Analysis & Comment > Bond of the Week
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Bond of the Week: 1 December 2006. We highlight Glaxo 4.875% October 2008.
We highlight the Glaxo 4.875% October 2008
Investors hunting for value in GBP bonds may be left scratching their heads when they examine the current market.
Conventionally, fixed income markets reward investors with a higher return for a longer investment, and one might expect a bond with a ten year maturity to pay around half a percent more than a bond with a two year maturity, a situation known as a positive yield curve. This is certainly not the case at present. The markets believe that UK interest rates will eventually drop below their current levels, and this has forced the return on longer dated bonds below that available for short-dated issues with two year Gilts at around 5% while the super-long 4.25% 7th Dec 2046 yields less than 4%.
This is known as a negative yield curve and is exacerbated by the demand for long gilts from pension funds and other institutional investors who need to lock in investment returns against future pension liabilities.
So where to look for yield? We would focus on the shorter end of the curve for the moment. Very short bonds of one year or less to maturity should be ruled out by most private investors, as the cost of dealing in such instruments (commission and bid/offer spread) may negatively impact the overall return. Better to use cash deposits for this area of the portfolio.
The two to three year area shows more promise and here we utlise the “column sort”* function on the website to identify bonds with these maturities
We are tempted by the 7.7% return shown by the Ford Credit Canada Dec 7.25% Dec 2007, but this bond is a little too short for our requirements and with a single B rating, somewhat too speculative for our model portfolio.
Better perhaps is the Vodafone 6.25% 10 July 2008, priced at just over par (101.08) and offering 5.43%. However, we prefer whenever possible to buy bonds under par and the GlaxoSmithKline 4.875% October 2008 offers a yield to maturity of 5.25% based on a purchase price of 99.25%. With a double “A” rating from Standard & Poors**, this bond can be comfortably considered investment grade and makes a good low risk holding for any portfolio.
* When viewing a table of bonds, the list can quickly be ranked by coupon, life, maturity or yield by clicking on the column headers.
** See the “Learn about bonds” section for more about credit rating.