Should income hunters ditch dividends and buy companies’ bonds instead?

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Times are tough for those who invest in shares for income.

Where dividends look secure, demand has pushed prices up – so the yield on newly invested money has gone down.  With the backdrop for shares uncertain, most investors would be content to know merely that their modest income will be maintained and their capital protected from losses.

Unfortunately, such assurances never exist in the stock market. There is, however, a way to achieve these things from investing in companies: by lending to them via bonds, rather than buying a stake in them through shares.

Read more on Telegraph

ANALYSIS: Is it the right time to be piling into bonds?

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Portfolio advisers have been looking at equity market valuations rather nervously for some time, tilting towards less risky assets, taking profits and holding more cash.

But has broader sentiment now caught up?

The UK’s Investment Association (IA) statistics for May show £230m ($296m, €260m) was invested in the IA Sterling Strategic Bond sector, while UK equity funds experienced a net retail outflow of £479m. The UK All Companies sector saw outflows of £532.1m, while UK equity income lost £23.1m.

Nexus IFA director Kerry Nelson says this could signal a shift from equities to bonds.

Read more on International Adviser 

UK investors pile into bonds and sell down UK equities

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Investors piled into the IA Sterling Strategic Bond sector in May, while UK equity funds experienced a net retail outflow of £479m ($642m, €566m), according to the latest IA statistics.

Rising from fourth in the net retail sales charts in April, the IA Sterling Strategic Bond sector topped May’s rankings after attracting net inflows of £392m.

Meanwhile having been the worst selling sector in April, with outflows of £277m, the Sterling Corporate Bond sector soared into fifth place in May with net sales of £230m.

 

Read more on International Adviser 

Pound tourists’ shop for UK corporate bonds

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The weakness in the pound has spurred greater demand from foreign investors for UK debt securities, with “sterling tourists” hailing mainly from Europe, helping British companies sell bonds. The trend is a sign of how the dramatic depreciation in the pound since the UK voted to leave the EU has rippled across the country’s financial markets, with sales of sterling-denominated debt running at a much faster pace than last year. UK companies have dramatically increased their borrowing in sterling compared with 2016, when concerns over the EU referendum stymied issuance. Companies rated investment grade have sold £17.3bn of bonds so far in 2017, compared with £6.2bn over the same period last year, according to Lloyds data.

Read more on Financial Times 

UK bond market on track for the biggest losses in our time, says investment officer

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Investors in the U.K. bond market could see losses on their bond portfolios as the Bank of England continues to be behind the inflation curve, an investment officer told CNBC on Monday.

“I see a scenario where losses will be inflicted on bond portfolios like we’ve never seen in our time,” Christopher Peel, chief investment officer at Tavistock Investments, said Monday.

“Governments and corporations have been issuing longer and longer duration maturity debt which has made its way into the markets themselves. When you look at the gilt market going back at the end of 90s the average duration of the guilt mark was around six and a half years, now it’s around eleven. That’s a recipe for losses in the most conservative portfolios,” he said.

Read more on CBNC

Record number of CFA U.K. members think corporate bonds are overvalued

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The proportion of the CFA Society of the U.K. members who view corporate bonds as overvalued is at a record high, show the society’s valuations index.

The index, which polls the society’s members, found 84% of respondents think the asset class is overvalued. This belief has climbed over five consecutive quarters. The previous quarter, 82% said they believed corporate bonds were overvalued.

In a news release accompanying the data, CFA U.K. said the increase in the proportion of members holding this view “most likely reflects the slight drop in corporate bond yields” since the previous quarter, to 1.56% as of April 20, from 1.66% as of Feb. 8.

 

Read more on Pensions & Investments 

Why are most corporate bonds still traded on the phone?

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Manual trading has all but disappeared in much of finance. Most stock exchanges no longer have shouting floor traders; anyone from retail investors to the largest asset managers can buy and sell shares through easy, automated, electronic systems. The derivatives markets are even further along: for some types, nine-tenths of volume is traded electronically. Yet more than 80% of corporate bonds trading still happens over the phone. Why does buying into the corporate bond market, a $50trn market globally, with $1.5trn in issuance last year in America alone, still require calling up a trading desk most of the time?

