The only way is up?

[88V8]

So if as seems likely, UK rates have topped out, one may expect a steady rise in Prefs and presumably other FI instruments - leaving aside junk, which has other drivers - as the market looks ahead to rate cuts.
And with some lag, the same with ITs such as BIPS, NCYF, SHRS, that are heavy in FI.

Today and in the coming days I intend to invest most of our liquid dosh in that area, it seems a no-brainer.
Today, added to BP.A, INVR, NCYF.

During the last cycle, I watched SPs rise, and then watched them fall. As an income investor, I contented myself with the income.
This time around however I intend to try and capture some of the capital gains by selling near the top. OK, that may be a year or three.
The question then would be, when all FI is falling, what does an FI investor buy?

What did you do, last time around?

V8

[BullDog]

Good question(s). I'm all ears waiting to hear the answers.

[DrFfybes]

2 of your choices are already up 10% or more in the last 6 months, NCYF already back towards 5 year highs.

The other 2 might be recovery plays, but last October seemed a good time to me to get exposed to Bonds. Ishares and Fidelity funds are up circa 10%, but Vanguard Govt UK Bond Index Fund is still slightly underwater.

Paul

[Jwdool]

Seems to me that we should distinguish between the long and short end at this stage. The short end is offering 4.8-5% (Gilts) out to 2025. Yields then drop back to 4.1-4.2% out to 2032 and then back up again to ~4.7% on the 20 year.

What has been interesting is the way in which PIBS and Prefs have been tracking the short end - not the long end. I suspect this is because there is a high likelihood of tenders from 2025/6 given the change in e.g. solvency rules for insurers (this would affect RSAB/ GACA, GACB, AV.A, AV.B). We are also likely to see other BoI-like tenders for names such as MBSP/R, NBSR, NOTP etc. as building societies eliminate capital that only counts as Tier 2 in the cap stack and isn't relevant for CET1/ Reg cap.

What does this mean? I guess it makes sense to go long of PIBS/ Prefs but seek out those most likely to get tendered - given the opportunity for a premium - namely the ones noted in this post. There are also a few interesting special situations such as the old WBS 6.15% PIB - which is trading ~75p, but likely to be taken out in 2026.

The Coop (group and bank) also offer very strong interest across their cap stack, typically >8% and over the next couple of years, I'd be surprised to see their solvency in any real trouble (famous last words!).

For those looking for long duration in senior - I I like the following:

Lloyds TSB Bank 6.5% with friendly £1k denom: XS0543369184 (also available on retail platforms e.g. HL)
Legal and General 5.875: XS0121464779
Glaxo 5.25% 2033: XS0140516864

[88V8]

2 of your choices are already up 10% or more in the last 6 months, NCYF already back towards 5 year highs.
The other 2 might be recovery plays, but last October seemed a good time to me to get exposed to Bonds.

Yes, already moved up. Logically, with more rates rises to come, prices should have continued falling, but as I said elsewhere, it's hard to know when one is at the bottom and the market is not always logical.
NCYF is around 47 vs 57 two years ago. The attraction there is the c9% divi which now will hopefully be covered which it has not been for some time.

The other two obvious IT targets SHRS and BIPS have also moved up and offer a more modest divi. I already hold both of them.

V8

[OldBoyReturns]

During the last cycle, I watched SPs rise, and then watched them fall. As an income investor, I contented myself with the income.
This time around however I intend to try and capture some of the capital gains by selling near the top. OK, that may be a year or three.
The question then would be, when all FI is falling, what does an FI investor buy?

What did you do, last time around?

V8

Having, like you, ridden out the last cycle (with various relative value switches and some more recent switches into gilts) I too plan to capture capital value next time we appear to be near the top of a fixed income price cycle rather than stay for another round. I am appalling beyond words at equity investment (even forays into reportedly safe equity income IT's have disappointed) so my embryonic plan is to switch from perpetuals towards low risk dated fixed income (ie not most of the rubbish issued on ORB). One of the challenges is that, aside from gilts, there is a shortage of high quality dated bonds issued in retail friendly denominations.

Hopefully some of the exits from my mass of perpetuals preference share and PIBS holdings will be made easier by friendly tender offers from issuers. Although I am surprised that, aside from Bank of Ireland, other issuers have steered clear so far.

