7th Apr

Retail Bonds, Remember Them?

‘….And you thought that we were faking, that we were all just money making…..’

Retail Bond Expert’s Mr Bond looks back wistfully at the hopes and expectations for the London Stock Exchange’s Order Book for Retail Bonds – and perhaps to his days in bond-age trousers!

Retail bonds or, more accurately, corporate bonds issued in small denominations, were greeted with a fanfare of approval in February 2010, when the Royal Bank of Scotland launched the ‘Royal Bond’, a 10-yr 5.1% bond. 

Mr Bond observes, somewhat cynically that, ‘as RBS was nationalised a year earlier this could be viewed as either incredibly cheap funding for a bankrupt business, or a 10-yr ‘Gilt’ with a yield pick-up’. 

Take your pick, it kick-started what became know as the Order Book for Retail Bonds (‘ORB’), the LSE listing for these securities. The halcyon days for issuance on ORB were 2011 and 2012 when there were circa 23 new issues, almost one a month. 

Since then issuance has declined, last year there was hardly any issuance and no new issuers to the market, this year there has been no issuance other than a US$ issue from Burford Capital. Mr Bond wonders just now many actual retail investors bought that one? Is there any point picking over the corpse that appears to be what is left of ORB, and asking why there are so few new issues? 

It’s all been said before; too expensive in terms of legal fees to issue a bond; the banks have returned to the market and offer cheaper funding with no execution risk; regulators became overly protective and issuers found it too difficult. 

Some issuers are still trying evidenced by the aborted issues from Blue Zest and Select Property Group;  up to £400,000, possibly more, was spent by these firms only to find out the market didn’t want their business in that form, at that time. There is a shadow market with overseas listings, and mini-bonds, both of which Mr Bond has commented on before and concluded that some, perhaps many, are the ultimate leap of faith, or a gift from Spectre to unsuspecting investors.

So, where does this leave the retail investor who is still seeking yield in a prolonged period of historically low interest rates? 

Basically, nowhere………ORB is rather like an exclusive gentleman’s club where one black ball stops a prospective membership application, unfortunately it appears to be blackballing itself out of existence. 

Are there options for those seeking yield? 

Well there are fixed income ETFs, and funds, both subjects for other writers to opine on. 

There is still NS&I, even ORB’s secondary market has some ‘fallen angels’ such as Eros, and Enquest for those fancying a flutter. 

Or,is the bond bull market really over? The end of the bond bull market has been called before. Last year, many analysts predicted doom and gloom, instead, global fixed income enjoyed its best year in a decade, returning 7.4% to investors in the Bloomberg Barclays Global Aggregate bond index But then we have rising Inflation. 

Typically, inflation is the enemy of bond investors as, if market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise as the prices of their bond holdings decrease. Some commentators are saying sell bonds and buy risk assets (equities to you and me), but then, confusingly, others are saying that stock markets are overvalued, and the bull market is overdue a ‘correction’ (code, for it going down).In short, everyone has an opinion, the problem is that most are contradictory. 

Where would Mr Bond turn for income? 

ORB still offers the best access for investors seeking yield, yes, they are low but then so are benchmark rates, in the UK  


  • *   2-yr Gilts yield circa 0.86%, and
  • *   circa 1.55% over 10-yr.

Investors should, perhaps consider the following: 

1. The spread they are earning over the benchmark, e.g. an ORB listed bond issued by BT which matures in March 2020 yields circa 1.4%. That equals an extra 0.60% for holding BT bonds 

2. Interest rates are expected to rise, in which case traditionally people either buy inflation-linked bonds (‘linkers’), or shorter duration bonds.

  •   - Given that ORB listed linkers are trading at very high premiums this isn’t a viable alternative
  • - Short-dated issues, perhaps those maturing within 5-yrs (2023) are an option.Looking at ORB there are several trading close to 3%, this excludes the ‘fallen angels’; please refer to point 1, this is still a spread over Gilts

3. Think in terms of ‘real returns’ not absolute returns; by real returns for income seeking investors, we refer to the yield less the rate of inflation.   The Consumer Prices Index (CPI) 12-month rate was 3.0% in January 2018, unchanged from December 2017. Any bond yielding 3%, or more, will buy you more goods and service than it did a year ago  

Now, in summary all of this may sound rather hopeless; no new issues to satisfy your need for yield; mixed messages from the markets. 

However, we are where we are, rates are low and will continue to be even when they ‘normalise’, get used to it - maybe 4% is the new 10%. 

As an example, I was reminded of the 1983 film, Trading Places, included in the cast was an entrepreneurial prostitute played by Jamie Lee Curtis who had saved up $42,000 in US Treasury bills. She calculated that with the accruing interest from the bonds she could retire after a few more years on the job. 

Given today’s low rates readers might be surprised that a modest portfolio of short term, ultra-safe loans to the US government could ever yield a big enough bonanza to retire on. However, at that time the three-month T-bill yield averaged nearly 9%, compared to 0.7% average of the past decade. 

To put this in context, Trading Places-era bills would double your money in less than nine years. At today’s yield it would take more than half a century. 

Oh, and one last thing, a wise man (Mark Twain) once said, ‘I am more interested in the return of my money than the return on my money’.

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