UK Corporate Bonds

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Topic Author
blueoak7
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Joined: Mon Nov 28, 2022 9:52 am

UK Corporate Bonds

Post by blueoak7 »

I am looking for a website which offers UK corporate bond trading advice. I would like to understand more about the opportunities and way of investing in UK Corporate Bonds. I intend to invest through HL Lifetime ISA and HSBC stocks and shares ISA.
Thanks for any advice as well as pointing me towards any resources you would deem useful
:sharebeer
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

blueoak7 wrote: Fri Mar 03, 2023 10:00 am I am looking for a website which offers UK corporate bond trading advice. I would like to understand more about the opportunities and way of investing in UK Corporate Bonds. I intend to invest through HL Lifetime ISA and HSBC stocks and shares ISA.
Thanks for any advice as well as pointing me towards any resources you would deem useful
:sharebeer
Monevator blog is my favourite UK personal investing blog.

Generally we do not recommend holding the securities of UK individual issuers here. In the cases of both stocks & bonds, one winds up taking on undiversified, non-systematic risk. Finance theory holds you don't get paid as an investor for taking on such risks. You are better to own a fully diversified, low cost, fund.
Topic Author
blueoak7
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Re: UK Corporate Bonds

Post by blueoak7 »

Thansk for the info on monevator.

as a US person, I have the PFIC complexity of holding low cost funds.
tubaleiter
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Re: UK Corporate Bonds

Post by tubaleiter »

blueoak7 wrote: Fri Mar 10, 2023 6:20 am as a US person, I have the PFIC complexity of holding low cost funds.
US citizens investing in the UK definitely face a unique constellation of challenges - worth reading the wiki article focused on those of us in that situation: https://www.bogleheads.org/wiki/Investi ... _residents

Corporate bonds is not a solution I've come across before the the PFIC challenges (individual stocks certainly is). I don't see any major hurdle to it, but am curious why the corporate bond approach? You're still going to owe US tax on the interest (at US income tax rates) and capital gains, if any, but putting them in an ISA does avoid the UK complexity.

Definitely keep an eye on fees, HL is not a low fee option in most cases, although there are strategies to minimise the transaction costs. Not sure about HSBC (I didn't realise they accepted US citizens for ISAs). May also be worth looking at Interactive Brokers' ISA offering, as they're generally very low fee.

None of that actually answers your question, I'm afraid, but curious to learn more about your approach!
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

blueoak7 wrote: Fri Mar 10, 2023 6:20 am Thansk for the info on monevator.

as a US person, I have the PFIC complexity of holding low cost funds.
Ouch.

Corporate bonds have credit risk. Since there are thousands of issues, many more than for stocks, you really need to have a very diversified portfolio. Even a totally blue chip FTSE 100 company can have quirks. If you look at the quite limited offer on the London Stock Exchange bond market (ORB) for retail investors, you see some blue chip names that have higher yields reflecting the greater risk.

Can I suggest holding:

- individual gilts - lower interest means less tax in any case (I am assuming this is not in your pension, because in your pension PFIC does not apply?)

- individual shares - a spread of the world's super cap companies in all the key sectors - in effect a stratified sample of the S&P 500/ FTSE World? For example Berkshire Hathaway serves as a sort of proxy for "old economy" USA (but also has a big holding in Apple).

The data shows that corporate bonds are a mix of equity risk + interest rate risk, and you don't get much over that, ie the "special sauce" of corporate bonds is credit risk, and that tends to be highly correlated with equity risk, so it's not that great a diversifier.

There is a wiki here about doing that.

It also appears that one can simulate the indices using Futures, without triggering PFIC- -and use that to track major indices. Again there have been discussions here. Options are tougher, because the buyer of a Call option is paying time and volatility premium to someone else (and I find all the technicalities of options make my head hurt).
invest2bfree
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Re: UK Corporate Bonds

Post by invest2bfree »

Valuethinker wrote: Fri Mar 10, 2023 8:31 am
blueoak7 wrote: Fri Mar 10, 2023 6:20 am Thansk for the info on monevator.

as a US person, I have the PFIC complexity of holding low cost funds.


