Retail Bonds - Caveat Emptor

Retail Bonds: In a world of pathetically low interest rates for savers, the hunt for yield has led private investors to seek out new opportunities. Retail bonds have been a success story on the back of that, with numerous offerings from well known (and not so well known) corporate issuers. The LSE is now running an electronic trading book, allowing investors to buy and sell these retail bonds more readily. There are certainly some attractive yields on offer, but I have concerns that some investors might not realise that their capital is at risk in the event of an adverse corporate development. For example, Tesco issued a 5.2% 2018 bond in 2011, which had by May 2014 reached a price of £108, for a running yield of 4.8%. However, the recent travails at Tesco have seen the price drop to £102, leaving recent buyers nursing a capital loss. Of course initial investors at par will still be showing a profit, but that assumes that the credit risk at Tesco does not deteriorate any further. Another example would be Paragon Group, the mortgage company. Its fortunes have fluctuated with the UK housing market over the years, so life is good right now. But it hasn’t always been that way, with the most recent tough patch being through the sub-prime banking crisis. The 6.125% bond matures in 2022 and at £102 is a running yield of 6%. But it strikes me that backing the UK housing market through to 2022 is not a ‘gimme’ and there is an element of capital risk. So if you are prepared to monitor and trade these bonds, then that is fine, but a buy and hold strategy could leave you exposed to surprises. They are not deposit accounts. (8th October 2014)

 These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

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