There are thousands of bond issues trading in the international markets. Sterling issues are just a small slice of this giant pie, and even within the sterling market, not all issues will be liquid or transparent.
I have put together a sample of twelve bonds and fixed income securities, broadly speaking a cross-section of the various maturities, credit qualities and features that one might expect to find. The list is by no means comprehensive, but is intended a starting point for selection or comparison. For ease of viewing, the bonds are displayed in order of maturity, with the shortest first.
Many of these bonds have featured as 'Bonds of the week' on the Investors Chronicle website
Gazprom 6.58% Oct 2013; 95.8 - 7.8% YTM.
A bond issued by the giant Russian gas producer and pipeline operator. This sterling-denominated bond is rated BBB and at current market prices offers a yield of 7.8%.
With an incremental yield of 4.8 per cent over than the equivalent gilt, the bond is good value, but sadly only available in a minimum piece of £50,000; thus, for larger investors only. Note also that this bond is not available for Crest delivery, thus only full-service brokers offering Euroclear custody accounts will be able to deal in this security.
Mark & Spencer 5.625% March 2014: 101.4 - 5.2% YTM.
The high street favourite has strong name recognition with the investing public, and is a popular choice. The bond gives a margin of 2.1% over the equivalent Gilt. Rated BBB- by Standard & Poor's, the M&S bond is available in £1,000 minimum piece.
The chart shows the price performance of this asset over the past few years. Note the sharp sell-off caused by the fear of a leveraged takeover back in 2004 and the recent credit-crunch-related sell-off and recovery.
Bank of America 5.75% Dec 2014: 96.6 - 6.4% YTM
This bond was originally issued by Merrill Lynch, and subsequently became a liability of Bank of America following the shotgun wedding between the two last year. Whilst banks have understandably fallen from favour with investors over the last year or so, this giant financial appears to be back on its feet. Rated A by Standard & Poor's, the bond offers a good margin of 3.3% over the equivalent gilt.
General Electric 5.125% Dec 2015: 96.55 - 5.8% YTM
This giant US engineering and finance conglomerate boasts a strong AA+ credit rating. This rating may come under pressure over time, but readers may remember Warren Buffet's decision to invest in the company last year via preferred stock - a strong vote of confidence from the world's smartest investor. The bond offers a good margin of 2.5% over the equivalent gilt and is available in a minimum denomination of £1,000.
British Telecom 8% Dec 2016: 107 - 7% YTM (estimated).
An interesting security with a variable coupon. Originally issued as part of a large multi-currency offering in 2001, helping to fund the group's restructuring and the massive £4 billion licence fee paid to the government for 3G mobile spectrum. At the time of issue, the £700m sterling tranche had a 7.5% annual coupon, but came with a clause that the coupon would be increased by 25bp for every notch that the rating fell below S&P's A- (or Moody's A3).
The credit rating for BT now stands at Baa2/BBB, still just investment grade but a few notches below where it was issued. As a result, the coupon has edged up to an attractive 8%. It looks set to ratchet up to 8.5% in December, providing the current low-ish ratings are continued.
The bond works well for private investors with a £1,000 minimum "piece" and good liquidity in this £700 million issue. What is more, the seven-year maturity makes the security eligible for Isas, allowing for a tax free income. On the negative side, the price of this bond has traded up a fair bit over par, meaning that holders will receive a capital loss as the bond rolls down towards 100 in 2016.
EIB 4.125% 2017: 99.6 - 4.1% YTM.
For investors looking for total security, the European Investment Bank offers a triple-A rating, by virtue of its supranational government-backed status. These bonds are liquid and make an excellent alternative to gilts, with a small incremental yield margin of around 0.5% to boot.
The minimum piece is £1,000 and the six-year maturity makes the bond eligible for ISA accounts. A good choice where complete security of capital is required.
Segro June 5.5% 2018: 83.5 - 8.% YTM
Unlike the EIB issue above, Segro is one of the more speculative credits on our list of potential holdings, and this is reflected in the comparatively high yield offered by this nine-year maturity bond.
Rated A- by Fitch. The bond has already recovered from the lows seen in the early part of this year (see chart, below). Available in minimum denominations of £1,000.
Tesco 5.5% Dec 2019: 102.725 - 5.1% YTM
The defensive nature of the company makes this bond a safe choice. This is reflected in the fairly low margin over gilts, with the bond offering just over 1% over gilts. Rated A3 by Moody's, the bond offers a sound choice for investors looking to lock in yield with comparatively low risk. Available in minimum denominations of £1,000.
Goldman Sachs 5.5% Oct 2021 YTM : 83.93 - 7.4%.
Arguably the world's premier investment bank, Goldman is now climbing its way out of trouble as the first of the Wall Street giants to start paying back the US government's financial aid.
This bond is long-dated, and importantly, subordinated, meaning that in the event of the company's bankruptcy, holders will stand further down the queue; behind the senior debt holders (although in front of the shareholders).
This subordinated status makes the bond higher risk - buyers will be taking a punt on the continuing recovery of Goldman - with the upside a yield of 7.4% over the next twelve years. The bond is rated A- by Standard & Poor's and is available in minimum denominations of £1,000.
Italy 6% 2028: 104.5 - 5.6% YTM
For very long-dated bonds, I prefer the security of a sovereign issuer. Italy comes in with an Aa2 Rating from Moody's and can be relied upon to still be around in 19 years' time. The bond trades slightly over par, but with a 5.6% yield to maturity offers a respectable 100bp over gilts.
A good choice for investors looking to lock in a return for an extended period. Available in minimum denominations of £1,000.
Lloyds 9.25% non-cumulative preference shares
Not really a bond; preference shares are a type of equity, bearing a fixed coupon. As such, the security of the investment is lower than that offered by senior debt or bank deposits - and the coupon may withheld under certain circumstances. This is reflected in the sub-investment grade rating given to the security; rated B3 by Moody's
However, the Lloyds preference share does offer the opportunity to lock in a healthy stream of income. At the current market price of 86.5, a tempting running yield of over 10% can be achieved.
Note - with any undated security, the holder is reliant on the future market price to realize his or her investment. This makes such instrument higher-risk than conventional bonds. However, this exchange-traded security is liquid and easy to deal in with a minimum "piece" of just £1.
Nationwide 7.25% PIBS 83 - 8.7% running yield
Another bond-like instruments. Pibs, or Permanent Interest Bearing Shares were issued by building societies as a method of boosting their capital.
A few years ago these instrument were considered to be as good as gold by private investors and demanded high prices in the market. Following the collapse of Northern Rock and Bradford and Bingley, prices started to fall.
Recent developments have seen the West Bromwich Building Society cut the coupon on their Pibs, further undermining confidence in this class of security.
A recovery now appears to be underway with the Nationwide issue some way up from the lows in the 60s. The nature of Pibs has changed. Once considered virtually risk free, these subordinated securities should now be viewed as a more speculative and high-yield play. With a running yield (there is no redemption date) of nearly 9%, the potential return is tempting.
The Nationwide Pibs pay coupons semi-annually in and can be dealt in multiples of £1,000. The instrument has no fixed maturity date but in 2021 the holder has the option to call the instrument at 100. Alternatively, the coupon will be reset to 3.8% over the rate then prevailing for 5 year Gilts.