The data shows that corporate bonds are a mix of equity risk + interest rate risk, and you don't get much over that, ie the "special sauce" of corporate bonds is credit risk, and that tends to be highly correlated with equity risk, so it's not that great a diversifier.

I disagree with this statement and is basically a blanket statement used to eliminate this asset class. This is a great asset class for folks with decent asset base who do not like either stocks or government bonds.

You will lose money in Corporate Bonds only if the company issuing the bond goes outright Bankrupt. In all other cases if you hold to maturity you will get your money back and interest.

It is not the case in equities, Japan has been going sideways for the last 30 years. Rest of the world has reached the peak in 2007 and have not crossed it. US can be another japan in the next 30 years.

If you are happy with 6% returns and are willing to hold long term and are well diversified then this is a great asset class.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
Topic Author
blueoak7
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Re: UK Corporate Bonds

Post by blueoak7 »

Talking ISAs exclusively here..
I chose HL for Lifetime ISA because most others wouldn't allow me to open one up. I felt like a stocks and shares lifetime ISA was better option than a Lifetime Cash ISA (which hover around 2%). Lifetime ISA simply because I get 1000£ for each annaul 4000£ deposit.

HSBC UK didn't offer me a lifetime ISA else I would have done so. They have allowed me as US person to open a S&S ISA.

I am interested in the bond market (corporate or otherwise) as an asset class to earn steady interest (5-6% annual). I would be equally pleased with a basket of stocks which could provide this return with risk equal to that of a ~AA corp bond. I intend to hold the bonds until maturity.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

blueoak7 wrote: Sun Mar 12, 2023 10:28 am Talking ISAs exclusively here..
I chose HL for Lifetime ISA because most others wouldn't allow me to open one up. I felt like a stocks and shares lifetime ISA was better option than a Lifetime Cash ISA (which hover around 2%). Lifetime ISA simply because I get 1000£ for each annaul 4000£ deposit.

HSBC UK didn't offer me a lifetime ISA else I would have done so. They have allowed me as US person to open a S&S ISA.

I am interested in the bond market (corporate or otherwise) as an asset class to earn steady interest (5-6% annual). I would be equally pleased with a basket of stocks which could provide this return with risk equal to that of a ~AA corp bond. I intend to hold the bonds until maturity.
The data shows that your long run return from corporate bonds is very similar to that of US Treasury bonds (US data).

You get a higher yield, but you also get default risk. Even for Investment Grade bonds, there's enough of that to wipe out the higher starting yields. You just have higher volatility without higher returns.

An additional problem is identifying which bonds are callable - bond prospectuses are easy to find in the USA (EDGAR database) but not at all easy to find in UK. It's just assumed that you have access to Bloomberg (which doesn't always carry the documentation) at £2,500 pcm. You want to avoid callable issues in general -- or at least view them as "Yield to Worst" or "Yield to Call" not Yield to Maturity/ Gross Redemption Yield.

There is an issue with gilts vis a vis yield. Which we saw in spades in the abortive Liz Truss budget. UK pension funds own a lot of gilts, and that probably drives the yield below "equilibrium" long term. Tax treatment may also play a role (below)

I think I am right in saying with gilts that changes in the capital value don't matter to HMRC. It's all just treated as taxable interest. That does, for a UK investor, tilt one towards holding the gilts *outside* a pension or ISA. There aren't many gilts one can buy at a discount to par value, but there might be more now.

EDIT there is (or was) an "anomaly" which was that Short Term Corporate Bonds seemed to outperform US Treasuries on a risk-adjusted basis. It appeared that the market overestimated default risk in the short term. Although the holders of bonds for Silicon Valley Bank did not overestimate risk! (In all likelihood, the bond holders will be heavily, or totally, wiped out).

