RBS Inflation Bond

redmalc

Hi ,I have recently been advised to put 50K into the above product which pays 3.9 % Gross per annum or the change in the UK Retail price index whichever is the highest.I have to say i am not up to speed with this type of product and do not understand the risks and pitfalls if there are any ? any advice would be very helpful to assist in making my mind up where to invest the funds. I have no mortgage and have utilised this years ISA allowances and also have a number of portfolios with Skandia and Fidelity together with cash holdings,i could tie the funds up for a number of years if needed.

purch

As it is a Structured Product, it is classed as an experienced investor product. You should also check if your 'adviser' is experienced enough to advise on the product.

In many ways it is similar to most fixed interest securities, except that the coupon is variable/floating with a floor of 3.9%.

It trades on the markets, so the actual price of the security will change along with market conditions.

RBPI (the inflation linked Bond) has traded between 100.43 and 99.15 since it's launch.

RBLI (the Libor linked Bond) has traded between 99.70 and 99.05 since it's launch.

Under current market conditions, on the face of it, the Bonds appear to be decent offerings if you have a need for a fixed interest (type) security in your portfolio, but want some protection against rises in inflation. However if you do not need or want this protection the 'floor' coupon of 3.9% is not particularly attractive, considering that RBS also has in issue two other fixed interest securities with coupons of 5.3 or 5.1% and which can be purchased with a GRY of slightly under 5% currently.

The main risks are:

Counterparty: There is no protection in the event of default.

Inflation:
Not going any higher, making the coupon of 3.9% uncompetitive for the product and issuer.
Only your coupon is protected from Inflation, not the capital.
The Libor linked product might not keep up with changes in RPI


Mark Glowrey has comments on these issues on his website.

http://www.fixedincomeinvestor.co.uk/x/analysis.html?cat=Analysis%20%26%20Comment&type=Bond%20of%20the%20Week&aid=526

PosterBoy77

purch wrote: »

Inflation:
Not going any higher, making the coupon of 3.9% uncompetitive for the product and issuer.

Do you have a crystal ball? I have believed inflation would be above target for a long time, but economists keep saying it is "unexpected" It seems nobody knows how high inflation could go.

JamesU

redmalc wrote: »

I have to say i am not up to speed with this type of product and do not understand the risks and pitfalls if there are any?

Risks as mentioned in detail above. Also note the buy/sell spread is 0.75%.

Currently the RBPI bond will pay in first quarter/Feb 2011 either 3.9%/4 or based on RPI, (3.6% + next 2 months RPI)/4, i.e. Dec 2010 %RPI/4.

Previous discussion on RBPI calculations and timing in link here:

https://forums.moneysavingexpert.com/discussion/comment/38115966#Comment_38115966

Also, another article discussing the RBPI here:

http://www.investorschronicle.co.uk/Tips/Buy/MiniTips/article/20101027/dbda25da-e118-11df-93a8-00144f2af8e8/Hedging-with-RBS-bonds.jsp


JamesU

purch

Do you have a crystal ball?

No.

That's why it is listed as a potential risk, not a certainty.

JamesU

Irrespective of future inflation prospects, I find it difficult to understand why an IFA would advise to put £50K into RBPI (perhaps it is a bank advisor at RBS itself?). Despite the fact RBS is I guess, 70-80% government owned, the bank has significant exposure to Irish debt (approx £4 billion at least?) and I feel there must be a significant risk of default. Investing such a large amount in a single product does not sit comfortablly with me. If the objective is to hedge against inflation, on this amount of investment, I would be happier if the advisor (IFA?) suggested options for diversifying risk across a range of inflation products rather than this single RBPI product.

Update: Newsnight 17th Nov, RBS exposure to Irish debt appears to be around 40 billion Eur!

JamesU

dunstonh

I find it difficult to understand why an IFA would advise to put £50K into RBPI (perhaps it is a bank advisor at RBS itself?).

Me too given the FSAs structured product thematic review. However, bank tied agents typically oversell structured products and many probably wouldnt even know of the FSA thematic review. That said, if the portfolio is above £500,000 then £50k in one structured product is within tolerance. If its less than £500k its not (Good practice is no more than 10% in a single structured product and 25% in multiple structured products).