TRAINING! How To Invest In Corporate Bonds

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Corporate bonds are issued by companies and are either publicly traded or private. Bond rating services such as Standard & Poor’s, Moody’s and Fitch, calculate the risk inherent in each bond issue – the chances of a default or failure to pay – and assign a series of letters to each issue signifying its risk factor.

Bond Ratings and Risk
Bonds rated triple-A (AAA) are the most reliable and the least risky; bonds rated triple B (BB) and below are the most risky. Bond ratings are calculated using many factors including financial stability, current debt and growth potential.

In a well-diversified investment portfolio, highly-rated corporate bonds of short-term, mid-term and long-term maturity (when the principal loan amount is scheduled for repayment) can help investors accumulate money for retirement, save for a college education for children, or to establish a cash reserve for emergencies, vacations or for other expenses.

Buying (and Selling) Bonds
Some corporate bonds are traded on the over-the-counter (OTC) market and offer good liquidity – the ability to quickly and easily sell the bond for ready cash. This is important, especially if you plan on getting active with your bond portfolio. Investors may buy bonds from this market or buy the initial offering of the bond from the issuing company in the primary market. OTC bonds typically sell in $5,000 face values.

Primary market purchases may be made from brokerage firms, banks, bond traders and brokers, all of which take a commission (a fee based on a percentage of the sale price) for facilitating the sale. Bond prices are quoted as a percentage of the face value of the bond, based on $100. For example, if a bond is selling at 95, it means that the bond may be purchased for 95% of its face value; a $10,000 bond, therefore, would cost the investor $9,500.

Interest Payments
Interest on bonds is usually paid every six months. On the highest rated bonds, these semi-annual payments are a reliable source of income. Bonds with the least risk pay lower rates of return. The higher risk bonds, in order to attract lenders (buyers), pay a higher return but are less reliable.

When bond prices decline, the interest rate increases because the bond costs less, but the interest rate remains the same as its initial offering. Conversely, when the price of a bond goes up, the effective yield declines. Long term bonds usually offer a higher interest rate because of the unpredictability of the future. A company’s financial stability and profitability may change over the long term and not be the same as when it first issued its bonds. To offset this risk, bonds with long maturity dates pay a higher interest.

A callable or redeemable bond is a bond that may be redeemed by the issuing company before the maturity date. The downside for investors, if a high yield bond is called, is the loss of interest return for the years remaining in the life of the bond. Sometimes, however, a firm calling a bond will pay a cash premium to the bond holder.

Bond prices are listed in many newspapers, including Barron’s, Investor’s Business Daily and The Wall Street Journal. The prices listed for bonds are for recent trades, usually for the previous day, so keep in mind that prices fluctuate and market conditions may change quickly. An alternative to investing in individual corporate bonds is to invest in a professionally managed bond fund or an index-pegged fund, which is a passive fund tied to the average price of a “basket” of bonds.

The Bottom Line
A well-diversified investment portfolio should hold a percentage of the total amount invested in highly-rated bonds of various maturities. Although no corporate bond is entirely risk free, and may sometimes even result at a loss because of changing market conditions, highly-rated corporate bonds could reasonably assure a steady income stream over the life of the bond.

SOURCE: Investopedia.com

NOSE DIVE! Bad News for Cash and Bonds as Inflation Falls

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Inflation has unexpectedly fallen to 0.3% for the month of April, down from 0.5% in March. Without inflationary pressure the MPC is unlikely to vote to raise interest rates

Inflation has fallen for the first time since September, down to 0.3% in April, from 0.5% the previous month. While this is good news for consumers, it is bad news for the Bank of England – 0.3% is far off the government set inflation target of 2%. The fall was largely due to the downward pressure of falling prices of airfares, automobiles and clothing. The Office of National Statistics said that these deflationary items were off-set by the rising cost of oil and therefore petrol and diesel, and the fact that food prices have stayed put. Ian Forrest, investment analyst at The Share Centre, added: “While inflation is still expected to be below 1% for the rest of the year it was interesting to see data from the ONS today that house prices have risen 9% over the past year and the oil price has recovered sharply in the first four months of the year.” What Does this Mean for Interest Rates? Without inflationary pressure the Monetary Policy Committee is unlikely to vote to raise interest rates any time soon – especially with no more movement across the pond. The US raised rates for the first time in seven years back in December, but has since sat tight. No rise in Bank of England base rate means no rise in either cash savings rates or bond yields either – bad news for low-risk investors. Although, with inflation so low, at least the vast majority of any yield will count as a real rate of return – inflationary erosion is minimal. “The market can barely see when there might be another rise, and at the moment is plumping for 2018,” Andrew Wilson, Head of Investment at Towry. “Core inflation was also down, from 1.5% to 1.3%, and this might further feed the narrative that the UK economy is materially slowing down, and largely due to uncertainties around potential Brexit.” Calum Bennie, savings expert at Scottish Friendly, agreed that even though the oil price has risen in recent months, the Bank of England’s 2% inflation target seems a long way off. “For those who want to grow their money over the long-term they should be considering stocks and shares ISAs as an alternative to the derisory saving rates on offer from the banks, although risk is attached,” said Bennie.

