• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • London CIV appoints Dean Bowden as CEO

    August 18, 2022

  • Coventry secures over £115m of funding to decarbonise transport system

    August 18, 2022

  • Bexley Pension Fund appoints responsible investment consultant

    August 17, 2022

  • Leeds’ £120m levelling up bids offers ‘transformational change’

    August 16, 2022

  • Social care workforce crisis ‘requires government intervention’

    August 15, 2022

  • Consultation opens on future of IFRS 9 statutory override

    August 12, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Retail bonds and black gold

0
  • by David Green
  • in Blogs · David Green
  • — 24 Feb, 2012

One of the good things about working for a traditional City of London firm is that we get invited to lots of meetings and events within a couple of minutes walking distance. Having suffered public transport to get into work, it’s rather pleasant to use the famous streets of London later in the day. As Dick Whittington found out, they aren’t exactly paved with gold, but neither are they paved with chewing gum and cigarette butts like in some other cities.

My first meeting of the week was at the London Stock Exchange, where the streets are still paved with protestors and tents, for the New Local Government Network’s launch of its study into retail bonds. The LSE has been running an order book for retail bonds (ORB) since 2010, allowing individual savers easy access to the bond markets, normally for a minimum investment of just £1,000. A growing number of private companies and public sector organisations are looking at retail bonds as an alternative way to borrow, especially as recent events have shown the importance of having a diversity of funding sources.

I see two big advantages with retail bonds. Firstly, it’s ideal for borrowing between £50 and £100 million, bringing it much more into line with larger local authorities funding needs. Wholesale capital market bonds tend to only work for issues above £150 million, too large for most of us. The smallest bond issue on ORB to date was just £20 million by RBS, while the most recent public sector issue was by the Places for People housing association for £40 million in January.

Secondly, retail investors are less sensitive to wholesale market interest rates. The rate payable on PWLB and bank loans, and on wholesale bonds, is very closely tied to the gilt market. If gilt yields rise by 0.10%, so do PWLB rates. Retail bond buyers typically target a return of around 5%, irrespective of current gilt yields. This obviously looks rather high at the moment compared with long-term PWLB rates around 4.30%, but when the economic situation improves and interest rates start to rise, 5% will start to look quite cheap. Retail investors aren’t completely insensitive to rate changes though, and if long-term rates remain low for long periods, it’s entirely plausible that a well run local authority with a good story to tell could borrow via ORB at closer to 4%.

My second meeting was at the square mile’s other august institution, the Bank of England. No tents in sight here, and all those people in jeans instead of suits turned out to be tourists for the Bank’s museum rather than protestors. On Threadneedle Street, the gold is in the vaults and in the museum displays, not on the paving stones.

The Bank’s economists were characteristically dismal about the UK economy, but I expected nothing less – they can hardly paint a rosy picture of the future while maintaining rock bottom interest rates and pumping more emergency funds into the money supply. The newest concern is whether the political situation in Iran, alongside events in Syria, will cause further rises in the oil price. This “black gold” is so ingrained into our economy, from the manufacture of plastics to the transport of goods and the supply of energy in our homes, that the Middle East is a key driver of UK growth and inflation. The only saving grace is that a continued high oil price will make it cheaper to produce goods at home than to ship them over from China.

Ralph McTell once sang that he’d take us by the hand, lead us through the streets of London and show us something to make us change our minds. My walks across the City this week have only reinforced my view that we are still waiting for the big game changing event to drag us out of the economic doldrums.

David Green is the Head of Sterling Consultancy Services, a provider of treasury management advice to local authorities and other not for profit organisations. This is the writer’s personal opinion and does not constitute investment advice. It should not be relied upon when making investment decisions.

 

Share

You may also like...

  • Investing today: nowhere to hide 20th May, 2022
  • CCLA/Room151 Impact Awards: Deadline extended 29th Apr, 2021
  • Ryan Boothroyd: Post-covid world holds opportunity for long-term LGPS investors 28th Apr, 2021
  • Controlling inflation: the conundrum for central banks 23rd Feb, 2022

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • London CIV appoints Dean Bowden as CEO
    • Coventry secures over £115m of funding to decarbonise transport system
    • Bexley Pension Fund appoints responsible investment consultant
    • Leeds’ £120m levelling up bids offers ‘transformational change’
    • Social care workforce crisis ‘requires government intervention’
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 9 hours ago

    Liverpool faces further government intervention as commissioners find ‘whole-council failure’: The levelling up secretary has announced that he is “minded to” expand intervention at Liverpool City Council by transferring the authority’s financial… dlvr.it/SWvgGc pic.twitter.com/cB7YeHZ9lE

    Room151 1 day ago

    Recovery position: withholding tax and the LGPS: Partner Content: Paul Sprenger from WTax talks to Room151 about how Local Government Pension Scheme funds could be missing out on millions of pounds of withholding tax recovery opportunities.… dlvr.it/SWsTfQ pic.twitter.com/z6aVMcaqHe

    Room151 1 day ago

    Treasurer societies favour permanent extension to IFRS 9 statutory override: Two treasurer society presidents have indicated their preference for the current five-year IFRS 9 statutory override to be made permanent following the government’s latest… dlvr.it/SWr3G4 pic.twitter.com/MGf9M5zC8Q

    Room151 2 days ago

    Luton Borough Council faces ‘grave’ £10m overspend: Luton Borough Council faces a £10m overspend in its 2022/23 budget which poses a “serious risk” to the authority’s financial sustainability. A report by Dev Gopal, director of finance, revenues[...] dlvr.it/SWmynD pic.twitter.com/ETDd7sQA48

    Room151 3 days ago

    Luton Borough Council faces ‘grave’ £10m overspend: Luton Borough Council faces a £10m overspend in its 2022/23 budget which poses a “serious risk” to the authority’s financial sustainability. room151.co.uk/funding/luton-… pic.twitter.com/XvyTZckW6m

    Room151 1 week ago

    LATIF/FDs’ Summit ‘on course to be biggest yet’: Room151’s flagship event – the Local Authority Treasurers Investment Forum (LATIF) and FDs’ Summit – is on course to be the biggest yet, with more than 200 delegates expected. Combining[...] dlvr.it/SWSDrL pic.twitter.com/f8FXzcAdWB

    Room151 1 week ago

    ‘Local government treated worse than any other part of public sector’: Clive Betts, chair of the Levelling Up, Housing and Communities Committee, talks to Mike Thatcher about lack of progress on levelling up, pork-barrel politics and why local government… dlvr.it/SWRk1L pic.twitter.com/Jpw0BsOsy3

    Room151 1 week ago

    Which LGPS pools and funds are attending the LGPS Investment Forum on Nov 2 & the LGPS Private Markets Forum on Nov 1st? Answer here: lnkd.in/eDHU8tuy pic.twitter.com/D3gd63Rh7F

    Room151 1 week ago

    LGPS and levelling up: nothing to fear but fear itself: There have been a number of objections to government plans for LGPS funds to invest 5% of their assets in local projects. But George Graham says these objections can be[...] dlvr.it/SWL7vt pic.twitter.com/ebwBEkZTy4

  • Register to become a Room151 user

  • Previous story CIPFA survey reveals CFO concerns
  • Next story Markets unenthusiastic for Greek bailout

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares