National Grid launches first ever inflation-linked retail bond

dach

http://www.citywire.co.uk/money/national-grid-launches-first-ever-inflation-linked-retail-bond/a523697?ref=citywire-money-latest-new

an alternative to ns&i

will they be easily available, if so how??

Sceptic001

Looks interesting. Looks like they will be trade-able like any other corporate bond.

PS. I can't make Citywire website work, here's another link...
http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=4508166

Ark_Welder

These retail corporate bonds are not directly comparable to NS&I or any other cash accounts. You could lose 100% of your money and have no recourse to FSCS - not a likely event, but still possible. You could also get back less than your original investment if you bought or sold in the secondary market.

The Cirywire article is incorrect in one respect: the coupon is not 1.25% + RPI, it is 1.25% adjusted by RPI. But, your original capital will also be increased by RPI, and in the event that there is deflation over the 10 years there is a floor of par value.


Prospectus: http://www.rns-pdf.londonstockexchange.com/rns/6028L_1-2011-8-2.pdf

Final Terms: http://www.rns-pdf.londonstockexchange.com/rns/1536O_1-2011-9-13.pdf

Read the risk factors...

[Edit] P.S. Graded BBB+, so investment grade, although a low rung.

BLB53

This is pretty much a 'no brainer' for anyone seeking inflation proofed income.
The withdrawal if NS&I bonds last week, will mean there is a lot of demand for this type of issue.
If you take the view that inflation is likely to persist for the foreseeable future, the returns on this product will be very tasty.
If inflation falls away, there is a floor as the bond will return par at maturity.
Certainly one to tuck away in the isa imho.
The other positive - its not a bank!

BLB

opinions4u

I assume there's a tax liability on the return, so stocks and shares ISA would be the way to go.

So factor in taxation if outside ISA, falling inflation (especially after the VAT rise drops out of the equation in January), provider risk / lack of FSCS protection, outlook for interest rate rises and then make your decision.

purch

The withdrawal if NS&I bonds last week, will mean there is a lot of demand for this type of issue.

As this security is completely different from any NS&I Bond, and is aimed at a totally different (and more sophisticated) investor, I would hope not :eek:

Sceptic001

opinions4u wrote: »

I assume there's a tax liability on the return, so stocks and shares ISA would be the way to go.

[STRIKE]Not necessarily. The tax implications are quite interesting.[/STRIKE] Because the coupon is low (1.25% + RPI increases) compared to a typical corporate bond return of around 5%, income received is low and the main return is the increase in the [STRIKE]capital[/STRIKE] value of the bond (assuming inflation is greater than zero, of course). [STRIKE]So it might be of interest to higher rate taxpayers who can make use of their CGT allowance on redemption.[/STRIKE]

NB. Ark Welder's subsequent post #18 indicates that HMRC will regard this bond as a "deep discount security" thus making the gain on redemption liable to income tax.

spenderdave

The big drawback is that it is a 10 year bond, maturing in 2021. You won't get the RPI indexed capital until then. For those of us within a couple of years of retirement it really is not that appropriate.

BLB53

There's an article in todays Telegraph under the business/finance tab

SnowMan

BLB53 wrote: »

There's an article in todays Telegraph under the business/finance tab

Link to the article. Although it contains some obviously weak analysis such as

There is currently not a single savings account available that beats RPI at 5.2pc

My own random thoughts are as follows:

The best comparator to this product are index linked gilts.

The difference is that index linked gilts are guaranteeed by the government whereas the National Grid product relies on National Grid being up and running in 10 years time.

So clearly you would expect a premium on the National Grid product which is there. If we remember Railtrack let's not forget that this sort of company isn't certain to remain solvent.

Last time I checked the yield on index linked gilts was about RPI + 0% (haven't checked recently). Attractiveness of index linked gilts has been low for individuals because there is a big demand from institutions looking to match inflation linked liabilities taht seems to have pushed down returns.

It is quite a long term product 10 years, too long for many. Of course if the expectations for inflation over the next 10 years reduce then you will have to sell at a loss to get out early.

As already mentioned may be of some use for those who haven't used up the investment part of their ISA allowance (but have used up their cash ISA allowance) as it gives a guaranteed real return for those who buy at launch (assuming it can be purchased at face value at launch and ignoring broker fees), subject to the cliff edge risk that National Grid goes bust.

It was interesting that some of the other inflation linked SAVINGS products have for some time looked better value than index linked gilts and without fully checking they may still be obviously better than the National Grid product allowing for the risks.

It may be the ISA-bility of the National Grid product that might make it attractive to a small niche of investors who have used their cash ISA allowance but not their investment ISA allowance, when compared with the alternative of a taxed SAVINGS inflation linked product.

Ark_Welder

Another unkown are future rates of taxation, which could have an unknown impact on returns outside an ISA or SIPP.

Talking taxation, is anyone able to definitively state what the tax treatment will be upon any gain - either at or before redemption? My reason for asking is that I have read an opinion that any gain might be taxed as income, but no reasons have been given - and the answer isn't as simple as 'it's a Qualifying Corporate Bond'. I've started to have a flick through the relevant HMRC documentation, but......[pick the smiley of your choice!]


Thanks