I don't know if this anomaly is still the case. What tends to happen in Finance is that once the academics have published it, it ceases to have value.
Last edited by Valuethinker on Mon Mar 13, 2023 4:03 am, edited 1 time in total.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

invest2bfree wrote: Sat Mar 11, 2023 8:43 am

If you are happy with 6% returns and are willing to hold long term and are well diversified then this is a great asset class.
You are quoting a yield ex default risk. That will lower returns.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

blueoak7 wrote: Fri Mar 03, 2023 10:00 am I am looking for a website which offers UK corporate bond trading advice. I would like to understand more about the opportunities and way of investing in UK Corporate Bonds. I intend to invest through HL Lifetime ISA and HSBC stocks and shares ISA.
Thanks for any advice as well as pointing me towards any resources you would deem useful
:sharebeer
To try to answer your question directly:

- you need more information about UK corporate bonds
- you cannot hold bond funds

I don't know of a website in particular. There are courses about bonds and bond investing - you might find some good stuff re fixed income courses online, amazing what is free on Youtube these days. US concepts are easily applicable to UK corporate bonds (although the language is a little different, sometimes).

Bloomberg itself gives huge amounts of information on corporate bonds, and often has the Prospectus. So some online brokers might give you that information (Prospectuses are hard to find in the UK relative to USA where it is all in EDGAR).

You probably also need some kind of background re credit analysis. Or at the very least you are going to have to rely on the Credit Rating Agencies - subscription to those reports is quite expensive, but you can get summaries online (or at least know the letter grades).

The main thing you have to know is whether the bond is callable. Then it is Yield-to-Worst or Yield-to-Call that matters (in an environment of lower interest rates) and conversely extension risk (not called) if interest rates are rising. Yield to Worst is how trades view these bonds, I believe.

Make sure the portfolio is spread across sectors and industries. For example Tesco has a bond (on ORB - the LSE retail system for bonds). I believe it's not issued by Tesco, but by Tesco Bank? That's higher risk, because conceptually Tesco (the food retailer) could just say "not honouring that debt"-- unless the legal documentation says something different. We know Food Retail is a sector under huge pressure, and that will affect the credit quality of all the companies in the sector.

Big consumer stocks, big pharma, utilities - these tend to have pretty stable dividends.* I would probably add something like Lloyds Bank, now, as it is practically a utility. But check what the big UK income funds hold. This becomes a "crowded trade" where if one of these stocks disappoints on dividend (increase, or even a cut) then the share price gets hammered. My main concern here tbh is Tobacco, which has been the "winner" dividend stock for the past 3 decades.

I am actually a fan of mining companies - in that, they all wind up overinvesting when mineral prices are high, then cutting the dividend when they plummet. But, through the cycle, one could take a view that BHP/ Rio Tinto/ Glencore all do right for their shareholders. You have to believe managers are more attentive to shareholder value than they have historically been. And also that we are in a secular upswing in mineral demand in the world (and I do believe that) due to rush to build renewable energy infrastructure, rising standards of living in big Emerging Markets etc. However a pronounced Chinese downturn in construction could make that moot.

High yields are often a sign that the market is expecting a dividend cut.

* there are "Dividend Achiever" ETFs for different markets - companies that have never cut their dividend and typically increase it. The yield is much lower than typical "High Yield/ Dividend Income" shares that you find in funds with those names. But you have greater security around the business and the business model, at least in principle.
Last edited by Valuethinker on Mon Mar 13, 2023 5:58 am, edited 1 time in total.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

invest2bfree wrote: Sat Mar 11, 2023 8:43 am
Valuethinker wrote: Fri Mar 10, 2023 8:31 am
blueoak7 wrote: Fri Mar 10, 2023 6:20 am Thansk for the info on monevator.

as a US person, I have the PFIC complexity of holding low cost funds.


The data shows that corporate bonds are a mix of equity risk + interest rate risk, and you don't get much over that, ie the "special sauce" of corporate bonds is credit risk, and that tends to be highly correlated with equity risk, so it's not that great a diversifier.

I disagree with this statement and is basically a blanket statement used to eliminate this asset class. This is a great asset class for folks with decent asset base who do not like either stocks or government bonds.

You will lose money in Corporate Bonds only if the company issuing the bond goes outright Bankrupt. In all other cases if you hold to maturity you will get your money back and interest.

It is not the case in equities, Japan has been going sideways for the last 30 years. Rest of the world has reached the peak in 2007 and have not crossed it. US can be another japan in the next 30 years.

