Investec Prefs - Bond of the Week

Thanks for an interesting idea.

Things not to like include the huge bid/offer spread, as implied by the illiquidity highlighted in Oliver's article. Also, the shares have improved a lot in price of late, leaving less upside for late arrivals. Not to mention volatility, which leaves an investment here vulnerable to correction, should unforeseen developments occur. There is no getting away from individual stock risk here and unlike with bonds, no promise of an escape route on redemption on a fixed date some way down the road.

Nonetheless, floating rate note instruments such as this are as rare as hens' teeth so far as the retail investor is concerned. Oliver is suggesting that interest rates can only rise from here and how can one argue?

As somewhere to park some cash for the medium to longer term - as a means of protecting a small proportion of capital in a widely invested portfolio - I can see that this idea makes sense.

Comments

  • There has obviously been some interest as the price has ticked up to £4.50 on the LSE website. I've been holding inflation linked bonds as a hedge against rising interest rates in the future so this alternative piqued my interest. Agree about the bid/offer, not sure why it is so large given the issue size seems to be £151 million. Presumably nobody is selling. It has had a good run up recently although pre credit crunch the price peaked at over £6.00
  • Price is now £4.60, so I think the "horse has now bolted from the stable". However very interesting write up, which could be worth investing once the yield approaches 3.5% (Price £4.28) at the current bank rates. As with Frugal, been holding inflation linked bonds, namely RBPX & RBPI, which both have seen gains in the last two months. However since their issue, the prices go up & down like a roller coaster. Will review when the professionals (Institutions) believe the UK will enter a deflationary period, like most of Southern Europe, including Spain, as they attempt to become competitive once again within industry.
  • As I don't at all believe in the published rates of inflation, there's little chance that I'd be investing in an inflation linked bond. Now if they were linked to the "real" rate of inflation, I would be filling my boots!
  • Shotgun, interestingly the coupon the Investec Preference Share is not based upon Inflation figures (CPI/ RPI) , but upon the views / actions of the current Bank of England’s new Governor, Mr Mark Carney & his team, that is for Bank of England “Base rates”.
    With MarkIT Eurozone retail PMI (released today) not looking very good, and the high number of IPOs, in particular in the USA, I’m getting a bit “twitchy” (Twitter) as to whether the equity markets may get a sudden downwards adjustment?
    Not sure, how this would affect the ORB bond market? Any comment?
    ps Agree that RPI is not "real rate" of inflation, far from it.
    Investec now at £4.65 (purchase price)
  • Any serious sell off would almost certainly result in a wobble in the ORB market. I think there's something of a liquidity problem in the ORB bond market and so any nervousness can quickly be amplified.
    I went into ca 40% cash a few weeks back and rotated some other investments into the ishares silver & gold etcs. I'm hoping that continued dollar weakness will send those investments north! (Good start so far) I decided to wait until ca January to reconsider.
    On the other side of the coin, with no end in sight to QE and the massively oversubscribed post office sell off indicates that there's an awful lot of cash out there looking for a return. Perhaps the markets still can edge up a bit yet. Historically, the last few months of the year are normally good for the markets.
  • The other big negative looming up is the significant bad debts on the banks balance sheets
  • Normally November and December are good months for stock markets, yet I too am feeling a little twitchy and have started selling and redistributing into a more defensive posture with cash remaining on hand.

    I have been partly influenced by the fact that we are at / near all time highs in the US and UK stockmarkets and there have been a number of profit warnings and less enthusiastic outlooks recently.

    Time to sell ORB bonds? I am certainly considering it.
  • It never feels right to be in cash when there is nothing to show for it.
    However, when the lack of new issues allows below investment grade to get away with 5 -6% coupons (even less in Euros) then cash or 3% for no risk issuers are surely the better option.
  • Shouldn't really sell just because stock markets are at a high. After 13 years they have to make new highs at some point. Who knows, we could be on the verge of a period of 13 years where the stock market makes good gains.
  • Frugal: the figures need to be inflation-adjusted. Cf. http://www.retirementinvestingtoday.com/2013/11/valuing-ftse-100-november-2013.html?showComment=1383504194290. According to this blog, the FTSE 100 is 27% below its high of 9273 in October 2000.
  • Price at writing: 480. Is this a spike by any chance?
  • Good point re inflation. There are also dividends to factor in as part of the total return which he touches on but doesn't give all the data.

    Interesting to see the power of bond of the week. The volume traded and price of this has been amazing since it got a mention. Monthly trades for the last year were around 20 max 40, and October is suddenly 100 with almost all in the last week. Should have bought some for a quick profit rather than a hedge against rising interest rates!
  • Fair point re total return - I would say that is what matters, but the daily price is the one that attracts attention.
  • Price is now 488, giving a running yield of 3.07%.
    Are investors going for this preference share in the knowledge of several more years of ultra low yields (with latest Euro rate reduction, due to the fear of deflation), or because of higher "medium term" inflation within the UK?
    or perhaps just a short term capital gain punt, because there are few new ORB bond issues?
  • I do often wonder if we should just spend all the dough! Now let's see, a new car, a holiday in the Bahamas ....... We can't take it with us, perhaps we should just knock it out. THEY will inflate it away, tax it or confiscate it one way or the other anyway. :(
  • One should indeed. Otherwise just wait until Milliband & Co get their hands on it. Same risk applies to home equity, whilst bond investors, now snapping up CCC credits at less than 7% as seen in Euroland, have only themselves to blame.
  • However, with Euroland gradually entering "deflationary" quick sand, and with the UK too close escape it's effect, 6% coupons could become the norm for many years to come. No doubt inflation linked securities will price down-wards!
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