Top easy bond picks

Gilt 4% 2016 (T16)

As anybody with savings knows, interest rates are low. Understandably, the return offered by gilts is also fairly modest and this five-year issue offers 2.7 per cent a year if held to maturity. What makes the bond slightly more interesting is the fact that, with a maturity of just over five years, the bond can still go into an Isa, meaning all income is received tax-free. To achieve 2.7 per cent outside a tax wrapper, a higher-rate taxpayer would need to find an asset paying 4.6 per cent a year.

Gilt 4.75% 2020 (TS20) – the 10-year gilt benchmark

This is the bond that is the most closely followed by professional traders and is worth monitoring as a bellwether for the general market. The price action since late 2008 suggests that this instrument has moved into a new range, trading between yields of 3 per cent and 4 per cent. We are currently bang in the middle of that range.

Index-linked gilts

National Savings has withdrawn its much-loved index-linked saving certificates. This means that for investors looking for a means to hedge against inflation, index-linked gilts are now the last game in town. The Treasury has recently launched a new type of index-linked floater, but for investors new to the game I would suggest the popular Treasury Index Linked 2.5% 2016 (TR16) and 1.875% 2022 (T22) issues. These bonds offer coupons and a redemption price linked directly to the retail price index (RPI).

European Investment Bank 3% Dec 2015 (EIB)

The European Investment Bank is a supranational development bank backed by the member states of the EU. As such, the organisation merits an AAA rating and should be seen as at least the equal of gilts in terms of quality. Luckily for investors, EIB bonds offer a slight yield margin over gilts (perhaps 20 basis points) and are good value for investors seeking a rock-solid asset. Trading at a slight premium to par, at 102 the bonds offer a yield to maturity of 2.6 per cent.

EIB FRN Feb 2015 (96ML)

Floating-rate notes (FRNs) are bonds where the coupon is linked to a money-market benchmark, in this case the London Inter Bank Offered Rate (Libor). These instruments are popular among banks and corporate treasurers and typically trade in huge size (tens of millions a clip). The EIB issue is unusual in that it is available in minimum pieces of just £100. With an AAA-rating, the bond is a good alternative to bank deposits and is also ideal for those investors who believe that interest rates will rise over the next few years. The coupon floats at Libor+0.1 per cent and is currently paying 0.79 per cent.

Lloyds 5.375% 2015 (LBG1)

This retail-targeted issue launched in June at par with an attractive 5.375 per cent coupon, and has quickly moved to a premium in the secondary market. Currently trading at around 105, the bond offers a yield to maturity of around 4.2 per cent. Given the post-launch rally, the bond is now no better than fair value and I would not be inclined to chase the price higher. Investors should instead watch to buy other new issues of this type.

RBS 5.1% Jan 2020 (RB51)

Known as the 'RB fifty-one', the bond was issued at par to coincide with the launch of the Orb platform last February. The A-minus-rated 10-year bond saw fairly limited initial demand and, after following the market up in the late spring, the price has slipped a little of late to around 96. At the current price, RB51 now offers fair value with a yield to redemption of 5.5 per cent, nearly 2 per cent more than gilts of the equivalent maturity. The small initial float of the issue should not hamper ongoing liquidity – as a retail-targeted issue, RBS has the ability to 'tap' the bond, issuing more paper into demand as it arises. The flip side of this arrangement is that a system of open supply may dampen any future outperformance that the bond might display.

Provident Financial 7% 2020 (PFG7)

Unsecured lender Provident Financial was another early mover onto the Orb platform, launching a 10-year bond in March of this year. The issue of the bond was unconventional in terms of its method – namely an offer for subscription, targeted towards private investors via stockbroker Hargreaves Lansdown. The 7 per cent coupon combined with an investment-grade rating proved an attractive combination and demand post-launch squeezed the bond’s price northwards. Currently trading at around 108, the yield to redemption will now be circa 6 per cent for purchasers. Even allowing for the post-launch price appreciation, the Provident Financial 'PFG7' remains one of the higher-yielding bonds on Orb, although the best of any capital gains are probably in the past.

Enterprise Inns 6.5% 2018 (47VU)

It is always tempting to look through a list of bonds and select the highest yielding member. As a method of selecting assets, I would not recommend this – you'll just end up with a portfolio of high-risk bonds. Nevertheless, a few high-yielders can liven up a safe-but-dull portfolio, and such a role could be fulfilled by this issue. A glance at the share price of this company – down from nearly 800p in 2007 to around 100p today – suggests that it's a risky proposition, and the same goes for its bonds.

They have a credit rating of BB+ and trade at a discount to par. But that makes for a yield to redemption of 9.6 per cent. It is worth noting that the bond is a debenture, with the assets secured against a portfolio of 503 pubs. So with the benefit of at least some kind of hold on the underlying assets, and a yield of nearly 10 per cent, the Enterprise Inns 6.5% 2018 makes for a tempting prospect for risk-positive investors.

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