Have retail bond prices run too far?

I’ve found myself staring at the screen this month considering whether prices on retail bonds have run too far and are expensive. I have a decision to make based on; I think they are expensive versus the time cost of money of being invested in nothing versus a better opportunity coming along at a later date.

In general I’m happy to continue to be invested as the bonds I have provide a return on my capital and the spread is such that I feel it unlikely I can sell and get back in again later at a better price and cover the lost interest whilst I’m out of the market.

But I’m dithering over buying anything new and I'm sitting on quite a bit of cash. Some of this may be psychological. I bought IPF2 at 86p so to now pay 100p is a barrier because when they rolled this bond it took a second attempt and the recent eurbond had a coupon approaching 10% if I remember correctly.

The same could be said of the PF23’s on which was trading at a YTM of around 9% and is now down to 5%. Which is right because I can’t help feeling 5% is as wrong as 9% was.

And then there is PAG3 which is year ago was trading at 110p a year ago reflecting a YTM of 3.8% and is now trading at 110p with a YTM of 3.4%. I appreciate the BOE base rate has fallen but Paragon is sitting on a huge pile of corporate defaults and nothing in the yield reflects the risk.

This is all caused by QE and there is nothing I can do about that but I’m still left with a decision to make about whether to invest now or invest later or to perhaps hedge my bets and buy some short dated bonds. I’m doing some of this already

In the back of my mind bonds look expensive, equities look expensive, commodities look expensive, bitcoin looks expensive. It feels like a bubble to me and I would hate to be investing at the top of a bubble only to find there were some great opportunities in 6 months time once fiscal and monetary stimulus starts to get withdrawn. On the other hand I can’t sit on the cash forever…

I’m wondering fellow posters share my concerns and how you are managing your portfolios at the moment


  • I have the same dilemma with PAG3 and also PFP2. A shortage of bond issues is preventing selling overpriced bonds for a little longer, as I want to have a substantial bond portfolio. It would be ideal to have new bond issues (not necessarily from these companies) to prompt me to sell, however I will have to sell at some point this year to lock in the gains. High bond prices often persist longer than expected.
  • I'm still holding a fair percentage of retail bonds, rather too many of Burford & a small percentage of Enquest. The yields on offer are of little appeal right now. I have healthy positions on Tesco & Ladbrokes finance bonds and am often tempted to take a decent profit on the Tesco ones, having bought them at, or just under par some years back. I think there's a ca. 30% profit to be had on the Tesco ones. If I don't take it, this potential profit will slowly disappear, though I'd keep getting the dividends.
    I have put a fair amount into equities, particularly Asian ones. While this has worked so far, it could easily turn the other way. Most are probably expecting that the tide of central bank money will keep flowing for a while yet. Gold seems an obvious place to be for the longer term, as it will be some time before the money printing is slowed or paused.
    I think I am going to have a stab at an s&p financials ETF in the next year or so. If inflation creeps up as predicted, bond prices will go down & a bit further down the line, interest rates ought to creep up. I guess the timing of all of this depends on how quickly we get out of the covid crisis. Overall, there are few appealing investments right now.
  • edited January 19
    I'm sitting on a large percentage of portfolio cash at the moment, I will have to put it somewhere over the next 6 months but I would like to get a more certain picture of what the 'new normal' looks like, there has been a big rally in assets driven by flows, whereas today we had record deaths, so in case of some unexpected turns I'm waiting a bit longer.
  • Agree with all the comments above, many reflect my personal feelings about where prices have gone (too high bearing in mind the problems out there) I too am sat on a high percentage of cash.
    In late Autumn I started looking at the shorter dated bonds. I purchase Eros at mid 80's callable 16/10 21 when they joint ventured with an American technology company on the hope they would be stronger.
    I also bought some One Savings Bank !SBA again at mid 80's hoping they would be called on the 7/3/21. These are available around 88p so may be worth a bit of a punt !
    What really annoys me is the massive spreads especially on some of the PIBS I have been looking at .
    Like most posters above I am sitting on cash, although i did top up my premium bonds in desperation !!
    Have done a bit with equities but they are now pretty high and I feel we are at something of a tipping point
  • The other things I bought recently, were a couple of "boring" companies, in BAT & GSK. People will always need medicine & were we to suffer a recession, many people usually continue with their "luxuries" - fags & gambling! You would be hopeful that they would keep paying their dividends, while other companies might be cutting theirs. If the market does take a downturn, you could "keep calm & carry on", re-investing the dividends. I'm hoping that they are "bond like". Of course, we saw the covid dip for the markets back in March & bond valuations were hit for a short period, in a similar fashion to equities. I snapped up the odd bargain at that time to compensate for other losses at the time.
  • Hmmm - I thought IMP was "bond like" when I bought them a while ago - currently showing a 38% loss (not counting the dividends). Yes, yes, I know - what happened to your "stop loss"??

    I wish I shared others discipline but if there's cash in the brokers' account then I must invest it.

    Can't summon up much enthusiasm for fixed interest at the moment though. Especially anything longer than a couple of years duration.

    Surely inflation is already on its way up - Biden is about to spend spend spend and Janet Yellen says economy must be run hot and worry about interest rates later on. They'd love some inflation and low interest rates to inflate away all that debt they've already run up and about to increase. Problem could be that by the time they do worry about inflation it might be too late.

    Still some way to go on the equities front I think.

    But bear in mind - I know very little.

    Currently 23% in fixed interest, 56% in equities, 15% in gold and silver and 6% in cash (in bank to pay pension etc.)
  • Thanks for all your replies. A bit hard to summarise but a general feeling of caution about prices. Not that many replies though so perhaps most are indifferent or don't have a view either way.

    Every day I become more and more uncomfortable. Equity markets are making records most days in many countries and it seems to be caused by money flow particuarly by new investors through platforms such as RobinHood or Etoro. The evidence suggest these new investors are moving to leveraged products.

    Yields seem to continue to compress with today for example what looks like almost indescrimate rises on the bid by one market maker (CSTE who I assume are Credit Suisse) on prefs and a number of bonds.

    It seems to me that regardless of current pricing we must accept:
    1. high unemployment
    2. more taxation
    3. more borrowing
    4. inflation will be forced to 2% by central banks in US and UK although whether this is already baked in and will overshoot is unknown.

    I am 2% equities, 17% various bond IT's, 41% fixed interest and 40% cash
  • @JammyDodger It would be nice to see some more ORB new issues and to see a tighter bid-offer spreads, the problem with holding a large amount of cash is that inflation will get you in the end, so it's tolerable in the short-term but not in the long term.
  • I think we all have concerns and for sure there are some very over priced products out there but what is over priced for some is a buying opportunity for others. The markets would indicate there are lots of the latter.

    There is a new breed of " investor" ( speculator ) on the block that has been educated in gambling on line on all sorts but particularly sport and mostly football. There are many possibilities and odds on anything that moves-they either win or lose and big time. On that basis stocks/bonds are boring ( ord. shares less so ) but if and when they venture that way they trade big and hardly ever for the long term.
    Gambling is now a national past time or disease if you prefer and it's spreading worldwide-the U.K. is good at it with many platforms to help empty our pockets.
    I'm afraid with the wall of money around looking for a home the old way ( mine ) of thinking of investing is fast disappearing.

    Anyway good luck all and what we all invest/speculate in.
  • @JammyDodger With regard to PF23's, I would agree that they are now looking a bit dear. They will have to refinance the PF21's in September and I expect them to do this by issuing a longer term bond (e.g. 5 years) at around the 6-6.5% level and offering an incentive to current holders (this is what they did for the 2019 issue). Given that you can still buy the PF21's at 5.35%, for me it makes sense to switch out of the 23's into the 21's and wait for the new issue.
  • Quote JammyDodger: “I’m wondering if fellow posters share my concerns and how you are managing your portfolios at the moment.”

    Concerns? Yes.
    Managing portfolio? Carrying on as usual with just a few tweaks.

    I am a contrarian, very patient, always look to the long term and am less risk averse than I suspect most bond investors are. Here is a much simplified picture of the investment procedure I have developed over the years.

    When the FTSE is near/at/over an all-time high (ATH) I sell stocks and store the proceeds as cash. With a lot of FTSE movement I might well end up with wads of cash and very few stocks.

    I define cash as actual cash, gold and gilts. Gold because it tends to move in the opposite direction of the FTSE. Ditto with gilts. My cash then provides a small return (much smaller than equities would) until the next event in my “grand scheme”.

