Tuesday 23 August 2016 by Trade opportunities

Sterling corporate bonds rally, we add Tesco to the DirectBond list


We continue to search for bonds that would diversify portfolios, offer a reasonable return and that are available in the market. This week we add sub investment grade GBP denominated Tesco to the list 

Tesco supermarket

The recent ride hasn’t been smooth for UK corporate bondholders.  On 23 June 2016, after the Brexit vote there was a selloff in both sterling high grade bonds (BGBP, Bloomberg GBP Investment Grade Bond Index – green line) and also high yield (BGBH, Bloomberg GBP High Yield Bond Index – white line).  However as the chart below highlights, these losses were short lived and both indices have recovered since, with investment grade bonds clearly the better performer.

Source: Bloomberg

Additional impetus was given to the sterling corporate bond market after the Bank of England’s surprise decision on 4 August 2016 to buy up to GBP10bn of investment grade corporate bonds denominated in British pounds.  Although the program hasn’t yet started – it’s pencilled in for mid-September 2016 – there has been a significant bounce in price and a corresponding reduction in yields.

As can be seen in the above chart by the moves in the green (high grade) and white (high yield) indices that high grade has outperformed.  This is entirely to be expected because the BoE purchase program will only buy investment grade bonds.  Given that high yield bonds have lagged, this may present an opportunity for investors still searching for additional yield.

In that regard, we have access to some Tesco 5.5% sterling bonds due 13 January 2033 at an indicative yield of 4.19%.*

We currently offer 22 other GBP bonds. Other high yield GBP bonds that include:

Issuer Sector Maturity / call date Trading margin Coupon type Capital structure YTM* Running yield Capital price Face value Capital value
Assicurazioni Generali Insurance 08/02/2022 4.78% Fixed Hybrid 5.28% 6.10% 105.211 £500,000 £526,055
Barclays Bank Plc ADI – international bank 15/06/2019 2.41% Fixed
Hybrid 2.84% 10.80% 129.671 £200,000
Barclays Bank Plc ADI – international bank
15/12/2017 4.44% Fixed
Hybrid 4.96% 5.93% 101.250 £500,000
Investec Finance Plc ADI – regional bank
23/01/2017 4.94% Fixed
Hybrid 4.94% 6.22% 100.500 £500,000
Old Mutual Plc Insurance 24/03/2020 4.45% Fixed
Hybrid 4.89% 6.09% 104.750 £10,000
TESCO Plc Other corporate 13/01/2033 3.28% Fixed
Senior debt 4.19% 4.77% 115.250 £10,000

Note: Foreign currency bonds are only available to wholesale investors. Minimum face value parcel sizes vary. *Prices quoted are accurate as at 23 August 2016 but subject to change.