Friday 15 August 2014

HALP Yourself with Horizontal Thinking

horizontal vertical 2
You've no doubt heard of lateral thinking but I do some of my best (?) thinking horizontally, lying on my bed looking at my laptop. Not good for posture, I know - perhaps that's why my back hurts?

But back to horizontal thinking: it's not like sitting at a desk, with so many distractions but rather it is almost Zen-like, as I can look at the trees out of the window. Almost day-dreaming - but allowing the subconscious to surface.

So, what does horizontal thinking tell us about the price of bonds?

I'll come back to that, after a bit of background. Being a confirmed value-seeker (as my shopping habits reveal), as well as an income-seeker, I have typically not wanted to 'buy yield': in other words, I don't usually pay a lot more than 'par' for a bond. (Think of 'par' as the 'face value' or amount you would get back if the bond were repaid.)

Well, back in late 2013, I got a bit desperate for attractive fixed-income securities and I did buy yield, in the form of Halifax 9.375% (9 3/8%) Perpetual Subordinated Bond (now part of Lloyds Bank) with the ticker HALP. A cracking yield - but at a price that matched (around £1.23).

The price has (perhaps surprisingly) risen since then - but horizontal thinking flashed up a warning: could you have a better environment for UK fixed-income? Low interest rate, international crises by the bucketful, uncertainty in the Eurozone. The obvious answer (to the horizontal me, at least) was: no, it can't really get much better.

And that means that the only way for the price to move is down. Plus, because I have 'bought yield', this downward movement will be leveraged: these price levels won't be seen again for years. Not good at all for the DIY Income Investor portfolio.

So I have sold my HALP bonds, at a modest capital gain of 9%. This is not so much a decision based on my buy/sell rules but a correction of the mistake of 'buying yield' in the first place.

By the way, after a couple of weeks of depressing stock market news, the portfolio is now hitting new all-time highs, with 2014 net total returns running at over 10%.

Time to go vertical, before my back seizes up completely.

[Sale price: £1.3776]

I am not a financial adviser 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.

1 comment:

  1. I feel the same way and usually buy on issue.

    HT for flagging up CLIG, it made sense to me on macro levels too. Its been a scorcher!