Exchange traded bonds arrive in retail market

Kathleen Brooks
FOR investors wanting to diversify their investments, bonds have always been an attractive option. However, until now retail investors who manage their own portfolio would have found it difficult to try and buy UK bonds.
Earlier this week, though, the London Stock Exchange launched an electronic retail bond-trading platform, and for the first time investors will be able to buy UK corporate bonds just like stocks and for as little as £100 (courtesy of RBS) as well as gilts.

Previously, retail investors were subject to large bid-offer spreads if they wanted to buy a UK bond in the over-the-counter market, which made investing in fixed income products an unattractive option. Charles Stanley, the investment advisor and stock broker, said that there is demand for a retail bond market in the UK and that it will be a “good thing” for its clients to have more choice in their investments.

Now investors can trade bonds on the exchange in the same way they do stocks. They can use the same broker account and trading on an exchange offers the benefits of price transparency and regulation.

For investors not used to the fixed income markets there are a few things they should know before they start. Ben
Board, RBS’s head of UK listed product sales, says it’s worth keeping in mind that you will incur dealing charges for all transactions you make on the exchange. So, if you are purchasing a £100 bond with a 5 per cent yield, and the transaction cost is in excess of £10, then you will immediately be sacrificing two years of yield or income. To avoid this and limit your costs it’s more economical to plan what bonds you want beforehand and even buy bonds in bulk.

On top of that Board says that investors should be aware that bond prices are deeply sensitive to credit ratings and investors need to be on top of what the agencies are saying about the bonds they own: “If a company’s credit rating is downgraded then the price of the bond will collapse. Likewise if it’s upgraded then bond prices can soar.”

But, for those looking for a safer investment after the turmoil of the last two years, then bonds could be the answer. After the collapse of Lehman Brothers and HBOS, investors are now more aware that companies can fail. The bonds currently traded on the LSE’s order book are all senior debt. This means that if a company goes insolvent, you are higher in the pecking order as a senior creditor and have a greater chance of getting your money back through the sale of a liquidated company’s assets. This puts you in a better position than shareholders who are not entitled to anything if a company goes bust. Of course, if the company has no assets left then your capital will be wiped out.

The bonds currently trading on the LSE’s new order book are also free from stamp duty. The launch of a retail bond exchange in the UK is good news for investors. Bonds that are tax friendly, relatively safe and now fully transparent and tradable on an exchange makes diversifying your portfolio a lot easier.