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Inflation-busting savings: RBS launches RPI-linked bond

Lorna Bourke examines the new inflation-linked bond from RBS, and has an update for holders of Lloyds and Halifax bonds.

 
Inflation-busting savings: RBS launches RPI-linked bond

With inflation squeezing returns from investments, a new RPI-linked bond from RBS could be an attractive option, writes Lorna Bourke.

Inflation-linked bond from RBS

Finding an investment that beats inflation – or even keeps pace with it – can be tricky. One new option comes from the Royal Bank of Scotland (RBS.L), which is offering an index-linked corporate bond. The bond has a seven-year term so it can be held in an ISA or Sipp where the return will be tax-free. The minimum you must invest is £1,000.

The interest rate offered (or coupon) is fixed for the term at 2%, but the face value of the bond is uprated in line with the retail prices index (RPI), currently 5.6%. If inflation stays at current levels this means that a £1,000 investment would be worth £1,056 at the end of the first year. There are, of course, risks involved. Inflation may not stay at current levels. Economists are predicting that it will start to fall in the New Year as the effect of the 2.5% rise in VAT begins to fall out of the figures. 

Investors who buy the bond and hold it to maturity will get back the inflation-adjusted value of the bond. If you want to cash in, the bond can be bought and sold on the stock exchange with the price fluctuating to reflect the market’s expectations of where inflation will go. There is also the risk that RBS could find itself in difficulty over the euro sovereign debt crisis. If RBS were to go bust, the bonds are not covered by the Financial Services Compensation Scheme, and investors could lose their money. 

Alternative option: National Grid

Last month National Grid (NG.L) also launched a 10-year inflation-linked bond. The bond pays interest semi-annually at 1.25% gross, and like the RBS bond the returns will be tax-free if held in an ISA or Sipp. But in this case both the interest payments and capital value are uprated in line with changes in RPI. 

On maturity, the amount repaid is the full face value of the bond uprated to take account of any overall increase in the RPI. However, on maturity even if the RPI has fallen, National Grid will still repay the bonds at their full face value.

Good news for Lloyds and Halifax bond holders

Meanwhile, things are looking a bit better for holders of Lloyds TSB (LLOY.L) and Halifax bonds bought prior to the credit crunch who have received no income from their investment since then. Since 31 January 2010 the bank has been prohibited under the terms of an agreement with the European Commission from paying discretionary coupons and dividends on these bonds.

In a recent statement the bank said ‘this prohibition ends on 31 January 2012. The group intends to be in a position to recommence payment of coupons and dividends on these hybrid capital securities after this date.’

Rik Edwards from stockbroker Collins Stewart, which is a market maker in these securities, said ‘We understand this to mean that holders of the currently non-paying Lloyds preference and Halifax subordinated notes can expect dividend and interest payments to resume on their due dates. However the bank is stressing the non-compulsory nature of these payments in future.’

If Lloyds does resume dividends on these bonds, it'd be very good news for investors as the price of the bonds – which have been trading well below their face value since the government bailout of the bank – should revive.  

Is now the time to buy in?

This announcement from Lloyds makes the bonds a much more attractive proposition for new investors, and analyst Mark Glowrey of Fixedincomeinvestor.co.uk likes the look of Lloyds TSB 9.25% preference shares. ‘It looks like the bank has every intention of re-starting these payments, no doubt to the relief of the holders. We view them as a recovery play ahead of the anticipated resumption of payment. That anticipation now has a more solid factual basis, and the securities have gained around ten points on the news.’

These non-cumulative preference shares are undated, which means that you can only realise your investment by selling in the market, where the price will reflect yields on other comparable securities. However, at a price of £87 for each £100 of stock, buyers could be looking at a yield of around 11% once dividends are resumed.

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17 comments so far. Why not have your say?

Robert Court

Nov 12, 2011 at 09:10

News to me!

I've held LLOYDS corporate bonds both in EUR and GBP and they've all paid out as far as I know; and those I've sold have paid me the accrued interest.

Maybe I was dreaming and the money paid into my account wasn't real money?

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sgjhaghsdg

Nov 12, 2011 at 09:59

I've held NWBD and LLPC for a wee while, and it's been a rough ride, but NWBD keeps paying the coupon, and LLPC should soon, and both are back at roughly where I bought. Note that all of these issues are illiquid, with huge spreads, so it's actually worth using a good broker rather than an online system as they can get better deals for larger trades.

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nottud

Nov 12, 2011 at 10:01

RBS has a numner of existing RPI linked Corporate Bonds. One pays interest t 3.9% or RPI if this is greater. It is traded on the ORBS market under the reference RBPI. These can be bought/sold through a broker and mature in November 2022 (current price is £93.42 per £100. So how will this compare against the new launch over the new 7 year term I wonder - clearly it depends on what inflation does?

