The last couple of weeks have seen the gilt market drift lower, with investors perhaps more bullish on the prospects for economic recovery both here and abroad. Equity markets have responded positively, but bond markets have suffered, with investors mindful of both the prospects of inflation and the current monetary largesse coming to an end.
Ten-year gilt prices are now four points below their October peak. Longer-dated corporate bonds have also been drifting lower, matching the gradual increase in yield.
However, for long-term investors, lower prices in bonds represent a buying opportunity, offering the chance to lock in a decent yield to maturity.
With this in mind, take a look at the Vodafone 5.625 per cent Dec 2025, a long-dated issue originally launched in 2003. The price at launch was 98.92, offering a spread of 98 basis points above the yield then available on the benchmark gilt of equivalent maturity. This Vodafone bond is senior, and rated A1 by S&P and Baa1 by Moody's. This is a reasonable investment-grade rating for a telco, and a couple of notches above the BBB rating given to sector-mate BT. Private investors will also be glad to know that the bond is available in a handy minimum "piece" of £1,000.
This is a long-dated issue, so price volatility will be greater than for short-dated bonds; a one percentage-point shift in yield will translate to a ten-point movement in price. And it is interesting to note that this bond yields slightly less than Vodafone shares. This is historically unusual, and suggests that the market has at least some doubts regarding the sustainability of the equity dividend payment.
| Price | 99.0 | Yield | 5.64% |
| Maturity | Dec 2025 | Piece | £1,000 |
| Coupon | 5.625 | Credit rating | A1 / Baa1 |
| Payment | Annual | Issue size | £250m |
See other bond of the week features.
