Bank bonds have been on the back foot ever since the credit crunch began. But the clean bill of health awarded by the US Federal Reserve to 15 US banks recently marks another step in their rehabilitation. The central bank declared that the majority of these institutions have ample reserves and are free to pay dividends. That's clearly good news for equity investors, but it's also a fillip to bank bondholders.
Not that you'd know it from the price action. The sector is still unloved. That's partly because traditionally, the biggest buyers of bank debt have been the banks themselves - but with the industry shrinking its balance sheet, this mutually-beneficial habit has diminished. Add in investors' re-evaluation of the risk in the sector and it is no surprise that bank debt is still trading at considerably wider margins than the historic average, even allowing for the improvement seen over the last few months.
So that means there is value still to be had in senior bonds, even if it is becoming increasingly marginal. Take the point of the Lloyds 5.5% Sept 2016 senior bond issue. This bond was launched at par this time last year. At the time, the 5.5 per cent yield-to-maturity offered an incremental yield of 2.7 per cent more than gilts of an equivalent maturity.
LLOYDS BANK 5.5% 25 Sep 2016 ISIN: XS0604804194 | |||
| Price: | 104.76 | Yield: | 4.3% |
| Maturity: | Sep-16 | Piece: | £1,000 |
| Coupon: | 5.50% | Credit rating: | A |
| Payment: | Semi-annual | Issue size: | £150m |
Since then, the gilt market has rallied and this has dragged the Lloyds 5.5% 2016 along in its wake. The price has risen to 104.75p and the yield has dropped to 4.3 per cent.
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