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Mark Glowrey. The Sterling Bonds and Fixed Income Handbook
Publishing details
Acknowledgements
About the Author
Foreword by Dr Stephen Barber
Preface. Who this book is for
What this book covers
Introduction
Chapter 1: What’s a bond? Some key concepts
Key features
Chapter 2: Why buy bonds? The risks and rewards of investing in bonds
Table 2.1: comparative performance of UK equities and gilts
The rewards
1. Security
2. Return of capital
3. Income
4. Capital growth
5. Diversification
Figure 2.1: long-dated gilts v. FTSE 100 (2000-2003)
6. Benefit from falling interest rates
7. Speculation
The risks
1. Risk of default
2. Market risk
3. Issue-specific risk
4. Event and operational risks
5. Inflation
Chapter 3: The players in the bond markets
Issuers
Common sterling bond issuers
The European Investment Bank
Kreditanstalt für Wiederaufbau
UK banks & building societies
General Electric
Utilities
Tesco
Investment banks
Table 3.1: ranking of investment banks in sterling bond market (2010)
Euroclear
Brokers & intermediaries
A day in the life of a broker-dealer
Investors
Table 3.2: classification of investors in bonds
Endnote
Chapter 4: The life cycle of a bond. The timeline of a new issue
The lead managers and the selling group
The life cycle of a bond
Chapter 5:What happens if interest rates move?
Price & yield
1. Income (or running) yield
2. Simple yield
3. Yield to maturity (YTM)
Bond calculators
Duration
Table 5.1: Duration example
Convexity
Figure 5.1: convexity
Chapter 6: Credit quality and ratings
Types of loan. Secured lending
Senior Unsecured
Subordinated
And how about government bonds?
Credit ratings. Credit rating agencies
The cost of ratings
Credit ratings
1. Investment-grade debt
2. Non-investment grade
Table 6.1: conversion table for S&P and Moody’s credit rating
Table 6.2: bond default analysis
Non-rated issues
Making the credit decision. Credit ratings
Do-it-yourself credit analysis
Table 6.3: the main credit questions for investors
Timescale of investment
A quick glance at the share price
Summing up
Types of issuer
Sovereign issuers
Bank issuers
Corporate issuers
Other types of issuers
Some sample issuers and their ratings
Frequently asked questions. Will a highly rated bond be less volatile than a lowly rated bond?
What are junk bonds?
Can credit ratings change?
Endnote
PART II: Bond Markets
Chapter 7: Gilts
Back in the day
Exchange floor nicknames
Trading gilts in the 70s and 80s
The modern gilt market
Conventional gilts
Table 7.1: sample gilt terms
Chart 7.1: price chart for sample gilt
The yield curve
Positive and negative curves
Chart 7.2: gilt yield curve (2000, 2010)
Table 7.2: UK gilts (March 2011)
Some peculiarities of gilts
Accrued interest
Sub-division to the penny
Ex-dividend
Gilts and taxation
Table 7.3: effective yields on gilts (accounting for tax)
Gilt strips
How do strips work?
Gilt strips
Why buy strips?
Advantages
Table 7.4: price comparison of strip v gilt
Disadvantages
Double-dated gilts
Undated gilts
Table 7.5: UK undated gilts
Chart 7.3: price chart of War Loan
Undated gilts and the yield premium
Treasury Bills
Chapter 8: Index-linked gilts
Treasury 2% Index-linked 1996 – the first index-linked bond
Table 8.1: actual payments made for sample index-linked gilt
Many linkers then followed
Table 8.2: UK index-linked gilts (18 Nov 2011)
Type-two linkers
Table 8.3: type two index-linked gilts
Estimating value in index-linked gilts
Real yield
Money yield
Breakeven inflation rate
Real return at X% inflation
Calculating the current par
The future
Conclusion
Chart 8.1: price performance of index-linked gilt (2007-2010)
Chapter 9: Domestic and Eurosterling corporate bonds
Development of the Eurobond market
What about listing?
Domestic and Bulldog bonds
Meat in the sandwich
How big is the sterling bond market?
Institutional or retail?
