WiseAlpha’s educational series: Teaching you everything you need to know about the bond market and more.
What are the different segments that make up the corporate bond market?
Wholesale bonds, retail bonds and savings bonds, all stand in the corporate bonds market, but how does their impact differ?
Unsurprisingly, a market as large as the corporate bonds has a number of different types of bond and venues in which the bonds are accessible.
In the UK, the main venue for private investors to access corporate bonds is via bonds issued on the London Stock Exchange ORB (Order Book for Retail Bonds).
Institutional investors on the other hand (large funds, banks and pension funds) have access to the wholesale corporate bond market which is far bigger and offer a greater variety of bond types and bigger universe of companies.
The majority of large corporates, especially household names, issue bonds in the wholesale bond markets whereas the retail bond market is mainly used by financial and insurance companies and other opaque type companies. The types of bond available in the wholesale bond market are much broader and the spectrum of bond returns is more attractive in our view.
But despite this segment of the market being much larger than the retail corporate bond market individual investors have had limited access to date.
Attractions of Corporate Bonds: Superior rates of interest
Please note that cash deposits into Cash ISAs are covered by the Financial Services Compensation Scheme (FSCS) and corporate bonds carry capital and investment risk.
Persistently low interest rates of between 1% and 2% on fixed rate savings bonds mean it’s no longer enough to rely on this source of interest income especially if you have retired.
Corporate Bonds pay higher income than fixed term deposits. For example a senior secured bond portfolio could potentially generate you income of between 5% and 8% per annum depending on your choice of bonds whereas fixed term deposits offer between 1% and 2%.
And unlike deposits, Corporate Bonds could earn higher than expected returns if the price of the bonds appreciates albeit with greater risk.
In addition to providing a better return than cash deposits, the income that corporate bonds yield is more predictable than dividends income from shares.
Corporate Bonds are the only contractually binding investment instruments apart from fixed term deposits that can give you more indication on expected returns — crucial if you’re making plans to save for your children’s education or build a nest egg for your retirement.
Regular interest income can help to supplement your salary and give you greater flexibility and freedom in decisions over your everyday expenses, travel plans, your children’s education, saving for a house deposit or other important lifestyle decisions.
You can plan your cash flow in advance with a greater degree predictability because the dates and amounts of income payable from Corporate Bonds are clearly defined and are not dependent on the profitability of the issuer like dividends.
Rezaah gives the example of Tesco, which may have looked like a good buy in November 2013 when it was selling at 363p per share with a 4% dividend:
“But over the next year, the share price fell over 50% to 176p, and the dividend was slashed by over 90%,” he says.
In comparison, Tesco’s senior unsecured bond maturing 2042 pays around 4.5% per annum.
When companies cut dividends, it’s normally good news for bondholders because capital is freed up for ongoing interest and maturity payments.
Please remember that bonds are investments not savings or deposit protected products and your capital and interest is at risk.
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As with all investments your capital is at risk. Invest via our Fractional Bonds.