Whilst shorter-dated government bonds have benefited from inflows of money, the majority of corporate bonds have been sold off heavily as the perceived risk of default increases. The general trend is illustrated (right) by the chart of the iShares Sterling Corporate Bond ETF (SLXX) which holds a cross section of the aforementioned securities.
As might be expected, our own holdings in corporate and financial sector bonds are marked considerably lower this month, bringing the value of the portfolio down to below the initial cash investment for the first time since launch.
We also note that liquidity in the corporate bond market is also poor at present, and "real" bid levels may be several points below indications on the screen, indicating that the credit crunch is still very much with us.
Over the month, our main activity has been a drive to liquidity in order to set ourselves up to re-invest in some of the high yield opportunities now available. With this in mind we have taken a profit in short dated Gilt holdings (the UK Treasury 4.25% 2011).
Whilst all the valuations are down, the biggest blow has been the B&B PIBS. The assets and liabilities (minus the retail savings) of the bank have now passed into the hands of the government and the value of this subordinated debt security is severely impaired. At present, we do not know if the next coupon (December) will be paid and the government has issued no guidance on this. Looking on the bright side, we note that, unlike the equity, these securities are still (just) trading. Where there is life there is hope; there is at least the potential for further coupon payments and/or some partial repayment as the whole mess is unwound. We tentatively value our holding at 10p in the pound, seeing that trades have printed on the LSE in the 11-13p range over the past few days.
So what should the bond investor on the Clapham omnibus do? Firstly, he or she should remember that bond portfolios are not quite the same as equity portfolios . With shares, one is wholly relient on the future market price in order to regain one’s capital; with bonds, the combination of income and redemptions keeps the cash rolling back in, thus a "buy and hold" strategy has a rather better chance of success.
We now have around 15% cash, with more due to come back at Christmas from the redemption of the Alliance & Leicester (now Santander) Dec 2008. We will be keeping our "ladder" structure of tiered maturities and re-investing, hopefully picking up a few bargains in the 7-10% yield bracket.