European Prospectus Directive (EPD)
LSE - Order Book for Retail Bonds
Endnote
Chapter 10: Zeros, FRNs, convertibles and others. Overview
1. Zero Coupon Bonds
Table 10.1: volatility analysis of EIB 0% 5th November 2026
Figure 10.1: effect of interest changes on bonds
Advantages of zero coupon bonds
Disadvantages of zero coupon bonds
Dealing in zero Coupon bonds
2. Floating Rate Notes
Table 10.2: list of example FRNs [4]
Advantages of FRNs
Disadvantages of FRN
Dealing in FRNs
The discounted floater gearing effect
Example
Perpetual Floating Rate Notes
Table 10.3: some sample perpetual FRN issues [5]
Advantages of Perpetual FRNs
Disadvantages of Perpetual FRNs
3. Equity Convertibles
Valuing convertibles
Buying “busted” convertibles
Advantages of convertibles
Disadvantages of convertibles
4. Mortgage & asset-backed bonds
Figure 10.2: Collateralised Mortgage Obligation structure
Pfandbriefs and European mortgage bonds
Covered bond
5. Corporate index-linked bonds
National Grid 2.983% 2018
Retail-targeted index-linked bonds and structured products
Index-linked retail bonds
Endnotes
Chapter 11: Other types of bonds
1. Debentures
2. Fixed income preference shares
Cumulative & non-cumulative
Redeemable, perpetual or convertible?
Zero dividend prefs
Dealing in FIPS
3. PIBS
Effect of the credit crunch
Ex-building societies
Dealing in PIBS
Call dates on PIBS
Case study – The Portman 7.25% PIBS
Chart 11.1: price history of Portman 7.25% PIBS
Extract from Portman 7.25% PIBS prospectus
Summary
4. Contingent capital instruments
My thoughts
Endnotes
Chapter 12: Overseas and foreign currency bonds
Think currency first, bonds next
Chart 12.1: BOBL v GBPEUR
US dollar bonds
Chart 12.2: US treasury yield curve
Euro-denominated bonds. European government bonds
Chart 12.3: yield spread on the 10 year Italian BTPS
Table 12.1: 10 year Euro government bond yields (March 2011)
Non-government Euro-denominated bonds
Table 12.2: sample of bonds traded on Italian MOT
Comment
Other foreign currency bonds
Chapter 13: A walk on the wild side – distressed and illiquid debt. Some key concepts
Fallen angels
Table 13.1: sample bond prices and yields – October 2008 to Sept 2010
Chart 13.1: price chart of RBS 7.0916% perpetual issue
New issue vs fallen angel
Michael Milken and Drexel Burnham Lambert
Junk bonds established as an asset class
Chart 13.2: a Brixton angel falls
High yield bonds and the credit cycle
Investing in high-yield bonds. Know your asset
Get a good broker
Broker criteria
Investment considerations
Transparency and liquidity
The inverse yield curve – getting more bang for your buck
Table 13.2: General Electric sterling yield curve
Sell or hold – consider your exit
Some types of trades
1. Overreaction to bad news
Chart 13.3: reaction of BP 4% 2014 bond to Gulf of Mexico disaster
2. Yield – and plenty of it
3. Calls and corporate events
4. Takeovers
Chart 13.4: M&S 5.625% 2014
5. It’s going bust – but not just yet
6. High-yielding currency plays
Chart 13.5: Iceland T-note 7.25%
7. Odd-lots and oddities
8. Busted bonds
9. No-premium convertibles
10. Selling short
Putting a high yield portfolio together
Size and scalability
Chapter 14: Bond funds
Charges
Table 14.1: three sample bond funds
ETFs
Chart 14.1: iShares £ Corporate Bond ETF (2006-2010)
Chart 14.2: Marks & Spencer 5.625% March 2014 (2006-2010)
Table 14.2: selection of bond ETFs
Comment
ETF structure
Chapter 15: Dealing, custody and other mechanics
1. How to deal. Bond identification
What will the final cost be?
