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Previous 'Bond of the Week'

War Loan: 28 January 2009

The undated UK Treasury 3.5% stock, known as War Loan last made the headlines in late November, hotly tipped at the time by hedge fund manager Hugh Hendry as a key holding in his own personal portfolio.

Mr Hendry was only partially right in terms of his market timing. The bond was trading in the low 80’s at the time and leapt up just below 90 by the end of the month. However, investor sentiment towards longer-dated bonds has softened considerably this year and the sector has fallen back.

War Loan has been no exception. The bond has fallen all the way back to historical support in the low 70’s, a level that dates back 2003.

Studying the longer term history of this bond’s price action, we note that it exhibits strong range-trading characteristics. With this in mind, the reaction to the sideways support at 72 is significant (see chart, right).

Trading around 75 today, the bond’s running yield is a not unreasonable 4.7%*, what is more, the range position is rather more favourable than when we last covered this instrument. We decide to add a 5,000 nominal position to our model portfolio, betting on a recovery. Unlike most of our positions, this is more than a trade than an investment, and we would look to realise a profit on a move into the 80 area.

Mark Glowrey

* "Perpetual" bonds such as the UK Treasury 3.5% War Loan have no fixed redemption date. It is thus impossible to calculate a yield to maturity. Market convention is to apply a "running yield", based on the coupon and the price paid. This calculates the amount of income yield that the investor will receive. At the current market price of 75, the running yield will be 3.5% x 100/75 = 4.7%.

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