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Model Portfolio: 15 September 2008
Gilts and supranational bonds strong, but storm continues to rage in corporate, financial sector bonds............... 
    

Over the five weeks that have passed since our last valuation, the tone of bond markets in general has been positive, buoyed by expectations for lower interest rates in the UK going forward. This dovish outlook for rates has extended the recovery in the price of Gilts and other quasi-government bonds such as the EIB issues a little further, and five year bonds are around 4% higher than their summer lows.

However, the price of corporate bonds is nowadays driven more by the credit outlook than by expectations for future rates, and in this asset class there have been considerable price fluctuations, particularly amongst issues from US banks/investment banks. We have two holdings in this sector, which we review below:

Merrill Lynch 5.125% 24 Sept 2010: We purchased this bond back in April at a price of 97.66p. The price has continued to trend lower, pushing to a worrying new low of 90.8p on Friday. However, the news over the weekend of the Bank of America bid for Merrill should be viewed as broadly positive, given the formerís double-A rating. The bond is a couple of points higher this morning. With the yield now nearly 10%, we view the bond as a hold/add.  

Citigroup 5.125% Dec 2018: This is a ten year bond, so might be expected to be more volatile than the two-year Merrill issue above. However, the price has been relatively stable for the sector, holding a range between 81p and 87p since the March low. Given the situation in the US, further volatility can be expected. With a yield of 7.5% to redemption, we view this bond as a weak hold.  

Elsewhere, the portfolio continues to be challenged by volatility in our PIBS holdings, and this can be expected to continue. We grit our teeth here, mindful of the high regular income which rolls back into the portfolio every six months. Overall, the portfolio is slightly up from last month and remains a reasonably secure port in a storm. However, the performance is less than we would like it to be and it will take some time for the discounts that have been priced into corporate and financial bonds to work their way out.   

Model Portfolio

Date of Purchase

Issue

Nominal

Purchase Price

Current Price

Value  

Accrued

30 Jan 2007

Kingfisher 5.625% 15 Dec 2014

10,000

  95.24

82

 8,200

 427

15 Feb 2007

Alliance & Leicester 4.25% December 2008

10,000

  97.46

99.25

 9,925

 305

7 Mar 2007

Segro 5.5% 20 June 2018

10,000

  97.35

82.50

 8,250

 135

28 Mar 2007

EIB 4.75% 06 June 2012

10,000

  96.82

98.25

 9,825

 135

18 April 2007

Merrill Lynch 5.125% 24 Sept 2010

10,000

  97.66

93.25

 9,325

 504

18 July 2007

Treasury (Gilt) 4.25% 7 March 2011

10,000

  95.20

99.00

 9,900

 10

19 Aug 2007

Portman (Nationwide) 6.25% PIBS

 5,000

  97.50

85

 4,250

 127
9th Jan 2008 Marks & Spencer 5.625% March 2014 10,000   95.82

86

 8,600  274
10th April 2008 Bradford and Bingley 11.625 PIBS 10,000  112.00

88

 8,800  189
1st May 2008 Citigroup 5.125% Dec 2018 10,000  85.30

84.25

 8,425  393
23 July 2008 Experian (GUS) 6.375% July 2009 5,000  98.95     98.10  4,905  109
20 Aug 2008 Next 5.25% Sept 2013 5,000  86.5     85.25  4,262  253
Bond sub total             94,667 2,861 

 

Category Sum            Notes
Securities

94,667

Valuation of current holdings
Accrued

2,861

Interest accrual on above 
Cash

4,542

Including interest & coupons received. 
     
Total

£102,070