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Cycling out of undated prefs and PIBS.

Gilts, bonds, and interest-bearing shares
Smallholding
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Cycling out of undated prefs and PIBS.

#99705

Postby Smallholding » November 28th, 2017, 8:53 pm

Further to an earlier post (Thanks to all respondents - I've been in Antarctica for 3 weeks and also managed to catch flu whilst in South America so I am a 6 weeks or so over due saying thanks.

I have returned to home and finally to a semblance of health to find my Prefs and PIBS still marching relentlessly up.

Having already unloaded my Skipton 12 and a bit I have now sold SAN. I think CVBP is next.

I have reinvested in ordinary shares that were at much more reasonable levels (ie) BP BLND LLOY and even GFRD. So far I have actually increased the pay out as there was so much surplus capital tied up in the prefs/PiBS.

Time will tell if this turns out to be a blunder. I still have Newcastle and Notts PIBS - the latter is not that over priced. Pref wise I still have LLPC AV 8 3/4 & also 8 3/8 NWBD NTEA SANB and BBYB.

If I can find more shares which will pay the same or better total return I shall keep moving out of FINT at least until I've halved my holdings. I am watching CSN and after reading a HL news snippet I am looking at LGEN.

I think if all these preference shares et al had been ordinary shares I'd have had less qualms selling them. The truth is that by a happy mixture of luck and judgement (say 80/20) I've done very well since 2007. I half feel that I am leaping off a gravy train which is showing little sign of slowing.

I am also considering trying to buy more Notts BS as they are relatively cheap. The only other prefs that seem attractive to me are Northern Electric NTEA but 160 is not so cheap - although as someone elsewhere noted they are not Financials and so offer welcome diversity.

I can't see how Coventry PIBS justify a price of 218. At that rate similar or better levels of income can be found cheaper.

I am also looking for something to add to my sons LISA when subscription time rolls around. Last year I bought a chunk of the Co-op 11% final repayment notes.

Finally I also have a large chunk of Enterprise Inns maturing next year and am struggling to find a replacement corporate bond.

Any suggestions/comments welcome. If there are some other Fixed Interest instruments at a reasonable price that I have missed
I'd be interested. But it does seem to my uneducated eye that things are looking very toppy.

SH :mrgreen: (this emoji looks green around the gills which fits quite well with my current convalescent state.)





I

Midsmartin
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Re: Cycling out of undated prefs and PIBS.

#100026

Postby Midsmartin » November 29th, 2017, 7:46 pm

I'd just logged on here to post a message asking why these things keep going up this year, because I don't understand. I thought they should be dropping a little with interest rates rising a little, but my Skipton PIBs and Nat West pref shares keep going up. I realise it's bad form to hijack a thread, but the subject is very similar - wondering if I should sell up!

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Re: Cycling out of undated prefs and PIBS.

#100056

Postby Alaric » November 29th, 2017, 9:27 pm

Midsmartin wrote: I thought they should be dropping a little with interest rates rising a little, but my Skipton PIBs and Nat West pref shares keep going up.


Perhaps the perception of risk has altered in their favour. I don't think they are widely traded, so an excess of potential buyers might be driving prices upwards. There aren't so many alternatives for a near guaranteed rate of return that's higher than derisory. The alternative of high yielding ordinary shares can have its problems as illustrated by Carillion and Provident Financial.

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Re: Cycling out of undated prefs and PIBS.

#100062

Postby GoSeigen » November 29th, 2017, 9:51 pm

Midsmartin wrote:I'd just logged on here to post a message asking why these things keep going up this year, because I don't understand. I thought they should be dropping a little with interest rates rising a little, but my Skipton PIBs and Nat West pref shares keep going up.


Would you expect shares to fall when interest rates are rising? Rising rates are a sign of a robust economy and that is bullish for shares, surely?


GS

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Re: Cycling out of undated prefs and PIBS.