SOURCE: Emma Wall – Morningstar.co.uk

New savings minnow launches best buy fixed-rate bonds at up to 3.2% – but is Milestone Savings a safe place to squirrel away cash?

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A savings provider that very few people are likely to have heard of has launched a range of best buy fixed-rate bonds.

Milestone Savings – which is part of Gatehouse Bank, an investment bank based in London – has one-year and five-year fixes that are offering better rates than those nestled at the top of the independent This is Money savings tables.

Its one-year fix has a 2.1 per cent rate beating the 2.06 per cent currently on offer from RCI Bank. And its longer five-year fix comes with a 3.2 per cent rate that tops the 3.11 per cent offer from Secure Trust.

Meanwhile, its two-year fix has a 2.35 per cent rate and three-year fix 2.65 per cent – rates that are competitive, but can be beaten in our savings tables.

A minimum of £10,000 is required to open the accounts and it has an online facility to do this.

However, many are likely to be wary of sticking such large sums with a provider they have not heard of.

Milestone launched in March last year. Money is protected under the Financial Services Compensation Scheme umbrella to the tune of £75,000, with Gatehouse having the licence.

The savings rates are also ‘expected profit’ as it is a Shariah compliant provider. This means it doesn’t technically offer interest – instead, it invests funds ‘ethically’ to earn profits which it then ‘shares’ with savers.

On its website, it says: ‘In the unlikely event that we feel the expected profit will not be achieved, we will contact you and let you know the new expected profit rate.

‘If the profit exceeds the expected profit, we will pay the expected profit to you and we will be entitled to retain the remaining amount.’

Milestone says savers can take their cash out before maturity if the rate is not living up to expectations.

It adds: ‘If we feel the expected profit rate will not be achieved, we will contact you giving you reasonable advanced notice of the new expected profit rate.

‘You will then have the option to continue your deposit with us at the new expected profit rate or close your account immediately.

‘If you choose to close your account we will return your original deposit along with the profit you have earned up to that date.’

Another bank in the This is Money savings tables also has the same Islamic investment principles, Al-Rayan. It has the top two and three-year fixed rates.

Sue Hannums, from independent rate checking website Savings Champion, says: ‘Milestone Savings is a trading name of Gatehouse Bank which is authorised by the Financial Conduct Authority and regulated by the FCA and Prudential Regulation Authority.

‘Savings are covered by the FSCS, so in that respect it ticks all of the minimum requirements for savers considering placing funds with the provider.

‘The main thing to note about the accounts are that they are Sharia compliant, so pay an expected profit rate, rather than a guaranteed rate of interest, so whilst the capital will be safe, the return you receive is linked to the performance of the provider itself.

‘There is a chance that the expected profit rate will not be achieved and whilst the provider states that customers can continue with the lower rate or take the funds away, this is a crucial difference to a standard fixed-rate bond, which guarantees the level of interest until the end of the term.

‘That is not to say that savers should avoid the accounts and certainly the profit rates on offer are attractive in today’s savings market, but savers should proceed with caution, ensuring that they are fully aware of how the profit is generated and paid before proceeding.’

Gatehouse specialises in real estate investment and finance which typical client base is high net wealth individuals, whereas Milestone is targeted at every day savers.

SOURCE: ThisIsMoney.co.uk

SOLID! BlackRock launches total return bond fund for fixed income duo

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BlackRock has launched a total return bond fund for the group’s £413m Corporate Bond manager Ben Edwards to run with sterling bond manager Simon Blundell.

The group had been planning to launch the product for some time, as Investment Week reported earlier this year.

The BlackRock Sterling Strategic Bond fund will seek income in global fixed income markets, while maintaining a UK bias and is not constrained to any specific benchmark.

Managed by Edwards (pictured) and Blundell, the fund will have core holdings in sterling-denominated corporate bonds but with the flexibility to source income from across the entire fixed income universe including allocations to emerging markets and high yield.

Jeremy Roberts, head of UK retail sales at BlackRock, said: “As financial markets become increasingly diverse and complex, the hunt for yield gets even harder. In a low-return, low-rate world, income is golden.