[Lootman]

I am appalling beyond words at equity investment (even forays into reportedly safe equity income IT's have disappointed)

Well yeah, investing in UK dividend shares has been a dud deal for as long as anyone can recall. The FTSE-100 has done nothing ex-dividend for 24 years now. Everyone knows that.

But in the same time period the S&P 500 is up seven-fold, and many US shares have done better than that.

[tjh290633]

I am appalling beyond words at equity investment (even forays into reportedly safe equity income IT's have disappointed)

Well yeah, investing in UK dividend shares has been a dud deal for as long as anyone can recall. The FTSE-100 has done nothing ex-dividend for 24 years now. Everyone knows that.

But in the same time period the S&P 500 is up seven-fold, and many US shares have done better than that.

If you invested selectively, you would have done far better than the FTSE100. Avoiding dot com shares would have been a good tactic at the turn of the century.

A good argument for avoiding index trackers.

TJH

[BullDog]

Trying to educate myself a little here. Looking today at NCYF and BIPS, I see the shares are quite a bit higher than year lows. Still a bit away from year highs, but not where they were. The smarter money seems to have anticipated a bottom in these shares quite a few months ago and pushed the prices up?

The yields today aren't any better than say MNG or LGEN and I understand those much better. I think I am going to sit on the sidelines here. As far as I can see, higher coupon bonds are likely to be rather equity like in their pricing? I don't see the attraction is worth bothering with when the equities I mentioned above seem to be doing a similar thing and have potential upside too if the economic outlook does improve.

[88V8]

Trying to educate myself a little here. Looking today at NCYF and BIPS, I see the shares are quite a bit higher than year lows. Still a bit away from year highs, but not where they were. The smarter money seems to have anticipated a bottom in these shares quite a few months ago and pushed the prices up?

The yields today aren't any better than say MNG or LGEN and I understand those much better. I think I am going to sit on the sidelines here. As far as I can see, higher coupon bonds are likely to be rather equity like in their pricing? I don't see the attraction is worth bothering with when the equities I mentioned above seem to be doing a similar thing and have potential upside too if the economic outlook does improve.

Potential... the thing with FI is that, Truss apart, you pretty well know where you're going, whereas with equities, you don't,

I also hold LGEN and MNG and PHNX and CSN etc etc, It just happens that imv now is a good time to pile into FI.

V8

[BullDog]

Trying to educate myself a little here. Looking today at NCYF and BIPS, I see the shares are quite a bit higher than year lows. Still a bit away from year highs, but not where they were. The smarter money seems to have anticipated a bottom in these shares quite a few months ago and pushed the prices up?

The yields today aren't any better than say MNG or LGEN and I understand those much better. I think I am going to sit on the sidelines here. As far as I can see, higher coupon bonds are likely to be rather equity like in their pricing? I don't see the attraction is worth bothering with when the equities I mentioned above seem to be doing a similar thing and have potential upside too if the economic outlook does improve.

Potential... the thing with FI is that, Truss apart, you pretty well know where you're going, whereas with equities, you don't,

I also hold LGEN and MNG and PHNX and CSN etc etc, It just happens that imv now is a good time to pile into FI.

V8

And fair enough. I believe I don't understand enough to make that judgment so I will sit tight. I would have to sell something to reinvest in say BIPS or NCYF and I can't really identify an obvious candidate. But good luck with the strategy. I'll keep an eye on this.

[richfool]

Potential... the thing with FI is that, Truss apart, you pretty well know where you're going, whereas with equities, you don't,

I also hold LGEN and MNG and PHNX and CSN etc etc, It just happens that imv now is a good time to pile into FI.

V8

And fair enough. I believe I don't understand enough to make that judgment so I will sit tight. I would have to sell something to reinvest in say BIPS or NCYF and I can't really identify an obvious candidate. But good luck with the strategy. I'll keep an eye on this.

FWIW, I did take a holding in NCYF during the disruption of the Truss/Kwarteng budget upset last autumn. I also added LGEN (my only direct holding) upon the falls after its recent results. I have since topped up both in the last couple of weeks (along with MYI). Both holdings are intended to capitalise on the higher yields available. I assume that interest rates are now at or near the top.

[dealtn]

Potential... the thing with FI is that, Truss apart, you pretty well know where you're going, whereas with equities, you don't,

Having been a fixed income market maker and trader for around 20 years that kind of statement is ridiculous and shows the kind of nonsense of misunderstanding market moves all too regularly witnessed.

