Bonds can offer far more attractive interest rates for savers, but are not entirely risk free, says Richard Wright
Even when interest rates go up, returns for savers will be well below where they were before the recession. Since 2007 savers have been the biggest losers, and in response to rates that fail to match the inflation rate, new ways of investing have become popular.
One is retail bonds, effectively loans to businesses that offer a higher rate than banks or building societies will pay. For the business selling the bond this is still cheaper than borrowing from banks, because of the spread between the base rate and commercial loan rates. There has been a big growth in these bonds, but they can never be a risk-free investment, and are not covered by the financial industry guarantee up to £85,000 against a bank collapsing.
Listed bonds, normally in blue chip companies, can be traded. ORB – Order Book for Retail Bonds – is part of the London Stock Exchange and it trades company bonds in the same way as shares, but on a much smaller scale. Over the past year bond values have increased over the original buying price, which is a bonus for savers on top of the 5 or 6% return promised. Examples are Tesco trading at 105.6 pence, National Grid’s 6% retail bond trading at 112p and Severn Trent’s 6.1% bond at 118p.
In the past two years the number of bonds traded on the ORB has trebled, although most investors buy planning to hold them for the full term. These are effectively IOUs in a business, but given that those that are traded are from blue-chip companies it’s difficult to see circumstances where they wouldn’t be able to meet the payment. That is theoretically possible, however, and these should always be part of an investment portfolio, rather than a home for life savings. And while they can be traded they should be thought of in the same way as buying a bond with a bank or building society – as something you will hold until maturity.
Another type is known as mini bonds. These are like when people held shares in shipping businesses or airlines to get a discount on tickets. Mini bonds are generally in lesser known businesses, but promise a similar premium interest rate, and often come with perks. The Jockey Club recently sold out a bond offer in days that included special treatment at races; Hotel Chocolat also sweetened its offer – no pun intended – with free products. These can’t be traded on the ORB, but apart from that they are the same, and come with the same caveat about there being no protection against default, either in the shape of an interest payment not being met or losing the entire investment.
Bonds that can be traded via the ORB will have had more due diligence applied before they are listed. This is not a guarantee of solvency, but it reduces some of the risk – although the only negative Google found on UK mini bond failure was when investors had to press collectively over a missed interest payment.
Remember too that with a bond that cannot be traded you are locked in until it matures. A middle way is to invest in some of the retail bond funds, run by investment houses, but these are open ended with no maturity date. They are still outside the scope of the Financial Compensation scheme if things go wrong. When interest rates are about to rise bonds may become less attractive, as the gap between their return and traditional savings narrows – so remember that the biggest mistake amateur investors make is ge