#100064

Postby Alaric » November 29th, 2017, 10:02 pm

GoSeigen wrote:Would you expect shares to fall when interest rates are rising?


PIBs and Prefs have fixed returns and thus are valued as irredeemable securities. Price is therefore Coupon divided by investors rate of return.

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Re: Cycling out of undated prefs and PIBS.

#100075

Postby GoSeigen » November 29th, 2017, 10:51 pm

Alaric wrote:
GoSeigen wrote:Would you expect shares to fall when interest rates are rising?


PIBs and Prefs have fixed returns and thus are valued as irredeemable securities. Price is therefore Coupon divided by investors rate of return.


Thanks Alaric, a chance to address a few common misconceptions/over-simplifications!!

1. It's PIBS not PIBs.
2. Permanent Interest Bearing Shares and Preference Shares are shares.
3. It's "fixed interest" not "fixed returns".
4. PIBS in the main are not fixed interest. Their interest is discretionary and so payments may be stopped completely. Some have step-ups. See WBS and MBSR for example.
5. Securities are not valued as irredeemable because they have fixed interest (or "returns"): they are valued as irredeemable because they are irredeemable (aka perpetual / permanent).
6. Some PIBS and prefs are irredeemable. Some are not. See WBS for an example of PIBS with a call option.
7. Prefs pay dividends: there are no coupons.
8. Investor's rate of return may fall if investors are increasingly bullish about the economy. Thus, even if you assume these shares to have fixed payments, their price will rise in such a scenario.
9. Even if these shares have fixed payments, they are usually (not always) perpetual so their price behavior will usually more closely match ordinary shares than money-like securities such as short gilts.
10. Even shorter dated subordinated corporate bonds behave more like shares than like short gilts. See ENQ1 vs ENQ for an example. Most prefs and PIBS constitute subordinated capital.


GS

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Re: Cycling out of undated prefs and PIBS.

#100078

Postby Alaric » November 29th, 2017, 11:17 pm

GoSeigen wrote:Thanks Alaric, a chance to address a few common misconceptions/over-simplifications!!


It's a simplification, but not an over simplification to treat PIBS and Preference Shares as mathematically equivalent to undated Government Bonds. That's because they are, apart from the fiddly bits like defaults, suspensions and repayment options.

Keynes created an entire economic theory on the premise that there were only two types of cash and bond investment, namely cash and irredeemables.

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Re: Cycling out of undated prefs and PIBS.

#100089

Postby johnhemming » November 30th, 2017, 7:20 am

I think you are seeing a typical example of market momentum in this area. That continues to drive the price up although the change in interest rates would in theory have caused a slight reduction in price. I had a lot of these which I sold a while ago when I thought the price was quite high in comparison to historic prices. The yield is coming close now to some equity yields. (not that I have done the detailed calculations recently).

It won't take much of a price change to lose the marginal yield for a few years. However, if your top priority is to have some fixed income beyond all other priorities then they are an option, but I have cycled out.

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Re: Cycling out of undated prefs and PIBS.

#100114

Postby GoSeigen » November 30th, 2017, 8:57 am

Alaric wrote:
GoSeigen wrote:Thanks Alaric, a chance to address a few common misconceptions/over-simplifications!!


It's a simplification, but not an over simplification to treat PIBS and Preference Shares as mathematically equivalent to undated Government Bonds. That's because they are, apart from the fiddly bits like defaults, suspensions and repayment options.


Exactly my point. Many many PIBS issues have/had call dates which make them quite unlike perpetual bonds as the call date approaches.

So two important things to remember:
-each PIBS issue and preference share is individual.
-the nearer to call/redemption and safer they are the more they behave like short gilts; the further from maturity and less safe they are the more they behave like shares.

To the OP: like shares, many PIBS/pref prices may rise in a bullish market with rising interest rates; however, each issue is unique and needs to be considered on its own terms.

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Re: Cycling out of undated prefs and PIBS.

#100121

Postby Alaric » November 30th, 2017, 9:14 am

GoSeigen wrote: the more they behave like shares.


