This has impacted yields on corporate bonds, where there are few attractive yields remaining. One of the more reasonable long-term corporate bond options is the Provident Financial 7% 2020 bond (i.e. 7% coupon, maturing in 2020). But buying any long-term bond has its risks - how does this bond measure up?
Buying any long-term corporate bond is a gamble on a number of factors, including:
- the long-term prospects for the organisation - will it survive? If not, you could lose all your money!
- future inflation - will your return be eroded by the steady drip, drip, drip of inflation?
So, how secure is the issuer? The Providential Financial Group is a money-lender to low-income borrowers with just a BBB+ rating. Door-step money-lenders specialising in unsecured loans - such as Cattles and London Scottish Bank - have had problems in the past: Cattles, trading as Welcome Finance, were suspended and London Scottish Bank went into administration. Provident Finance were criticised by Barnardo's for charging customers annualised interest rates of up to 545%. Panorama recently criticised them on a number of counts, including lending to people with mental problems: read the rebuttal here.
So, not a brilliant picture. But Providential Financial has been around, in various forms, for 130 years - providing what it calls 'small home credit loans' to households. It fills a niche need and provides a service, albeit one that most readers of this blog would not need to call on - but at an interest rate that would shock most investors.
As for the inflation risk, my money is obviously on the expectation that the Bank of England will keep this under control, even after flooding the market with new money. It will do this by raising the interest rate once there are signs of sustained recovery in the economy. This will mean that the price of bonds will fall in the short term - but this is not a problem for me as this is planned to be a long-term hold, giving me a layer of reasonable return over the next 8 years.
The price of this bond peaked recently and is now falling. Bondscape is currently showing an income yield of 6.5% and a yield to redemption of 5.9%, although the actual figures will obviously depend on the market price you obtain. Unlike many corporate bonds, you can buy this one in small parcels, which is nice for smaller portfolios.
Compare this to the return that you can obtain, risk-free in a cash bond or with a perpetual gilt and you will see that the risk premium is only a couple of percentage points. Times are getting harder for income investors with cash to re-invest.
[Purchase price: £1.072]
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.