Some readers alerted me to a bond that is being issued by Frasers Centrepoint and asked me what I thought of it. After all, investing for income, bonds are relevant instruments.
The bonds in question are 7 year bonds and have a fixed interest rate of 3.65% per annum. So, unlike the perpetual bonds issued earlier in the year by the same entity, there is a maturity date for these bonds.
Bond holders will get back their capital (as long as the entity doesn't default) at the end of the 7 year period. So, they are safer than the perpetuals which, like bond funds, I keep saying, we should avoid.
Of course, I also said that we should avoid long term bonds because as interest rates rise, bond prices will fall as Mr. Market expects higher returns for lending money. Yes, when we buy bonds, we are more lenders than investors.
There is no reason for Mr. Market to buy older bonds at their issue prices when the coupons or yields are higher for newer issues. So, prices of affected bonds will have to decline to give a comparable or more attractive yield.
Then, is a 7 year bond a long term bond? Well, conventionally, long term bonds are 20 year or 30 year bonds. However, I feel that a period of 10 years is also considerably long. What about a period of 7 years? I think it is pretty long.
In the next 7 years, is it likely for interest rates offered by the banks for money in fixed deposits to go to 3% or more per annum? When we consider how they have gone from about 1% per annum to as high as 1.6% per annum in the last one year, it is possible that they could go much higher in the next 7 years. So, we have to be prepared that the price of these bonds could decline in the next 7 years.
So, who should buy these bonds?
Those who are not only happy with a 3.65% coupon but are buying with money they are sure they do not need in the next 7 years and are prepared to hold for the full 7 years.
Read more about the bond in question: here.
Related post:
Frasers Centrepoint's Perpetual Bonds.