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sgjhaghsdg

Nov 12, 2011 at 10:08

@ Robert Court - preference shares are different to bonds in subtle and often confusing ways. Many of these are discretionary and non-cumulative (which makes them T1 capital) and payments on all of these was blocked by the EU. NWBD is an odd instrument, as the dividends aren't cumulative, but they have to issue extra paper at a 4/5 ratio if they miss a payment, which means they escaped the block on a technicality. Most of these prefs are also blockers, which means that (for example) Lloyds cannot pay a dividend on its ordinary shares for ONE YEAR after missing a dividend payment on the prefs. Lloyds want to pay divis soon, and paying the pref divis is cheap for them, which makes these a tempting purchase given how far below par they are trading. NWBD are trading above par, but that's a nice yield, and the capital value will go up to maybe 120-130p if/when sanity returns. DYOR!

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mark senior

Nov 12, 2011 at 10:11

@Nottud

RBS also have another bond which pays RPI plus 30% ticker is RBPX.

Last time I looked it was about 86 p to buy

Providing rbs don't go bust, it's got to be better value than the new launch.

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nottud

Nov 12, 2011 at 10:43

@marks

I did have a look at that one before buying a block of RBPI earlier in the year, I decided against as if RPI drops (who knows what is going to happen with the current market volatility and QE increase), then the coupon could drop below the fixed 3.9% of RBP!. However, the current price of RBPX is worth considering (and has been down to £83) if inflation takes off.

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kic

Nov 12, 2011 at 10:53

Can anyone recommend a reliable cooperate bond broker?

What is difference between the bond price quoted and the average price that is paid when the transaction is done?

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mark senior

Nov 12, 2011 at 11:02

@nottud

Hi again, yes the choice of rbpi or rbpx does depend on your view on inflation.

It will be interesting to see what price the new bond sells at in the after market.

Hopefully, any forum reader interested in the new bond will see from our posts that there are alternatives from the same provider that may well be cheaper.

Kind regards

Mark

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nottud

Nov 12, 2011 at 11:24

@kic

I used my SIPP supplier. They charge commission of course, and there is a buy/sell spread that varies in size, I check periodically on the Stock Exchange web site for the price and trade volumes - link here for RBPI http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary.html?fourWayKey=GB00B4P95L57GBGBPUKCP

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Robert Court

Nov 12, 2011 at 11:49

sgjhaghsdg

The only LLOYDS bank corporate bond I currently hold is the 9.334% LBG CAPITAL 2020 which I bought in at an average 88.92 and if I sold is only worth 83.56 as at yesterday 11/11/11.

I know LLOYDS is a risk (what isn't?) but I don't believe it's about to go bust and the interest only annual yield on purchase is:

9.334%/88.92 = 10.497+%

Perversely, now that the price has gone down it yields 9.334%/.8356 = 11.1704+% on its market value so I'd have to get better than say 11.25% elsewhere to make it worthwhile selling.

If ( a BIG 'if') I keep the bond until 2020 then I should (Deo Volenti) also receive a nice 12.46% capital gain as a bonus. I doubt I'll keep it that long, but who knows?

I now wish I'd kept hold of a good German EUR bond I bought recently below par:

7.5% HEIDELBERGCEMENT 2020; it went down as low as about 90 last month and has already recovered with a spread of 98.43 to sell and 99.52 (was a mid-spread price of 107.88 in June).

I sold a little too soon in my greed for a higher yield elsewhere.

Never mind! :)

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Hilary hames

Nov 12, 2011 at 22:00

we read all these posts each time there is a bond for sale and most of us still dont know of a reliable broker we can use (in UK) and what kind of spreads we would be looking at in ones mentioned.

Can anyone help? Quite interested in the Lloyds one discussed

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Robert Court

Nov 12, 2011 at 22:45

Hilary hames

A simple google search provides a list you can research at your leisure:

http://www.fixedincomeinvestor.co.uk/x/gencontent.html?title=How%20can%20I%20buy%20bonds?&ContentTitle=buy%20bonds

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Linda Green

Nov 14, 2011 at 08:59

can 't work out where you buy these bonds

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Linda Green

Nov 14, 2011 at 09:23

The Rbs bond doesn't seem to feature on the site mentioned,

above, nor on Hargreaves Lansdown's site

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mark senior

Nov 14, 2011 at 09:42

@Linda

Bonds are not usually able to be bought directly online. However, most if not all platforms will be able to help if you telephone.

I'm fairly confident that HL will be able to help.

One thing to watch is dealing charge, make sure that the dealer advises you of costs before you give the go ahead. You should be able to buy the RBS products at a dealing cost of £13 or less.

An even more important issue is to watch the spread between the buy and sell price, i attach a link below to upto date buying and selling prices for RBS product. Make sure your dealer gets you a quote around the price shown on the RBS bond site.

http://ukmarkets.rbs.com/EN/Showpage.aspx?pageID=5

Hope this helps

Mark

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Hilary hames

Nov 14, 2011 at 12:08

Linda, if you do explore buying from HL will you let us know how you get on eg costs and the spread? Would be very useful! Thanks

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nottud

Nov 14, 2011 at 12:40

Hilary,

I bought these via HL for my SIPP a few months ago. They are available on a phone basis only and cannot be purchased on-line. The HL commission rate is 1% (£20 min / £50 max) which is more than Mark S indicates. The spread varies and there is no stamp duty. The code used for the bond that I bought is B4P95L5. Hope this helps.

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