Let's discuss... corporate bonds

aroominyork

Picking up on masonic's post, corporate bonds are also more fact-driven than equities. If a bond does not default, its income flows and capital repayment are known; if a fund manager (I would never buy an individual bond) has selected underpriced bonds with a margin of safety to cope with unexpected events, then I should do fine. Also, higher yield/junk bond funds usually have short duration, typically two to four years, so carry less interest rate risk. Equity markets, on the other hand, are more affected by psychology and, as Keynes said, can stay irrational longer than you can stay solvent. 

Linton

Dead_keen said:

aroominyork said:

There is surprisingly little discussion of corporate bonds on the forum. That surprises me, both because they comprise a huge market – higher overall market cap than equities – and because I see them as a good source of diversification and income. So I thought I’d start this thread. 

There is a sizeable contingent of people who see them as serving no useful purpose: “equities for risk and growth, gilts for safety”. There is also the view that spreads are too tight at the moment. I assume that is based on index returns, but a good actively managed fund can make up for the perceived ‘loss’; Trustnet shows 95 Sterling corporate bonds and, over the last three years, the index funds (HSBC, iShares, Vanguard) are in positions 70-75. This is very different from equities where the index funds sit mid-table or higher. 

I own four actively managed bond funds with most holdings investment grade and/or short duration. They have returned between about 8% and 16% annually over the last three years (not that I have held them all during that period). Heading into retirement, I see corporate bonds as an excellent source of income, with more options than equities and less risk. 

I thought about it and decided it was a "no" from me.  Two reasons really:

1. Corporate bonds can be thought of as a mixture of (i) interest rate risk, and (ii) credit risk.  You can replicate that by buying (i) government bonds, plus (ii) equities (because there is some a correlation between a company's ability to pay its debts and its share price).  So I am not sure that corporate bonds really help much with diversification.

2. Corporate bonds are a lot less liquid than government bonds or equities.  Most equities are traded daily.  Many corporate bonds are not traded for months on end.  Where corporate bonds are "off-the-run" (think older, staler ones), the spread between the bid and offer price gets much bigger.  That might sound esoteric but once people have got the disinfectant out to clean air conditioning unit's blades, it may be harder / take longer to convert the corporate bonds into cash for the amount you thought they were worth (compared with gilts). 

I hold a significant amount in corporate bond and other non-equity income funds for my retirement income.

You seem to be talking about individual corporate bonds rather than corporate bond funds. Relatively few corporate bonds are available to small private investors as they are normally traded directly in large tranches between institutional investors rather than being dealt on the open market like shares. So a private investor must use funds to access them.

 Corporate bond funds make most sense if one wants long term income using minimum capital. Once bought the capital value becomes irrelevant since there is no intention to sell. In theory a fund could steadily lose value and disappear over time but this does not seem to happen in practise with funds retaining a fairly constant long term value over decades.

I am somewhat bemused by the concept of “older staler” bonds. Can you explain? Surely a bond continues paying the specified interest unless the issuer goes bust at which point the bond becomes valueless.

chiang_mai

The Vanguard Global Corporate Bond Fund was recommended earlier but I believe this is denominated in USD. A GBP based alternative that appeals to me is the Blackrock 1-10 year coporate bond fund which has smilar attributes.

https://global.morningstar.com/en-gb/investments/funds/0P0000WGSV/portfolio

Dead_keen

Linton said:

I am somewhat bemused by the concept of “older staler” bonds. Can you explain? Surely a bond continues paying the specified interest unless the issuer goes bust at which point the bond becomes valueless.

Have a look at this from April 2025: https://www.ft.com/content/ef86ccae-bcbf-4975-bb23-d1a39b7523df

Linton

Dead_keen said:

Linton s

I am somewhat bemused by the concept of “older staler” bonds. Can you explain? Surely a bond continues paying the specified interest unless the issuer goes bust at which point the bond becomes valueless.

Have a look at this from April 2025: https://www.ft.com/content/ef86ccae-bcbf-4975-bb23-d1a39b7523df

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aroominyork

chiang_mai said:

The Vanguard Global Corporate Bond Fund was recommended earlier but I believe this is denominated in USD. A GBP based alternative that appeals to me is the Blackrock 1-10 year coporate bond fund which has smilar attributes.

https://global.morningstar.com/en-gb/investments/funds/0P0000WGSV/portfolio

The Vanguard fund is available hedged to and priced in Sterling https://global.morningstar.com/en-gb/investments/funds/F00000ZQ4V/portfolio. Both those funds (Vanguard and Blackrock) are mostly a mix of A and BBB. Vanguard's (according to Morningstar) has a weighted coupon of 4.13%; Vanguard's UK Investment Grade Bond Index Fund (https://global.morningstar.com/en-eu/investments/funds/F000001W0U/portfolio) has 30% of holdings in AAA and AA yet a coupon of 4.41%, ie higher than the lower quality global fund. Maybe that is down to the UK's base rate being a bit higher than the Fed's (I am sure masonic et al will correct this).

