It’s been said that the four most expensive words in investment are: "It’s different this time..."
If you hear those four words, you’re supposed to run a mile.
But I’m not so sure. I mean, things are always different!
Today I want to take on those four dangerous words and show you why, when it comes to corporate bonds, I think it is indeed different this time.
Why 2008 was very different for bonds
No investment cycle is ever the same – if they were, this game would be easy!
And financial markets never make it easy. Interesting yes, but never easy...
Regular Right Side readers know that I’ve been keen on corporate bonds for a while now. It’s been obvious that interest rates are staying nailed to the floor for ages. And to my mind, a nice regular income from a range of UK businesses looks like a good idea.
But it’s been pointed out to me that these corporate bonds may not be quite the safe port we’re looking for. Following my tip on the RSA Insurance Group 8.5% Perpetual bond, one reader points out:
“...between 2007 and 2009, the price of the RSA note did not price off its yield... the price decline from peak to trough was about 33%, pretty much the same as the decline in RSA's share price.”
And that’s a fair point. Even though the bond never stopped paying its promised yield, it’s true that the price of the bond took a pounding. As the reader says – this bond followed pretty much the same path as the stock itself.
You can see what a hit it took in 2008/09 on this chart of the bond:
RSA Insurance Group 8.5% Perpetual Subordinated bond
But, as far as I’m concerned, it’s different this time...
An exclusive report from The Right Side
The Bank of England now has the wheels well oiled
2008 saw a bank-induced liquidity crisis the likes of which a generation of City bods had never seen. I think it’s fair to say that most players didn’t have a clue what was going on.
Just about every investment got marked down: bonds, shares, commodities... everything! The proverbial baby got thrown out with the bath water.
All except government bonds that is. Back then government debt was the obvious answer for managers that didn’t know what else to do. The City clamoured for the safety of government bonds.
And ever since the crisis, the Bank of England has been printing money and buying back those bonds from the City – what’s known as quantitative easing (QE).
As that’s happened, the money the City has been making from offloading those bonds has been finding its way back into the markets.
Simple. And now the Bank of England will feel emboldened by its wizardry.
Watch this before buying retail bonds
Tim Bennett on what you should know before you buy retail bonds.
• Watch all of Tim's videos here
Here’s the thing: if we suffer another bank-led liquidity crisis (probably kicking off in Europe), then you’ve got to expect the central banks to waste absolutely no time getting stuck in with a bit more QE.
But this time round, I suspect the Bank will go even further. I don’t think it’ll be happy just to buy government debt. There’s already talk of ‘qualitative easing’. That is they’ll be looking to buy assets of lower quality too – and the first port of call is likely to be corporate bonds.
If you missed out on the great gilt rally, then there’s a chance you could still line yourself up for the great corporate bond rally.
Markets never make it easy for you. They don’t simply repeat themselves. Remember, "it’s always different this time". As investors, our job is to make an assessment of what’s likely to happen this time, not last time.
And what if our liquidity crisis never comes? Well, at least with these bonds you’re locking yourself in a nice little return. Who needs gilts paying around 2%? And just look at the person you’re lending your money to.
Keep reading The Right Side. I’m on the hunt for new and interesting bonds I think will help you profit from what could be the next major asset rally.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.