Hybrid Bonds

by | Aug 30, 2012 | Archives

British Hybrid bonds are interesting as a way to diversify into British pounds.

Multi currency investors generally diversify into most major currencies but my portfolio has been shy the British pound.

This is good as this chart from www.finance.yahoo shows… it is down 21.5% versus the US dollar.

pound dollar chart 8-2012

Click to enlarge this pound/dollar chart.

This makes the pound interesting.  Britain has economic problems and is in a double dip recession. When this type of trouble comes along markets tend to oversell.   Britain’s economy and currency fundamentals such as current account and government deficit are not good, but not worse than the numbers for the USA.   A 21% drop is huge and the chart shows plenty of room for the upside of the pound versus the greenback.

currency fundmentals

From the  August 18, 2012 “Trade, exchange rates, budget balances and interest rates” at Economist.com. Click on photo to enlarge.

This makes the pound attractive so I started looking for investments in Britain.

One of my private investment brokers sent me a British pound portfolio that balances growth and income with low to medium risk.

Two of the British bonds in that portfolio offer very interesting yields.

These bonds are issued by #1: Co Op Bank and #2: Skipton Building Society.

Co-Operative Bank 5⅞% Variable due 02/04/19  sold at a discount of 93.5  yields 6.3%.

The Coupon fixed until first call date 02/04/14 when if not called at 100 coupon becomes variable fixed annually on the 5 year Gilt yield plus 2.25%.  Yield to call is 10% pa.

The Co-operative Bank plc is a commercial bank in the United Kingdom and Guernsey, with its headquarters in Manchester.

The bank markets itself as an ethical bank, and refuses to invest in companies involved in the arms trade, global climate change, genetic engineering, animal testing and use of sweated labour as stated in its ethical policy. The ethical policy was introduced in 1992.

Recently the bank committed 300 million pounds ($482 million) in loans for U.K. renewable energy projects in 2102 and said it may increase its overall lending target, its head of renewables said. The bank is also in the process of buying over 600 branch of TSB bank from Lloyds bank group which will make Co Op bank the fourth largest UK main street bank.

See more on Co Op Bank below.

Co Op Bank at Wikipedia

Skipton Building Society 10% Variable Bond due 12/12/18  at @ 97 yields 10.1%.

The Skipton coupon is fixed until the first call date of 12/12/13.  If not called at 100 the coupon becomes variable fixed annually on the 30month LIBOR yield plus 6.95%.  Yield to call is 12% per annum.

Established in 1853, Skipton was among the first building societies and is Britain’s fourth largest building society with £13.9bn of assets and over 100 branches across the UK.  They just reported a £22.3m pre-tax profit for the six months ending June 30, 2012, an increase of 253 per cent on the £6.3m profit it made in the first six months of last year.

British Bond ETF

For investors who want broader diversification into higher yield British bonds the “iShares Markit iBoxx GBP Corporate Bond 1-5 ETF” is open to almost all investors.

The British bond market is a large one mainly supported by pension fund investors … who  typically invest in long term bonds.

Bond prices move conversely to interest rates and because interest rates are so low… the potential for capital gains are dramatically reduced in the bond sector.  The longer dated a bond the more it is affected by interest rate changes. This means that in periods of very low interest rates (like now) short term bonds are safer.

This new 1-5 ETF  is restricted to corporate bonds with maturities of five years or less and minimum outstanding of GBP 100mn. The ETF invests in the index that shows a broad 60/40 split between financial and non-financial bonds, with some 45%  rated A rating and around 30% BBB. The ETF denominated in British pounds.

Brit financial charts

This is the iShares Markit iBoxx GBP Corporate Bond 1-5 ETF performance chart for the last year.  This ETF has a trading symbol IS15 on the London Stock Exchange.

Brit financial charts

Here is this ETF’s performance over the last year according to Bloomberg.

Learn about our report… “Borrow Low Deposit High-How to be a Multi Currency Investor

Being a multi currency investor adds safety, stability and extra profit opportunity especially in this volatile global economy.   The British pound is a currency to consider adding for a long term investment now.


Learn more about investing in Multi Currency bonds at our October 5-6-7 Super Thinking + International Investing and Business seminar.

More on Co OP Bank

More on Skipton Building Society