Linton

aroominyork said:

chiang_mai said:

The Vanguard Global Corporate Bond Fund was recommended earlier but I believe this is denominated in USD. A GBP based alternative that appeals to me is the Blackrock 1-10 year coporate bond fund which has smilar attributes.

https://global.morningstar.com/en-gb/investments/funds/0P0000WGSV/portfolio

The Vanguard fund is available hedged to and priced in Sterling https://global.morningstar.com/en-gb/investments/funds/F00000ZQ4V/portfolio. Both those funds (Vanguard and Blackrock) are mostly a mix of A and BBB. Vanguard's (according to Morningstar) has a weighted coupon of 4.13%; Vanguard's UK Investment Grade Bond Index Fund (https://global.morningstar.com/en-eu/investments/funds/F000001W0U/portfolio) has 30% of holdings in AAA and AA yet a coupon of 4.41%, ie higher than the lower quality global fund. Maybe that is down to the UK's base rate being a bit higher than the Fed's (I am sure masonic et al will correct this).

I dont see much attraction in 4-4.5% initial interest from corporate bonds when you can get that plus an expectation of capital growth plus an expectation of an increase in £ terms over time from an equity income fund. 

aroominyork

Linton said:

aroominyork said:

chiang_mai said:

The Vanguard Global Corporate Bond Fund was recommended earlier but I believe this is denominated in USD. A GBP based alternative that appeals to me is the Blackrock 1-10 year coporate bond fund which has smilar attributes.

https://global.morningstar.com/en-gb/investments/funds/0P0000WGSV/portfolio

The Vanguard fund is available hedged to and priced in Sterling https://global.morningstar.com/en-gb/investments/funds/F00000ZQ4V/portfolio. Both those funds (Vanguard and Blackrock) are mostly a mix of A and BBB. Vanguard's (according to Morningstar) has a weighted coupon of 4.13%; Vanguard's UK Investment Grade Bond Index Fund (https://global.morningstar.com/en-eu/investments/funds/F000001W0U/portfolio) has 30% of holdings in AAA and AA yet a coupon of 4.41%, ie higher than the lower quality global fund. Maybe that is down to the UK's base rate being a bit higher than the Fed's (I am sure masonic et al will correct this).

I dont see much attraction in 4-4.5% initial interest from corporate bonds when you can get that plus an expectation of capital growth plus an expectation of an increase in £ terms over time from an equity income fund. 

The riskier the credit rating and the shorter your duration the more you can consider corp bonds a replacement for part of your gilts. Comparing higher quality bonds with equities is changing your asset allocation quite fundamentally. I take your point about equity income funds (which I hold in the UK and EM), but you are more likely to have a prolonged period of flat/negative growth with equities than with bonds, and equities that yield c.7% takes me into territory that doesn't greatly interest me (although I do own DEM which isn't far off).

I would have much less interest in bonds if it were not for capital growth potential. Over the last three years my two short duration funds have averaged 2.5% pa capital growth, and my two meatier ones have averaged over 7%. You should not only look at yield when buying corporate bonds. 

Dead_keen

Linton said:

Dead_keen said:

Linton s

I am somewhat bemused by the concept of “older staler” bonds. Can you explain? Surely a bond continues paying the specified interest unless the issuer goes bust at which point the bond becomes valueless.

Have a look at this from April 2025: https://www.ft.com/content/ef86ccae-bcbf-4975-bb23-d1a39b7523df

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Linton

Dead_keen said:

Linton said:

Dead_keen said:

Linton s

I am somewhat bemused by the concept of “older staler” bonds. Can you explain? Surely a bond continues paying the specified interest unless the issuer goes bust at which point the bond becomes valueless.

Have a look at this from April 2025: https://www.ft.com/content/ef86ccae-bcbf-4975-bb23-d1a39b7523df

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Thanks - the article is talking about trading corporate bonds, which seems to be easier in the US than the UK, and that some of those bonds are rarely traded and so don't change in price.  Therefore they are of no interest to traders. However they would still be generating the same interest they always did. Trading corporate bonds for profit is a very different scenario than using corporate bonds for income.