Corporate Bonds

cogito

DiggerUK wrote: »

Nazitf,
I see corporate bonds (CB's) as a bad investment. As dangerous a risk as Icelandic banks turned out to be. A simple smell test should have told anybody that the rates being offered by the Icelandic banks, was too good to be true.
If it wasn't for the government bailout, many on these boards would have seen a good part of their investments go belly up.

With the complete tanking of interest rates for savers, there are a lot of people preparing to take a high risk for a better return in the CB market with their savings.
CB's, (plus government gilts/treasuries) can now be purchased through London Stock Exchange traders like any other share can be bought.
Individuals being able to purchase CB's is a recent phenomenon, I say it's because the banks will not lend to what they see as risky customers. A simple smell test should warn people, that when banks won't lend, it is probably down to the banks viewing them as a bad risk.

Most are paying 7% plus. In funds with a spread, they are realising about 4% plus. As the CB's are normally fixed rate, and fixed term, you will get stiffed if inflation kicks of over 5/6%, An inflation rate that is likely given the ammount of funnies from the printy printy factory.
Unlike cash savings if you cash in under those conditions you will not get your initial investment back.

And unlike the Icelandic bank fiasco you will not get bailed out. Buying CB's, Gilts, and Treasuries, that are not index linked, is a one way ticket to Palookaville. Even index linked are relying on the corporation not going belly up.
It is less than 3 years since queues outside Northern Rock, the real fun is still to come. Seems to me like short term memory loss is the problem for many round here.

You really are clueless.

jamesd

baby_boomer wrote: »

Any fixed rate bond - secure or not - would drop in value if inflation really took off.

They would if inflation took off in the place where most buyers of the bond are located. That's one reason to favour strategic bond funds that are more likely to hold bonds outside the UK where most holders may not see higher inflation and where the price drops may be less.

I'm still pretty cautious about corporate bonds of all types at the moment. Too much inflation and too much monetary easing with low rates to undo and that will inevitably push down bond capital values in many places to raise the yields. But it should be worse in gilt and high quality markets, not the junk bonds.

DiggerUK wrote: »

If it wasn't for the government bailout, many on these boards would have seen a good part of their investments go belly up.

That guarantee is why a lot of people were using them: the government guaranteed their money, most of it at least, up to the FSCS limit of the time. And delivered more. If you have a reliable guarantee it doesn't mater how risky the investment is. Their rates weren't far above other competitive rates anyway, only 0.25 to 0.5%. You can see that much variation easily now.

Nazitf

Thanks for all the responses.

Would I be correct in concluding that UK gilts / corporate bonds are relatively cautious investments but not in the current climate and it would be better to invest in them at a time when inflation is less volatile/ more predictable?

Annisele wrote: »

It's possible for the price of corporate bonds (even investment grade corporate bonds) to collapse. Are you happy with that risk?

Yes but I thought that this is very unlikely. In addition, doesn't investing in a fund would spread my exposure to this risk?

Annisele wrote: »

Unless you are a higher rate taxpayer, the tax benefits of holding corporate bonds within an ISA aren't all that exciting.

This was one my reasons for branching out into cautious investments. I wanted to utilise the ISA allowance that was getting wasted each year. Even if I only matched the cash interest rates, I would still be getting a better return because of the ISA wrapper.

What types of other cautious funds would you recommend I look into?

Thrugelmir

DiggerUK wrote: »

, I say it's because the banks will not lend to what they see as risky customers. A simple smell test should warn people, that when banks won't lend, it is probably down to the banks viewing them as a bad risk.

So using your logic. That's presumably why the UK Government has to issue gilts as the banks won't lend it the money thats required.

Annisele

Nazitf wrote: »

Thanks for all the responses.
This was one my reasons for branching out into cautious investments. I wanted to utilise the ISA allowance that was getting wasted each year. Even if I only matched the cash interest rates, I would still be getting a better return because of the ISA wrapper.

Just to be clear, I'm not giving any advice or recommendations - I'm not authorised to do so, and even if I was I don't know enough about you to advise you.

In general, I don't think it's a good idea to invest in something just because of its tax advantages (there are exceptions, but they tend to apply to very rich people with very complicated affairs - and even then I think they should be paying an accountant and/or an IFA to sort it out for them).

If you like the look of the underlying investment, and you'd have invested anyway regardless of the tax wrapper, then great. I don't think it's entirely fair to call the unused ISA allowance "wasted" if you couldn't have used it on something that you want. Most people could contribute 100% of their salary into a pension and get tax relief on the whole lot - but they don't, because they need their salary to live on. You could consider the unused pension allowance "wasted", but for most people it wouldn't be sensible to use it.

UK gilts are relatively cautious investments. UK corporate bond funds might or might not be cautious investments - it depends on what is in the fund. Investing in a fund does spread your exposure to risk, but if we do enter a period of high inflation there's a good chance corporate bond funds will get hammered.

DiggerUK

Thrugelmir wrote: »

So using your logic. That's presumably why the UK Government has to issue gilts as the banks won't lend it the money that's required.

The whole story behind QE is one were the bond vultures are not buying the gilts from the UK government.

So the government prints the money to buy the gilts, after accepting toxic assets as security for the money they have printed from the banks.

After the banks get the money the government gets asset rich in toxic assets thereby selling the gilts to themselves when the gilts are bought, (are we keeping up at the back?) by the people with the funny money.

Apart from the fact that the government don't own the gilts, they can only buy them back by borrowing, taxation or, (wait for it), printing more money, they also don't seem to have a clue what they are doing in my humble opinion. And they say they are not sure if it is working!!!!

Makes the Mad Hatter seem quite sane wouldn't you agree. As you know, I also enjoy the enviable reputation of being completely bonkers, so I give you this link to one Liam Halligan, a financial journalist at the Telegraph, he makes perfect sense of it all.
http://journalisted.com/liam-halligan?allarticles=yes

StevieJ

Nazitf wrote: »

Thanks for all the responses.

Would I be correct in concluding that UK gilts / corporate bonds are relatively cautious investments but not in the current climate and it would be better to invest in them at a time when inflation is less volatile/ more predictable?


Yes but I thought that this is very unlikely. In addition, doesn't investing in a fund would spread my exposure to this risk?


This was one my reasons for branching out into cautious investments. I wanted to utilise the ISA allowance that was getting wasted each year. Even if I only matched the cash interest rates, I would still be getting a better return because of the ISA wrapper.

What types of other cautious funds would you recommend I look into?

I think income funds may prove to be a good buy at the moment i.e. funds that concentrate on high yield stocks, not a recommendation BTW just my thoughts.

Nazitf

Annisele wrote: »

Just to be clear, I'm not giving any advice or recommendations - I'm not authorised to do so, and even if I was I don't know enough about you to advise you.

Noted

Annisele wrote: »

.....but if we do enter a period of high inflation there's a good chance corporate bond funds will get hammered.

Would I be correct in assuming that this will also affect UK gilts in a similar way?

StevieJ

Thrugelmir wrote: »

So using your logic. That's presumably why the UK Government has to issue gilts as the banks won't lend it the money thats required.

I thought it was the banks that were the bad risks

Aegis

Nazitf wrote: »

Noted



Would I be correct in assuming that this will also affect UK gilts in a similar way?

Yes and no. Conventional gilts would be ruined by high inflation. Index-linked gilts would offer a rising income with the inflation, but the eventual cash-in value on maturity would stay the same, so the final redemption would suffer, while the income wouldn't (in RPI terms anyway).