Only if you ignore the rather important point that on shares, payouts by way of dividends can and do increase, whilst on PIBS and Prefs they cannot. That is a somewhat important factor in determining the price.

When relevant interest rates were 8%, PIBS or Pref with an 8% coupon would stand at or around par. When interest rates fell to 4%, it would go to 200. A similar equity could have gone anywhere.

The yield on PIBS and Prefs is considerably higher than a Bank of England rate or a similar Government Bond. The difference is risk, lack of marketability and sundry other features. There's more than enough scope for these to move in an opposite direction to Bank of England rates.

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Re: Cycling out of undated prefs and PIBS.

#100263

Postby GoSeigen » November 30th, 2017, 3:51 pm

Alaric wrote:
GoSeigen wrote: the more they behave like shares.


Only if you ignore the rather important point that on shares, payouts by way of dividends can and do increase, whilst on PIBS and Prefs they cannot.


But they can, and I quoted a example (the unique WBS, whose interest is zero now but steps up in a profitable and rising-rate, inflationary, environment). Not that this is an important point. I certainly concede that ord divs can rise and do. I also claim that they can fall and do. I also claim that with yields now so low market expectations are that dividends will NOT increase very much (e.g. various utilities?) and therefore as a first approximation we can assume them to be relatively flat for the forseeable.

However, I am now wandering away from the topic of the OP so will leave the field clear if you wish to dispute the above.

GS

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Re: Cycling out of undated prefs and PIBS.

#100277

Postby Alaric » November 30th, 2017, 4:41 pm

GoSeigen wrote: I also claim that with yields now so low market expectations are that dividends will NOT increase very much (e.g. various utilities?) and therefore as a first approximation we can assume them to be relatively flat for the forseeable.


I would have thought there's an expectation that the dividends will increase at least in line with general prices. Those living off dividends are amongst the few whose income has increased over the past few years. There are comments elsewhere on this site about how well in income terms those investing for yield have done. As a benchmark, equity investors for income may be looking for a 4% running return, increasing at 2% a year or more if annualised RPI/CPI change is above 2%.

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Re: Cycling out of undated prefs and PIBS.

#100989

Postby Wizard » December 3rd, 2017, 9:57 am

Two things are stopping me unloading any of my prefs. First, the capital gains are not tax sheltered, so I have to factor the tax which reduces the capital available into any calculations. Second, over the last 12 months my recently purchased higher yielding equities have not performed well, I have lost capital they on average pay less than my prefs and the annualised income is actually falling with some dividends held, some cut and one suspended completely.

Terry.

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Re: Cycling out of undated prefs and PIBS.

#101194

Postby hiriskpaul » December 3rd, 2017, 7:57 pm

Wizard wrote:Two things are stopping me unloading any of my prefs. First, the capital gains are not tax sheltered, so I have to factor the tax which reduces the capital available into any calculations. Second, over the last 12 months my recently purchased higher yielding equities have not performed well, I have lost capital they on average pay less than my prefs and the annualised income is actually falling with some dividends held, some cut and one suspended completely.

Terry.

I share your CGT problem and it keeps getting worse! Prefs like SAN are up another 25% over the last year and that does not include the dividends. In comparison, the total £ return on the FTSE World index is about 15%.

Nice problem to have.

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Re: Cycling out of undated prefs and PIBS.

#101258

Postby hiriskpaul » December 3rd, 2017, 10:20 pm

I can see a lot of confusion over the prices of prefs and "Interest Rates". I think most people perceive interest rates to be the bank of England base rate, but irredeemable pref prices are very insensitive to changes in base rates. If they were they would not have risen in price by 25% over the last year - a year in which BoE base rate increased. Prior to the financial crisis the peak price reached for NWBD was in March 2006. The implied yield at that time was about 5.5% and the BoE base rate was 4.5% and heading upwards. When BoE rates peaked at 5.75% in July 2007, NWBD was yielding just 0.6% more. Now we have NWBD yielding about 5.2% and BoE base rates on 0.5%.

