and could simply trade out of the position?

You would make the capital gain that you mention in those circumstances, but your yield is based on the price you bought at, not on future values. Your yield doesn't go down if the bonds increase in value. Only the yield of future investors.

BTW, Far Eastern investors gained better guarantees than existing Barclays corporate bond-holders - but were still only prepared to lend to Barclays at 14%!

gozomark

I'm guessing baby-boomer means yield falls to zero if goes into default

baby_boomer

The yield will fall to 0% if the government has to get involved and puts a stop on share and bond dividends until the taxpayer is paid back.

The problem with all these banks is that they haven't properly "fessed up" to their CDO / hedge fund losses - often because they still don't know themselves.

purch

why the yield on these perpetual bonds is so high and what the risks are currently in buying these corporate bonds for long term investment.

They are perpetual, and the coupon is not cumulative, so if the Coupon is not paid it will be lost forever.

As they are Perpetual you do not have the 'backstop' of a redemption date, so if Barclays got into real trouble, the Bonds might become non-performing (which would depress the price even further) and the only way to return the Capital would be to find some other "Mug" to buy the Bond from you.

With a non-perpetual Bond, even if the Bond does become non-performing for a period, you might still receive your Capital on the redemption date if the issuer is still around.

The spread is so wide, because these Bonds are virtually untradeable currently, and your chances of actually getting a decent price are slim.

tradetime

You would make the capital gain that you mention in those circumstances, but your yield is based on the price you bought at, not on future values. Your yield doesn't go down if the bonds increase in value. Only the yield of future investors.

Thanx for that explanation, told you I didn't really understand bonds, I didn't even realize that when you bought at a certain price and yield that you locked that yield in, I thought your yield fluctuated also with the bond price so what you lost in yield you gained in price but more importantly, what you lost in price if the bond price fell you would gain in better yield.. That makes say US treasuries even nuttier at the moment, as the yields are poor, and the prices high, so you would lock in a very low yield at purchase and run a strong risk that the bond price will depreciate.

eeja

baby_boomer wrote: »

The yield will fall to 0% if the government has to get involved and puts a stop on share and bond dividends until the taxpayer is paid back.

The problem with all these banks is that they haven't properly "fessed up" to their CDO / hedge fund losses - often because they still don't know themselves.

Do we agree therefore that for those investors that are confident that Barclays Bank will not go bankrupt this must be the best deal on offer in the market for fixed income in sterling at the moment ?
Bear in mind government policy at the moment is not bailing banks out after they are declared bankrupt (cf the Northern Rock fiasco) but it is supporting and strengthening them with loans and guarantees before that happens.
Do readers not see eye to eye on this ?
Were Barclays to go that would be the end of the UK banking system as we know it ..full stop.

gozomark

Do we agree therefore that for those investors that are confident that Barclays Bank will not go bankrupt this must be the best deal on offer in the market for fixed income in sterling at the moment ? - is it the best - no idea, but if you are 100% confident they will not default, then its very attractive

Were Barclays to go that would be the end of the UK banking system full stop - depends on what you mean by "go" - they can default without disappearing

eeja

purch wrote: »

They are perpetual, and the coupon is not cumulative, so if the Coupon is not paid it will be lost forever.

As they are Perpetual you do not have the 'backstop' of a redemption date, so if Barclays got into real trouble, the Bonds might become non-performing (which would depress the price even further) and the only way to return the Capital would be to find some other "Mug" to buy the Bond from you.

With a non-perpetual Bond, even if the Bond does become non-performing for a period, you might still receive your Capital on the redemption date if the issuer is still around.

The spread is so wide, because these Bonds are virtually untradeable currently, and your chances of actually getting a decent price are slim.

Thanks purch
The first issue you raised was of spreads. Do you know these are the actual spreads ?
Surely the huge spreads on Bondscape are purely indicative and only when one goes to the dealer are the true tradable prices revealed and even that will depend whether the dealers have 'stock' and market conditions on the day, amongst other factors which only the bond traders have knowledge of, this being an OTC market .
If they are in fact correct then why not go for the HSBC perpetual as this has a much narrower spread according to Bondscape.
Surely 9% pa is a good enough rate for most people worried about the spread which is irrelevant anyway once one has locked in and doesn't want to sell ?
Regarding the point about unpaid coupons not being cumulative this surely is irrelevant.
If the bank fails to pay the coupon it can be declared insolvent immediately with most bonds ( one would have to study the terms and conditions of each bond individually and the difference between the various Barclays perpetuals is probably explained by the different clauses in the bond deeds and the priority of payment in case of bankrupcy.)
A final point is that the bondholder ALWAYS has a legal claim for an unpaid bond so if the money's there even five years later, he can surely claim it ?

sabretoothtigger

You need 100k to buy these bonds