Bond Watch: blockchain bonds, equity alternatives, and better cash returns

Sam Benstead breaks down the latest news affecting bond investors and income seekers.

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

• Invest with ii: Investing in Bonds | Free Regular Investing | Open a SIPP

Here’s what you need to know this week.

Equity manager adds bonds

An equity investment trust has spotted an opportunity in fixed income, as rising bond yields offer genuine alternatives to shares.

Polar Capital Global Financials (LSE:PCFT) has been buying corporate bonds that yield between 8% and 12%. The trust has 7.5% invested in fixed income as of the end of January 2023, compared with just 1.8% 12 months before.

Rising bond yields are giving investors more choice about where they put their money. With the economic outlook uncertain due to rising inflation and interest rates, locking in a fixed return from bonds could be a savvy move.

• Bond Watch: bond yields rise despite inflation drop off
• Benstead on Bonds: where to find the best yields in 2023

If held to maturity, then there is no “duration” risk, which refers to the impact on bond prices from changing interest rates. There is, however, a “default” risk as companies could fail to deliver on their coupon payment obligations.

The trust yields 2.8% and counts JPMorgan, Chubb Ltd (NYSE:CB) and Bank of America Corp (NYSE:BAC) as its top stocks.

Bonds on the blockchain

Siemens (XETRA:SIE), the German industrial giant that has been going since 1847, has issued a blockchain-based “digital” one-year €60 million bond.

Blockchains are the digital ledgers that underpin cryptocurrency networks. They allow for peer-to-peer trading of assets – in this case a bond on the Polygon network.

Miriam B Hehir, credit research director at M&G Investments, said: “Software coding creates a series of smart (automated) contract capabilities to handle secure and decentralised transactions.

“It facilitates direct bond offerings to investors without the need for a traditional financial (‘TradFi’) institution or central clearing. Disintermediation benefits for issuers like Siemens include lower cost, higher transparency, and increased speed of execution and settlement.”

However, she notes that the absence of a digital euro means that investment in Siemens’ new bond, and coupon payments, involves classic bank transfers for now, so is not absolutely digital yet.

Increased interest on cash at ii

Rising interest rates at the Bank of England and higher bond yields is leading to increased cash returns for interactive investor customers. 

For ISAs and Junior ISAs, ii will pass on interest of 1.25% gross on cash balances up to £10,000. On the value over £10,000, ii will pay 2.25%.  This compares to the current rate of 0.75% on the first £10,000 and 1.75% on balances over £10,000.

• Where pro fund buyers are investing their ISAs this year
• Active or passive: the ultimate guide to investing your ISA

For SIPPs, interactive investor will pay 1.5% gross on cash balances up to £10,000, and 2.5% gross on the value over £10,000. This compares to the current rate of 1% on the first £10,000 and 2% on balances over £10,000.

For trading accounts, interactive investor will pay 1.10% gross on cash balances up to £10,000 (up from the current 0.50%), and 2.10% gross on the value over £10,000, up from the current 1.50%.

These changes will be active from 1 March 2023. They are the fifth increase since July 2022, with the last having been just a month ago.