More important IMHO are long dated gilt prices. In March 2006, 20y gilts were yielding about 4.0% (Note that this was less than BoE base), so NWBD had a spread of about 1.5% ofver 20y gilts. Now 20y gilts have a GRY of 1.7%, NWBD spread of 3.5%. I will get concerned when the spread drops below 2%.

It is also worth pointing out that the financial prefs such as NWBD have been yielding far more than non-distressed non-financial prefs since the financial crisis, but the gap has finally closed. Take for example Bristol Water 8.75% irredeemable cumulative preference shares BWRA. These only yield 4.9%. Another example is Northern Electric 8.061% NTEA, yielding 5.0%. I think the spread of bank pref yields over non-financial is about right now though.

Finally, any comparison between the yields on fixed interest prefs and ordinary shares is futile. On insolvency, prefs pay out ahead of ordinary shares, so capital is much safer. In addition it is often very hard for a company to avoid paying dividends on its preference shares, but dividends on the ords can be stopped or lowered at any time. NWBD paid right through the financial crisis. Goodness knows when RBS might start to pay on its ords again.

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Re: Cycling out of undated prefs and PIBS.

#101823

Postby moorfield » December 5th, 2017, 2:31 pm

I've sold all my AV.A today (with dividend due on 31st) at 5.0% yield, capital to be recycled into LGEN at ~5.4% yield.

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Re: Cycling out of undated prefs and PIBS.

#103313

Postby 88V8 » December 11th, 2017, 10:09 am

Recently I bought some BP.B on a yield just over 5%.
The ords yield nearer 6%, so why? Because the payout on the Prefs Is 'safe' and the ords' yield - I also hold - is not.

I too have CGT issues. But in any case I'm not going to try timing the market. I was convinced two years ago that FI prices would fall, well, huh.

To a degree, it depends of course. Hold or add or sell. I'm in my 60s, I'm invested for income and if the capital falls so be it. If I were younger and looking at TR, it might be a different matter.

Currently I hold 1SBB, 42TE, AV.A, AV.B, BBYB, BP.B, BOI, BWSA, DNA2, ELLA, FAP, IPF1, LLPC,D,E, MBSP (hmmm), NATW, NTEA, NWBD, RE.B, RUSC, RUSP, SAN, SAN.B, SKIP, STAC.
Bit philatelic, some might say.

Tried recently to buy Chemring's Prefs BC88, no price. They are very illiquid.

Oh, and I hold Carillion, Interserve, Cobham and a few others of comparable 'quality'.

Fixed interest. Fixed.

V8

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Re: Cycling out of undated prefs and PIBS.

#103468

Postby Wizard » December 11th, 2017, 7:23 pm

88V8 wrote:Recently I bought some BP.B on a yield just over 5%.
The ords yield nearer 6%, so why? Because the payout on the Prefs Is 'safe' and the ords' yield - I also hold - is not.

I too have CGT issues. But in any case I'm not going to try timing the market. I was convinced two years ago that FI prices would fall, well, huh.

To a degree, it depends of course. Hold or add or sell. I'm in my 60s, I'm invested for income and if the capital falls so be it. If I were younger and looking at TR, it might be a different matter.

Currently I hold 1SBB, 42TE, AV.A, AV.B, BBYB, BP.B, BOI, BWSA, DNA2, ELLA, FAP, IPF1, LLPC,D,E, MBSP (hmmm), NATW, NTEA, NWBD, RE.B, RUSC, RUSP, SAN, SAN.B, SKIP, STAC.
Bit philatelic, some might say.

Tried recently to buy Chemring's Prefs BC88, no price. They are very illiquid.

Oh, and I hold Carillion, Interserve, Cobham and a few others of comparable 'quality'.

Fixed interest. Fixed.

V8

Same here V8, still got the funds sloshing around. Not my finest hour, but so it goes.

Terry.


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