The thing with FI is that changes in the predicted path of interest rates happens continuously which are reflected in prices continuously. Unless you are conflating the fact that (barring default) the actual future settlement price is known, and the volatility of price moves is (mostly) less, you are frankly wrong.

[88V8]

Potential... the thing with FI is that, Truss apart, you pretty well know where you're going, whereas with equities, you don't.

Having been a fixed income market maker and trader for around 20 years that kind of statement is ridiculous and shows the kind of nonsense of misunderstanding market moves all too regularly witnessed.
The thing with FI is that changes in the predicted path of interest rates happens continuously which are reflected in prices continuously. Unless you are conflating the fact that (barring default) the actual future settlement price is known, and the volatility of price moves is (mostly) less, you are frankly wrong.

If one is trying to make money by short-term trading I'm sure you are right.

And some instruments respond earlier to rate changes and some later.

But there is an overall correlation between rates and FI prices which is very useful for the long-term holder.

For me, FI means mainly prefs and PIBS and allied ITs. Never looked into gilts, gilts may differ.

V8

[Padders72]

I too share the view that FI stuff will firm further and yields will fall. As well as future capital gains I'm also interested in the other side of the same coin: locking in as high a yield as a I can today. I'm now deeper into FI that at any time in the past 20 years with a smattering of GACA, INVR, IPF3, LLPD, MBSR and SAN. Some are more speculative and perhaps downright risky than others but there are compensations of course. The BOI redemption fell at a good time as it nudged me into action before rather than after the interest rate peak (if indeed this is what we are seeing). In the short to medium term I will continue to drip feed money into these, balancing risk and reward to decide which and when.

[Lootman]

I too share the view that FI stuff will firm further and yields will fall.

The BOI redemption fell at a good time as it nudged me into action before rather than after the interest rate peak (if indeed this is what we are seeing).

I was looking at a chart of the US Treasury long bond this morning, which many see as setting the direction for yields and FI performance generally. It is at its lowest price since 2011.

I know they do not ring a bell when yields have peaked, but that chart isn't indicating anything like a peak at the moment. TLT is down some 80% since 2021, which might seem like a lot. But it was lower still at various points in the mid to early 2000s.

I may start nibbling at TLT if it goes below 90. Currently it is at 91 and change.

[hiriskpaul]

I too share the view that FI stuff will firm further and yields will fall.

The BOI redemption fell at a good time as it nudged me into action before rather than after the interest rate peak (if indeed this is what we are seeing).

I was looking at a chart of the US Treasury long bond this morning, which many see as setting the direction for yields and FI performance generally. It is at its lowest price since 2011.

I know they do not ring a bell when yields have peaked, but that chart isn't indicating anything like a peak at the moment. TLT is down some 80% since 2021, which might seem like a lot. But it was lower still at various points in the mid to early 2000s.

I may start nibbling at TLT if it goes below 90. Currently it is at 91 and change.

Yields at the long duration end of the curve have been rising in the UK as well. We are not far way from where they were in the Truss crash. Despite that, for the long duration debt instruments frequently discussed here (prefs and PIBS) it is true that yields have moved down from where they were. So this is about changing attitude to credit risk rather than interest rates. That might be something to be concerned about rather than celebrated.

I can easily see long end rates staying high for a considerable period and potentially moving higher still, even if short term rates have peaked. If I am wrong though now could be a fantastic time to buy long duration gilts.

I still have a fair amount of exposure to undated prefs and PIBS, but nothing like I had in the aftermath of the 2007/8 crash and I have stopped adding to long duration positions. On the whole the prices do not strike me as being bargain basement and some positions, in particular NWBD, I would not mind reducing. It is just the tax on the capital gains that is stopping me.

[Yieldy]

That's true and I agree with you regarding the future direction of short rates vs long rates, but do remember that the duration of a perpetual pref (say about 7%) is c. 15 years. The duration of UKT 0.5% 2061 is c. 30 years.

[BobGe]

I may start nibbling at TLT if it goes below 90.

Well, that didn't take long for your wish to be granted!

[Lootman]

I may start nibbling at TLT if it goes below 90.

Well, that didn't take long for your wish to be granted!

I know, down as much as 3% since I spoke. I have started nibbling.