The corporate bond market has certain unique characteristics that make it different. A firm typically issues at most two types of shares (common and preferred), but may have dozens of bonds outstanding that differ by maturity, issue date and the degree of seniority in the firm’s capital structure. Given the dizzying variety of bonds, any individual one is traded only rarely. In fact, 90% of corporate bonds trade fewer than five times a year.

The traditional way to overcome this illiquidity has been through trading desks at investment banks, who act as market-makers. They name their price, buy up bonds from interested sellers, and hold them as inventory on their balance-sheet until a buyer comes along. This dealer-based system, relying on personal relationships, has remained unchanged for several decades; the phone calls have therefore persisted as well. Indeed, looking just at phone trades understates the continuing importance of dealers. Even of the 20% of trading that is electronic, nearly all takes place on so-called “request-for-quote” platforms where dealers are still the only ones with the right to quote prices, and to buy or sell.

read the full article on The Economist

The Bank of England and the Bond Market

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When the BoE’s monetary policy committee sits down to discuss the economy, it does so in the knowledge that the bond market does not think it is doing its job properly. Dan McCrum says if inflation hawks reveal themselves, markets may have to reassess.

UK inflation was steady in March, according to data released Tuesday, ticking along at what is the fastest pace in more than three years, as the effect of a weaker pound feeds through into import prices, all as might be expected. But when the bank of England’s monetary policy committee sits down next month to discuss the economy, its members will do so in the knowledge that the bond market doesn’t think that they are doing their job properly. Investors can trade bonds and financial contracts tied to the level of inflation. And over the next decade, the so-called breakeven rate for retail price inflation is 3.5%. The figure is also pretty similar for breakevens ranging from five to 30 years time. For such bets to pay off, inflation needs to be on average higher than the breakeven rate. The measure of inflation used here, which includes housing costs, tends to be around a percentage point higher than the consumer price variety policymakers target. Even so the implication is inflation will be seriously higher than 2% all the way to 2027. That’s going to require a series of letters to the treasury explaining why the target is being missed. Now look at market prices another way. And the inflation adjusted all real 10-year interest rate for the UK economy is minus 2.4%. That’s the lowest it’s been in, at least, 25 years. At a moment when the country is approaching full employment, an inflationary pressure from import prices is rising. Monetary policy is extremely stimulative. What is strange, however, is that many investors and strategists say that they share the view of policymakers, that import inflation will prove temporary. So we should look through it.

 

…read more on Financial Times

First Retail Bond for care sector raises £33m in under a week

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The first Retail Charity Bond to be issued for the care sector has closed after less than a week, having raised £33 million.

The bond, for Greensleeves Care, pays an interest rate of 4.25% a year for a term of nine years, and saw strong demand from a range of institutional, ethical and individual investors.

The bond will be issued through Allia’s Retail Charity Bond platform. According to Allia, it is the largest Retail Charity Bond and the lowest interest rate to date. It brings the total raised through the platform to £91million, following previous issues for Golden Lane Housing (£11m), Hightown Housing Association (£27m) and Charities Aid Foundation (£20m).

 

Read more on fundraising

Corporate debt returns lure investors back to bond market

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The global bond market rout triggered by Donald Trump’s US election victory looks overdone, according to bond investors now betting that the sell-off was too violent and that borrowing costs will remain contained into the start of the new year.

Mr Trump is expected to unveil a large, inflation-fuelling economic stimulus package of infrastructure spending and tax cuts, which has stoked fears of an end to the three-decade bull market in bonds. The global fixed income market lost more than $1.8tn of value over the past two weeks, sending yields — which move inversely to prices — to a nine-month high on Friday.

But some big investors are betting that the bond turmoil has been excessive, and are dipping back into the market, especially in areas such as US corporate debt, which now offers more attractive returns.

“There’s a greater chance of higher rates than before, but the fundamental backdrop — much greater global demand for dollar fixed income than supply — means they will stay low,” said Tod Nasser, chief investment officer of Pacific Life, an insurer. He is ramping up purchases of US corporate bonds in particular. “We want to be a bit more aggressive now,” he said.

The yield on 10-year Treasuries, one of the most closely followed rates, has climbed from 1.77 per cent ahead of the US presidential election to 2.35 per cent on Friday, the highest level since last December. That move has reverberated across debt markets, but many analysts and fund managers have pointed out that the details — and practicality — of many of Mr Trump’s plans remain unclear.

 

Read more on Financial Times