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Bond trading for private investors: is now the right time?

The London Stock Exchange's bond trading platform went live today, but is it coming at the top of the market?

 

The London Stock Exchange’s retail bond market went live today, enabling small investors to fish for returns, trading in and out of both corporate debt and gilts for the first time.

Initially, 49 gilts and 10 corporate bonds are available, although this is expected to rise significantly over time. Gilts can be traded in increments as low as £1 while for corporates that amount is closer to £1,000.

So, is this a positive step, truly opening up another asset class to retail investors, or has it been launched at the top of the market and likely to cause more volatility in bond land?

Corporate bond funds were the top sellers for 10 straight months from November 2008 through August 2009, but as more investors became convinced the equity rally had legs, the sector’s appeal fell away and the sector moved into redemption mode, allaying fears to some degree that a bubble was forming.

Shadow chief secretary to the Treasury, Philip Hammond MP, for one supports the new trading platform, pointing to low interest rates and investors’ need for income.

Fund managers appear unperturbed by the development, pointing to the precedent set in Italy and Germany. The Borsa Italia’s highly successful MOT market saw Eur230 billion worth of trading last year, with no undue impact on volatility.

Although loath to comment publicly, privately fund managers add that only top end investors are really likely to be interested and it is unlikely to lose them much in terms of fund flows.

So is it a damp squib then? The launch may not have the fanfare that the London Stock Exchange wanted, but for many savvy investors it offers a chance to diversify their portfolios, while retaining a greater degree of control over them.

The likes of Royal Bank of Scotland are talking about launching products specifically designed for the market, as they have done with some success in Italy.

With corporate bonds up 3.1% and gilts 0.7%, since the start of the year and the withdrawal of quantitative easing a pending headwind for the fixed income markets, maybe the timing will prove wrong. But given the nature of most bond investors, the majority will just ride it out and relish the democratisation of another asset class.

5 comments so far. Why not have your say?

Rob Walker

Feb 02, 2010 at 09:23

One day I'll read an article like this and it will say 'Yes' or 'No'

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Peter James

Feb 02, 2010 at 11:12

Crucially, when will it be possible to trade these bonds through Internet broking platforms such as Hargreaves Lansdown and Barclays with nominee ownership?

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White Rabbit

Feb 02, 2010 at 13:42

I am not convinced that the average small investor has sufficient knowledge and expertise to trade successfully.

How many have a qualification in macro economics and/or spend time researching govt. statistics, and fiscal studies.

In my youth I remember the older generation bemoaning the fact that they had invested their savings in the undated security "War Loan" in the anticipation that their capital would be returned to them in full. (face value) when the war ended.

The fact was they did not fully understand the investment and fell victim to plausible pressurised sales pitches.

With many govts financial affairs now in a parlous state I fear the unkowledgable, and inexperienced could be sold a pup.

In the final analysis all govt securities are debt. The decision a investor has to make is what are the chances of future govts honouring the debt, and how does that debt rank with other forms of debt.

If history is a guide to the future, then govts rarely pay all their debts. They merely replace maturing debt with new investors cash. Some people call that a ponzi scheme.

With new rules regarding company reporting, corporate governance, and financial transparency coming into affect, I consider stocks & shares to be a preferred candidate for analysis.

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Woodberry

Feb 03, 2010 at 21:27

This is a very small step - just 10 corporate bonds are listed. Many more are available through fixed income investor - the LSE scheme will only be working properly when it offers more choice.

Unfortunately EU rules discourage firms from issuing bonds in less than £50,000 units which closes them off to the small investor.

Bonds are not really more complicated than shares - it's just that most people don't fully understand the uncertainties of share investment - share investment looks simpler than it is.

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Phil Smith bis

Dec 20, 2013 at 23:07

Any recommendations for dealers? Obviously we are at top of market but there may be pockets of value and floating rate bonds

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