Example
Accrued interest for gilts
Selling your bonds
Commissions
Wide bid-offer spreads
Tips for keeping down dealing costs
Settlement
Reconcile your statements
2. Platforms and markets. The dematerialized bond market
Table 15.1: sample bond prices from a market maker
Key
Chart 15.1: Sterling corporate bond yield curve
Bondscape
The LSE ORB
A steady start
Figure 15.1: screenshot of ORB quote screen
3. Custody and delivery
4. Choosing a broker
Establishing value
Figure 15.2: screenshot of sample Bloomberg YAS page
Chart 15.2: average corporate bond yields compared to gilts
Spread over gilts or spread over swaps?
Trend of spread
Chart 15.3: trend of relative spread for Roche 5.5% 2015
Chapter 16: Building a bond portfolio
1. Diversification
Table 16.1: sector breakdown of the iShares iBoxx GBP Corporate [SLXX] (Mar 2011)
Costs
2. Ladder structure
Table 16.2: ladder structure of a rolling maturity portfolio
Surfing the yield curve
3. When to sell
4. Two sample portfolios
1. Model Bond Portfolio
Table 16.3: Model Bond Portfolio
Table 16.4: Model Bond Portfolio valuation
Comments
2. Invesco Perpetual Corporate Bond Portfolio
Table 16.5: top 10 bond issuers (allocation percentage in brackets)
Table 16.6: Invesco Perpetual Corporate Bond Portfolio breakdown by credit rating
Comments
Chapter 17: Trading the fixed income markets. About trading
What to trade and how
1. Trading benchmark government futures
Table 17.1: major government bond futures contracts
2. Spread betting
3. Credit derivative ETFs
Chart 17.1: dbx iTraxx Crossover ETF
Types of trade. Long and short trades
Chart 17.2: Japan 10yr bond yield
Curve trades
Chart 17.3: yield curves for UK, US and German government bonds (Feb 2011)
Steepener trade
Flatteners
Spread trades
Chart 17.4: GE 5.5 June 2021 v 10 year gilt
Chart 17.5: Portugal 10yr bonds v Germany 10yr bond
Short-term interest rates (STIRS)
An example of the Short-Sterling contract series
Endnote
Chapter 18: Trading with technical analysis
Primary trends
Chart 18.1: long-term downtrend for US bond yields
Chart 18.2: big picture in UK gilts
Support and resistance
Sideways support and resistance – reversals occurring at identifiable prior levels
Chart 18.3: iShares 7-10yr T-Bond fund
Sideways level corresponding to big figures
Fibonacci retracements
Chart 18.4: price reacting to a Fibonacci level
Uptrend support and resistance
Chart 18.5: an established uptrend
Breakouts and false breakouts
Chart 18.6: downside break through a support level
False breakouts
Chart 18.7: a failed breakout
Using moving average pairs
Chart 18.8: moving average pair to identify trend
Chapter 19: Tax
The tax treatment of bonds. Gilts. Income tax
Capital gains tax
Corporate and Eurosterling bonds
A quirk of index-linked corporate bonds
Preference shares
Tax shelters. ISAs
SIPPS
Stamp duty
Concluding advice
The Six Golden Rules of Bond Investing
Appendix 1: Sample bond prospectus and notes. Sample prospectus
Notes. Page 1
Page 2
Page 3
Page 4 and onwards
1. Form and denominations
2. Status of the bonds
3. Negative pledge
4. Interest
5. Payments
6. Redemption
7. Taxation
8. Prescription
9. Events of default
Features generally to watch out for with bonds
Appendix 2: Bond maths
Price & yield
1. Income yield
2. Simple yield
3. Yield to maturity (YTM)
Duration
Accrued interest
Floating Rate Note calculations
Index-linked calculations
Calculating current par
Appendix 3: Resources for investors
Books
First Steps in Bonds, by Peter Temple
An Introduction to the Bond Markets, by Patrick Brown
An Introduction to Bond Markets, by Moorad Choudhry
The Handbook of Fixed Income Securities, by Frank Fabozzi
Inside the New Gilt Edged Market, by Patrick Phillips
Liar’s Poker, by Michael Lewis
Software and systems
Calculators
Websites
Training
Appendix 4: Brokers
Appendix 5: RPI/CPI table
Appendix 6: Gilt Edged Market Makers
Appendix 7: GBP corporate bond prices and yields
Appendix 8: Glossary
Investing books from Harriman House