If you are happy with 6% returns and are willing to hold long term and are well diversified then this is a great asset class.
Can you tell us what is your source of information for corporate bonds? How do you do the credit analysis? How do you get the Prospectus -- or do you have a subscription to Bloomberg? There's no EDGAR equivalent in the UK (Companies House does have quite a bit of stuff) -- not for free (used to use Perfect Information, but that was a hefty subscription fee - 10s £000 as I recall).

Original Poster has posed a question re sources of information and discussion for UK Corporate Bonds. Do you have a specific answer?
Topic Author
blueoak7
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Joined: Mon Nov 28, 2022 9:52 am

Re: UK Corporate Bonds

Post by blueoak7 »

A few of you have understood my difficulty, as I am accustomed to sufficient information in the USA.

Thanks thus far for the discussion and help.
DoctorE
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Joined: Thu Feb 13, 2014 2:11 am

Re: UK Corporate Bonds

Post by DoctorE »

I would try working backwards by figuring out what your brokers offer and then seeing if those are attractive enough to buy.

My experience trying to put 6-7 figures at work with corporate bonds is that private banks and investment banks have a list of bonds they want to get rid of so careful with that. Secondary market for bond trading is a bit of a 'black box'. IBKR has a good platform but the spreads are nasty (not IB's fault). Be aware most if not all corporate bonds are callable so if interest rates drop, newer issues that were sold at higher rates might be called back.

You're probably 'better off' in a corporate bond fund, short term if you are worried about interest rates continuing to rise. It's certainly not the same thing as bonds as duration is constant in the fund so NAV might be underwater for a long time.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

DoctorE wrote: Thu Mar 16, 2023 6:54 am I would try working backwards by figuring out what your brokers offer and then seeing if those are attractive enough to buy.

My experience trying to put 6-7 figures at work with corporate bonds is that private banks and investment banks have a list of bonds they want to get rid of so careful with that. Secondary market for bond trading is a bit of a 'black box'. IBKR has a good platform but the spreads are nasty (not IB's fault). Be aware most if not all corporate bonds are callable so if interest rates drop, newer issues that were sold at higher rates might be called back.

You're probably 'better off' in a corporate bond fund, short term if you are worried about interest rates continuing to rise. It's certainly not the same thing as bonds as duration is constant in the fund so NAV might be underwater for a long time.
OP cannot hold a fund or ETF, because of IRS PFIC rules.

Coupled with the UK rules descended from PRIIP legislation (in EU days) that there are no US funds which provide the correct documentation so that a UK platform can sell them to a non-expert investor. A Catch-22.

Since the overwhelming body of evidence is that corporate bond = risk free govt security + equity risk, I suggest it's better to hold a portfolio of govt bonds, plus a sampling of large index shares. If an income is important, restrict oneself to companies that pay a yield, and there are lists ("Dividend Achiever" indices) of companies that have held or increased their dividends consistently:

I would include Shell (or Exxon), BAT, Lloyds Bank, Unilever, Nestle, Microsoft, GSK, Astra-Zeneca etc in that list*. However it is more tax efficient to hold non-dividend payers, such as Berkshire Hathaway. There will be other, smaller market cap companies that I do not recognise.

* recognising that Lloyds cut its dividend in the Global Financial Crisis- -but I view retail banking as a sort of utility business. And Shell has cut its dividend in the past, I believe. BAT & Imperial Brands have been the investor money machines for decades, but surely tobacco eventually runs out of road? (you could have made that argument any time since the big lawsuits broke in the 1990s).

One might also consider the "pure play" UK utilities such as United Utilities (water), Severn Trent & Pennon (all water cos). Or their European equivalents.
Valuethinker
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Re: UK Corporate Bonds

Post by Valuethinker »

blueoak7 wrote: Thu Mar 16, 2023 4:45 am A few of you have understood my difficulty, as I am accustomed to sufficient information in the USA.

Thanks thus far for the discussion and help.
The ORB retail bonds on the London Stock Exchange should have full documentation if you check LSEG website?

It is not many bonds, though.

What I don't know is what individual brokers offer - whether they offer the Prospectuses (to check things like Call features) or even just a summary of Bloomberg data (Yield to Call etc). Duration and convexity, etc.

Credit Rating is usually published but the actual credit rating agency reports are proprietary-- although the company may put them on its website.
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