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Moorad Choudhry

Moorad Choudhry is a vice-president with JP Morgan Chase in London.

Prior to joining JP Morgan, he traded gilts and sterling Eurobonds at ABN Amro Hoare Govett and Hambros Bank. He has lectured on the bond markets at International Faculty of Finance and London Guildhall University, and is a Fellow of the Centre for Mathematical Trading and Finance, City University Business School.

Books

The Bond and Money Markets, Butterworth-Heinemann, 2001

Bond Market Securities, FT Prentice Hall, 2001

Capital Market Instruments, FT Prentice Hall, 2001

Investing in bonds

The views, thoughts and opinions expressed in this article are those of the author in his individual capacity, and should not in any way be attributed to JP Morgan Chase, or to Moorad Choudhry as a representative, officer or employee of JP Morgan Chase.

1. The oldest rule in the book: diversify. Always have bonds in your portfolio.

Not all of your investments should be looking for the quick profit. That’s high risk, and therefore unnecessary. In a bull market you’re buying bonds at a lower relative price, but receiving a regular income (coupon) at a time when fewer and fewer equities pay dividends; when the stock market starts falling and we start the transformation to a bear market, your investment is exposed to less downside, and as interest rates start to fall you’ll also register capital gain.

2. Go with the business cycle, not against it.

Familiarise yourself with the interest rate cycle. Corporate debt spreads are at their lowest at the top of the business cycle - not the best time to buy. In reality its easier to discern a slowing down economy than a falling market. A better way of looking at this is as the ‘interest-rate cycle’. As interest rates start to fall and corporate debt spreads start to widen, the market entry point becomes clearer. What’s the consensus with the interest rate cycle? The UK’s Monetary Policy Committee has rarely, if ever, surprised the markets. So that means the market knows roughly where interest rates are going. So if the consensus is open knowledge, you can base your buy and sell decisions on the interest rate cycle. Contrast this with equities - its anybody’s guess where the buy or sell point is.

3. Everyone should have a safe haven for a portion of their savings - hold government bonds like gilts.

Gilts outperformed UK equities in 1998 and 1999, but with none of the risk of any of the equities in the FTSE 100. That’s a risk-reward combination that’s unbelievable and unmatchable. It almost invariably makes sense to place some funds with this kind of product irrespective of where the market or the business cycle is.

4. Buy the downgrades, sell the upgrades.

The market is usually marking down debt ahead of any formal announcement by the ratings agencies. But not all the news is priced in; after a downgrade the sharp sell-off signals a buying opportunity, as spreads have already widened considerably and widen still further. Similarly its too late to buy after the upgrade announcement, which implies a sell signal. But keep an eye on the interest rate cycle.

5. Heed the credit rating, but look ahead of it.

The formal credit rating is there for a reason, so heed it. But consider the statistical probabilities. A BBB- or BB-rated company has more upside potential, statistically speaking, than an AA-rated company, which is unlikely to go much higher. So with the higher-rated company you’re looking at smaller capital gain potential.

6. The current yield spread is telling you something - heed it.

Very wide spreads are there for a reason. So if you’re holding the debt, sell it. If you’re not, look at buying it. Check where the equity is trading: how is it viewed? But go with the fundamentals, not media fad.

7. Don’t hold corporate debt if you don’t like the corporate equity.

Simple psychology of the self: if you don’t like the company full-stop, you’re not going to like the company’s debt, and you won’t feel happy holding it.

8. Don’t invest going into important announcements.

Markets are unpredictable. We know that. So don’t make it any harder for yourself by buying, or indeed selling, just before an important announcement such as an FOMC meeting. Sit on your hands until after the announcement and then plan accordingly.

9. Corporate bond prices are good bell-weathers of corporate health generally. Use them as a guide for all your investment decisions.

Bond market analysts will tell you that, unlike equities, the bond market is a proper market. A greater fall in a company’s bond price relative to other debt of the same sector, is a good indicator of the falling positive perception of the company’s overall health and financial well-being.

10. Look at established names in a slowing economy or recession.

Corporate debt spreads widen in a slowing economy or recession. However established names (such as FTSE 100 companies, etc) are often viewed positively as the economy starts to recover, and their debt is a strong contender for upside growth as the economy starts to grow again. Consider buying into the market at this point.

11. When interest rates are historically high, buy bonds.

Check recent history. If interest rates are at historically high levels (go back say, three or five years), that means they will be going down at some point. It might be next week or next year, but they are going down. Jump on board now, sit back with your coupon income, and wait. A capital gain is a certainty. Especially with new issues.

12. Don’t look for the bottom of the market, or for that matter the top.

It’s very difficult to pick the bottom of any falling market. Look at the business cycle and interest rate cycle, and go with it. If you’ve lost confidence in your holding, sell it.

My one regret: Not joining Giles Fitzpatrick’s equity sales team at Hoare Govett Securities Ltd in 1993, after being offered a job by him.

‘Be sceptical of track records. There are so many funds and forecasts that at any point in time, someone has to have been right. With enough monkeys in the room, one of them will type out Hamlet. But it doesn’t mean the same monkey will then go on to write Macbeth.’

Paul Ormerod