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In last week's Bond of the Week we looked at the long-dated Vodafone issue, which offered a yield of about 5.6 per cent for a 15 year bond. Sticking with the telecommunication theme, this week's feature is its sector-mate, the British Telecom 5.75 % December 2028.
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Some £600 million of these bonds were issued back in 1999 at a price of 99.83. The yield at issue was equivalent to 110bp above that available on benchmark gilts. The bond is a "vanilla" issue, with an annual coupon of 5.75 per cent, a fixed redemption date in December 2028 and no put or call features to trap the unwary investor. The bond has senior status and is rated Baa2 by Moody's and BBB by Standard and Poors, down towards the bottom end of the investment grade rank.
Holders of the bond have had a fairly exciting time, as the chart (below) shows, However, the bondholder experience has been a little less stressful than that experienced by the equity holders, whose shares went from £1 at issue to over £10 in the tech boom, and then back below £1 earlier this year.
Now trading at around 86p in the pound (mid price), the bond offers a yield to maturity of roughly 7 per cent, or 280bp over gilts. Not bad. The average corporate bond yields just over 5 per cent and by this measure, the long-dated BT is one of the cheapest senior investment-grade bonds on the list.
See other bond of the week features.
Check out our free investment guide to bonds.
Read the IC cover feature on bonds.
Long-dated corporate bonds are not everybody's cup of tea, since no-one knows what will happen to BT, the telecoms industry or inflation over the next 18 years. But it is trading below par - increasingly unusual these days - and the yield is attractive. And it's easily tradeable and eligible for an Isa. BT faces some challenges, but recent results included some severe cost-cutting and a raised dividend, which are encouraging signs. For a diversified portfolio, the BT 2028 issue makes a good addition.
Bond of the week is supplied by fixedincomeinvestor.co.uk and is subject to their disclaimer.
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