The Bonds are Back in Town

The historically low interest rates of the last decade have kept many investors out of the fixed income markets. However, in recent months we have seen consecutive interest rate hikes meaning that bond yields are becoming more attractive to investors once again.  

In many ways a bond is similar to a loan or deposit, a commitment to repay the money borrowed to an investor with regular interest payments throughout the duration of the bond. At maturity the bond issuer reimburses the investor for their principal investment and final interest payment.  

Bond terms to know: 

• Issuer: The entity that has issued the bond and is in effect the borrower or the investment counterparty. Companies, banks and central and local governments are the main types of issuer. 
• Coupon: This is the bond's interest rate that is payable by the issuer on the face value.  Coupons can be either fixed or floating, i.e. set at a constant margin above a reference rate such as SONIA. 
• Yield: This is a way to calculate a return that accounts for the varying price movements of bonds. The most straightforward (but not the most accurate) technique is to calculate the running yield by dividing the bond's coupon by its current price. The more accurate yield to maturity (YTM) is the internal rate of return required for the present value of all the future cash flows of the bond (face value and coupon payments) to equal the current bond price. YTM assumes that all coupon payments are reinvested at a yield equal to the YTM and that the bond is held to maturity. 
• Face value, also referred to as "par value," is the amount the bond is worth at the time it is issued. 
• Price: This is the price the bond would cost on the secondary market. The greatest elements influencing a bond's current price are the creditworthiness of the issuer and how favourable the coupon is in comparison to other bonds of a similar type. Interest rate and inflation expectations also play a big role in influencing bond prices. If interest rates rise, then the price of bonds will fall. 

Bonds come in many shapes and sizes, ranging from very risky “junk bonds” to High Quality Bonds which have a very low risk of default and receive higher ratings from the credit rating agencies and the flip side is that higher quality bonds have a lower yield than riskier bonds.  

Including fixed income products such as bonds in your investment strategy allows you to help diversify your investment portfolio while providing a steady stream of income and reducing some volatility you might experience with other asset classes. Rates of return of bonds are becoming much more competitive as short-term bond yields continue to rise.  

Given broader global uncertainties around future economic growth, bonds can be a good diversifier as part of a wider portfolio. It is possible that slower global growth will mean that some of the rate hikes assumed by markets won’t be realised, particularly as it looks like we may be near the peak of inflation, if it has not already peaked. Given the speed of the market move, and the comparatively weak returns elsewhere in the market, we truly believe this has opened several attractive opportunities to invest in bonds. It is for these reasons that bonds are back in town.

What Arlingclose offers you?  

At the end of every month, we offer all professional clients a high-quality bond pack as well as publishing a list of covered bonds as part of our UK and Non-UK Counterparty Packs.  

Arlingclose also offer due diligence on all bonds, as well as other bespoke services such as investment strategy reports, interest rate forecasting, relative value reports and more.  

If you are interested in any of these services, please email info@arlingclose.com.  

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