Bond Watch: treat this 12% retail bond with caution

Sam Benstead breaks down the latest news affecting bond investors.

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.

Here’s what you need to know this week.

• Learn about: How Bonds & Gilts work | Free regular investing | Buy Bonds

Retail bond issue pays 12% interest – but be careful

Investors will be given the chance to purchase a bond yielding 12%, as a company takes the rare step of tapping UK DIY investors for cash.

The fixed-rate bond, which will be traded on the stock market, is being issued by International Personal Finance, a “subprime” lender that operates in Eastern Europe. It matures in five years.

The offer closes on 6 December 2022 – but think hard before putting your money into such a bond. If something sounds too good to be true, then it probably is. And a 12% annual return fits into that bucket for me.

• Personal Assets Trust sells shares as ‘bear market has room to run’
• Why bonds are back as a diversifier despite rate rises

There is a long history of bonds marketed to retail investors from companies that do not pass the sniff test. Holders of bonds from rugby club Wasps are still waiting on their capital to be returned, and the “burrito bonds” issued by Chilango got burnt after the fast-food chain went into administration.

For investors who want high yields from the bond market, they are best served by a professional fund manager. For a fee, an expert bond manager and a team of analysts will pick the bonds they deem the most creditworthy. Fund sectors to consider that invest in the riskier end of the market, so therefore offer higher income, include emerging market debt, high-yield and strategic bonds.

Bonds are back in fashion           

It’s the time of the year when fund managers begin to issue their forecasts for 2023, and for a change, bonds are being heavily tipped. Higher yields and the expectations that central banks will get a grip on inflation and stop rate rises early next year, and then even begin to cut rates, is driving this optimism.

To name just a couple, HSBC Global Private Bank said: “We are rebalancing towards bonds ahead of peaking interest rates. We think short maturities are the place to be, as they incorporate almost all of the rate hikes we expect to see, while extending duration would increase volatility without giving investors much more yield.”

• Bond Watch: markets happy, but Autumn Statement hurts households
• Benstead on Bonds: historic gilt collapse is a classic ‘blood on the streets’ moment
• Benstead on Bonds: why fixed income can become defensive again next year

UBS, meanwhile, said investors should seek “income opportunities”, such as investment grade US corporate bonds, which yield about 5%. Morgan Stanley released research entitled “why smart investors will look to bonds in 2023”, arguing that bond yields, while below inflation today, could be above the inflation rate in 2023 if inflation falls, as they forecast.

Its wealth management chief investment officer Lisa Shalett said: “Bond yields have meaningfully increased, providing investors [with] an opportunity to earn decent income. We expect inflation to be around 3.5% by the end of 2023, and US Treasuries, through the 10-year maturity, are yielding more than that. That means their inflation-adjusted, or “real,” yield could turn positive. Meanwhile, corporate bonds are providing an extra 1.5 to 2.5 percentage points beyond Treasury yields.”

Can bonds become defensive again?

My Benstead on Bonds column this month addressed this question, concluding that if central banks can tame inflation and hit their “terminal” or peak interest rate by spring next year, then this will allow them to cut rates next year to support the economy.

That would be good for bond prices and help return their defensive properties, leading to bonds becoming a natural portfolio diversifier again after they fell in unison with stocks this year.

Read the full column here for more, including some impressive data from Vanguard on the outlook for bonds and 60/40 portfolios following disappointing years.