Analysis & Comment  > bond-of-the-week

Share |

bond-of-the-week Archive

Bond of the Week: 5 September 2007
Money market rates surge higher.......................    

Money market rates continue to surge higher with Tuesday’s close for 3-month LIBOR (the London Interbank Offered Rate) at 6.7975%, an eight year high and slightly above the BOE’s offer of emergency funding at 6.75%.

It is fair to say that the credit crunch is underway, and yesterday’s 6.8% rate for LIBOR should be viewed against the context of a steady 5.75% base rate. At present, LIBOR is 1% over this base rate, whilst a more normal spread might be in the region of 1/8% of a percent.

The interbank market is the first port of call for most institutional funding requirements, and this sharp increase in the cost of funding is placing considerable strain on financial institutions who have built up portfolios based on the cheap and easy funding availability seen over the past few years. Assuming the scenario continues for the next few months, here are our thoughts on tactics for fixed income investors:

  • Cautious investors should stick to Gilts. These are the instruments that have shown the best performance recently, and will continue to show the best price performance if the credit crunch continues.
  • Long term investors should consider very high quality quasi-government debt such as European Investment Bank (rated AAA) bonds. These types of bonds have also suffered from spread expansion, but in the long-term offer absolutely rock solid assurance of the return of capital.
  • More risk-positive investors should start accumulating bargains in non-governmental bonds. If the funding squeeze continues, forced sellers of bonds will appear. Consider the credit risk and look to diversify across sectors.
  • Consider floating rate notes*; here the coupon is based on a margin to LIBOR, and thus coupon rates are rising accordingly. By selecting an issue that has just passed its quarterly refix, coupon rates of 6.75%-7% are available, at least for the next few months. As an example, the Allied Irish Bank (Aa2/A+) FRN 20 Feb 2012 pays 7.5bp over LIBOR, and fixed its coupon last month at 6.72%. The bond trades slightly under par around 99.70. These types of instruments allow investors to take advantage of the current high money market rates.


*Note , FRN’s typically trade on a peer-to-peer basis between financial institutions and can be hard to access by private investors. Minimum denominations (usually £50,000) usually apply and it may be hard to deal in sizes below £1 million.

Mark Glowrey

The next Bond of the Week will be published on Wednesday 19th September.                   


The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.

Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own,  the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.

None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such.  For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated.  The investments described by or in the services are not suitable for all investors. Investors  who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.

These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.