“With a go-anywhere approach we believe this fund will appeal to investors that are looking for an attractive income delivered by experienced managers with a strong track record.”

Edwards said: “We are delighted to be able to offer the Sterling Strategic Bond fund to complement our existing UK fixed income range.

“While investors are not suffering from a lack of choice in this sector, we believe clients will benefit from the same outcome driven style and disciplined risk management that have underlined our successful Corporate Bond fund over the last ten years.”

 

SOURCE: InvestmentWeek.co.uk

DESERTED? Fund Review: Corporate Bond

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Fixed income sectors have struggled in the past year and the Investment Association (IA) Sterling Corporate Bond sector is no exception, returning an average of just 0.03 per cent over the past 12 months.

But the sector’s relative stability has seen it outperform both the IA Sterling Strategic Bond and IA Sterling High Yield sectors over one-, three- and five-year periods to April 28, with a three-year return of 9.4 per cent. This compares with the average of 7.6 per cent for the IA Sterling High Yield sector and 7.9 per cent return by the IA Sterling Strategic Bond group for the period.

In spite of this consistency and a year-to-date average return of 2.6 per cent, net retail inflows into the sector have been patchy. In September 2015 the category saw outflows of £237m, making it the second worst selling sector in that month, but net retail inflows of £112m in March 2016 made it the fourth bestselling group in the IA universe.

So what is driving investors into and out of corporate bonds? One key issue is the monetary policy action of central banks in the UK and Europe. While both institutions kept policies unchanged in April, the potential for further negative interest rate policy action in Europe and the European Central Bank’s (ECB) move into non-bank investment-grade corporate debt as part of the expansion of its quantitative easing programme may change the dynamic for investors in European markets.

Bryn Jones, head of fixed income at Rathbones, notes that the ECB’s purchase programme could force investors into riskier assets.

He says: “It announced a fairly large universe: non-bank financials will be included, but also bonds from corporates with an overseas parent. There’s a 70 per cent issuer limit too – this is a very aggressive programme. But the ECB will only be buying senior debt, and this means crowding out smaller investors, who will be forced to buy lower-quality paper and be pushed into riskier assets.”

Marilyn Watson, head of global fundamental fixed income strategy at BlackRock, points out: “With the inclusion of corporate bonds out to 30 years, issuance may increase significantly in the long term, perhaps with tenders for shorter-maturity debt. The long end of the corporate market has previously had limited pockets of natural demand, but with ECB issue purchase limits up to 70 per cent, the ability for issuers to get long-dated deals done has improved significantly. This may be the start of a much deeper 15-year-plus corporate bond market in Europe.”

Central bank policy is not the only issue likely to affect corporate bond investors in the next three months. The UK referendum on EU membership scheduled for June 23 is already creating volatility and uncertainty in the domestic market, which could offer opportunities for investors willing to do the work.

Jeff Boswell, co-manager of the Investec Investment Grade Corporate Bond fund, says: “The next opportunity created by higher levels of volatility may be in the run-up to the referendum. Until then, we expect the market to remain supportive and believe valuations are still reasonable at current levels, even if the underlying fundamentals are weaker than a few years ago.”

 

SOURCE: ftadviser.com

ALL FOR SHOW! Are bonds too expensive? Fund manager’s tips on how to invest in the fixed income minefield

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Fixed income has been a tough place to be invested over the past five years, with mainstream equity markets making impressive gains This is especially true of developed market government bonds, many of which pay a yield that is below inflation or even in some cases negative – meaning holding them will effectively lose you money.So do bonds look too expensive at the moment, relative to the amount they yield? David Roberts, head of fixed income at Kames Capital, thinks so.

However, he also suggests the lack of opportunity for investors to earn an income in other asset classes means bonds will continue to see strong demand because of their ability to produce a steady yield. Roberts gives us his thoughts on how to invest in bonds in the videos below.

There has been quite a lot of negative sentiment around emerging markets as slowing economic growth, slumping commodity prices and lack of liquidity have all prompted investors to look to other parts of the market. However, Kames Capital is quite positive about emerging market debt, which it thinks can form an important part of your portfolio.

Because the fortunes of emerging markets are so intertwined with commodities, to invest in the region is also to take a bet on whether the outlook will improve for that asset class. And due to the many different factors having an impact on the region, Roberts warns prices could go up – and down – in the short term.

The world is facing mounting political uncertainty in the run-up to the US election and Britain’s EU referendum.These question marks mean that investors are flocking to safe haven assets such as bonds, which tend to be lower risk and less volatile than other asset classes such as equities. The fixed income team at Kames is currently favouring corporate debt, which it conversely expects to benefit from stability in economic conditions.