This will sadly be my last Bond of the week for the Investors Chronicle. A new job in the City is in the offing for me, and with this will come new responsibilities.
I first contributed to the IC on this subject in 2007. My view at the time was that bonds were an under-utilised asset for the private investor. Although the advent of the internet and discount broking, combined with the growth of SIPPs and ISAs has greatly expanded the activity of self-directed investors in shares, bonds had yet to become part of these portfolios for the vast majority of UK investors.
The column kicked off in the pre credit-crunch days of 2007, when ten-year gilts yielded just over 5 per cent, and corporate bonds yielded not much more - perhaps 5.5 per cent to 6 per cent. There have been some changes since then. The effect of the credit crunch, and the government and central bank response to the crisis has been to slash interest rates ever lower. The UK has now experienced base rates stuck at a record low of 0.5 per cent for over three years.
As rates fell, investors raced to lock in low yields, an effect that was exacerbated by the BoE's quantitative easing program and inflows of capital from the less secure European government bond markets. With falling yields came rising prices, and an investor buying a ten year gilt in 2007 will have experienced capital gains of 20-25 percent in addition to the income received.
Corporate bonds have had a rather bumpier ride than gilts. While the falling level of interest rates has been broadly beneficial for these fixed income securities, investors have been wary of taking credit risk, particularly in banks and other financial sector bonds. Here, risk aversion reached a virtual frenzy in late 2008, enabling some courageous investors to pick up some bargains. The chart shows the
What next? I have little reason to change my core outlook on the sterling fixed income markets, namely that policy interest rates will remain low for some time to come. Providing that the government can keep a lid on the deficit, the low short-end interest rates are likely to keep gilt yields low.
But what of corporate bonds? Here the situation is likely to remain fluid. High quality names will remain in demand and offer surprisingly low yields. More speculative issues will remain volatile – and on this point subordinated bank debt is once again trading lower ahead of the uncertainty of the Greek elections. Once again there are opportunities for risk-positive investors.
Another important aspect for private investors is the resurgent new issue market for "retail bonds". With the banks suffering from shrinking balance sheets and rising cost of funding, bank loans are less viable as a source of funding for industry. The income-hungry private investor can help fill this gap. We are now seeing good quality bonds from companies such as Tesco Bank, National Grid, Places for People and Provident Financial targeted to the private investor, launched on the London Stock Exchange's ORB platform. Effectively, the banks are being cut out of their traditional role; to my mind, this is a healthy piece of disintermediation.
Readers will be left in good hands. Jonathan Eley and Julian Hoffman will be continuing to cover the bond markets for IC readers. I have no doubt there will be further opportunities to come.