    When the FTSE falls I gradually start buying stocks according to a pre-defined plan.
    Should the FTSE fall by as much as 40% I will then have tons of stocks and no cash at all. The gold and the gilts will have generally increased in value during this period.
    So, where does that leave me now? In March the FTSE was just shy of 40% below its ATH. Thus I have a loads of stocks and only 3% of my portfolio is in cash. Also I have my corporate bonds which have played no part in these procedures.

    Following the last FTSE ATH I bought from 7500 to 4900 and it is now at 6600, a fall of 12%. In the same period my portfolio value has shown a gain of 4%.

    How do I feel about the current situation? Bonds are priced way too high for the risk and the bid/offer spreads are far too wide. I will keep the ones I have but not buy any more. Also I am fearful of inflation which would result in yields going higher. For me, this is not the time.

    Many of the world’s stock markets are at or near their ATH’s which gives rise to much talk of bubbles and froth. This is not the case with the FTSE which will have to rise 20% from here to reach its former ATH. This could be because of the Brexit fiasco or our having been harder hit by covid. In the medium term these issues should be resolved. And if inflation does rise remember that Warren Buffet once advised that in inflationary times there is no better place to be than in stocks. And if the FTSE does fall in the short term he also advised that provided you are in the stocks of solid companies they will always recover.

    And so, if I had spare available cash (which I don’t because it’s already there) the FTSE would be the place to go.

    I have recently had a few little tweaks. I have been putting dividends and coupon money into top-ups of financials but am now well overweight. I have been following the hospitality sector and in particular Carnival, Mitchell & Butler and Wetherspoon. This morning I was lucky enough to buy Carnival at 1236p (fingers crossed). The cash for this was in exchange for my G4S which probably had little hope of further substantial gains ahead.

    I wouldn’t be seen dead on a cruise ship but there are crowds of people out there who will jump at the chance once covid restrictions are relaxed. Perhaps spending some of the next winter in the Caribbean?

    Apologies for the super long post.
  • Two months on from my first post on this topic and we have seen some small pullback in the price retail bonds as longer term gilts yields have risen.

    Possibly some of the move has also been due to "risk on". Sell bonds and gold and buy equities.

    It's difficult to unravel the two, so perhaps some of both.

    There has been a much bigger move in the prefs reflecting their longer duration.

    I have taken the view that the longer duration bonds are the most overpriced and I've sold everyhing beyond 2025.

    It's hard to say where things are going next. I have a view that the economy is going to come back far quicker than the markets expect as it's human nature to enjoy yourself. Regrettably I also feel that after three months of amazing growth, the economy will stall as the consumer becomes constrained by tax rises, the level of unemployment and low investment.
    The first phase will likely lead to higher bond yields, yet the second will likely lead to lower.

    Decisions, decisions...
  • @JammyDodger , I tend to agree, In my view, pentup demand = growth spurt + inflation + more covid = new wave = more restrictions, eventually we will settle on a new normal, lower growth, more restricted.
  • Another 6 weeks on and all the retail bond prices have moved up some more.

    The Burford price rises are pleasing and supported by good RNS's.

    The others seem to be more related to investors trying to find yield wherever they can. Possbily something to do with new ISA allowances or redemption on PMO.

    My RGL1 for instance I can now sell at 101.5 which is leading me to look round at what else is available. The rest I'm happy to hold but I'm not a buyer at these prices.

    Of course I can't find anything to replace RGL1 as everyone is looking at all the same numbers I am.

    New issues would be nice and I would venture it would be a good time to raise capital as I doubt interest rates will be this low in a year or two's time. Yet, nothing is coming our way, mostly due to the market's inclination to issue in 100k minimum size.

    Despite my views that bond prices are too high, I expect nothing to change. The central banks have done their job providing liquidity and cheap lending. I would say their job is complete and it's time to stop printing money but there's no sign of that happenning.

    The search for safe yield goes on...
  • Be careful about the true value got the bonds you hold. I recently sold all my corporate bonds and the spreads ranged from 2% to 5% on the Eqi platform. This as you know this will make a significant difference to your final balance.

  • Prices do seem high. I sold ICG3 at 106.21p this morning as the YTM at that price was only 1.7%. I tend to be moving more towards ITs at present where better yields are on offer.
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