General Bond Discussion
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General Stock Discussion
General Bond Discussion
Bond ETF analysis
Has anyone got a view of how secure Tesco bonds are?
Tesco as a whole have seen their credit rating cut but are still investment grade although that could change. From memory the retail bonds are issued by tesco finance which is a slightly different organisation. Defaults on the lowest grade investment grade bonds in general are fairly rare at about 2% over a 5 year period so that would be my best guess for tesco - a 97-98% chance of getting your money back over 5 years
I'm holding on. Tesco will not go out of business I think, and the odiousness of default will be avoided. Good to keep these as ballast if, as I am, you are overweight in banking prefs. If I wanted to top up on non-banking I'd go for Co-Op group (not bank): YTM of which is 7.52%.
Cornucopia: thanks for the Co-Op idea. Did you mean Co-Op Group 11% Final Repayment Notes 20/12/2025 ISIN GB00bfxw0630 ? (quoted on FII at 128.5 today) ? If so, any suggestions about where best to get documentation ? Thanks
How are people feeling about Tesco at the moment. I don't have any yet. There are couple of the longer dated ones yielding near 6% and I'm thinking it's a nice bit of diversity. Any thoughts?
The highest yielding ones are probably the 4.875% 2042, offered at 76. However, minimum is 50K. In the interest of diversity, should not exceed , say, 10% of total. As to Tesco credit risk, who knows, at least it is management's desire to reduce debt, which is more than can be said for, say, IPF, who issue more debt and foolishly stuck to share buy-backs at elevated levels.
I don't think much has changed from a financial perspective in the last year. I have owned the 2018 and 2020 retail bonds from issue, I shop there and will continue to do both. I'm fairly confident they will keep paying coupons and give me my money back at maturity and they are one bond of many I own. Prices in store seem a little more competitive and it is still busy where I live - I don't see people deserting them in droves but then again we don't have an Aldi or Lidl nearby
I guess I am trying to be aware of the general cognitive bias to assume that they are too big to fail. It seems unlikely that the new management would be unable to rescue a going concern from the mess that they inherited, even in the changed retail environment, but I guess it's not impossible that the scale of the operation eventually proves to be its downfall. Hargreaves offer the 6% 2029 as an online deal with no minimum. Does anyone know the minimum on the 5.5% 2033 issue?
Although there is a small risk that Tesco could go out of business, the bigger risk with the 2029 & 2033, is that of maturity, 14 years & 17 years. This week's article in Investors Chronicle "Target the right bond for balance & Yield", discusses the risk of long duration.
"As a rough rule of thumb when rates rise by 1%, the capital value of a bond will fall by 1% for each year of duration - longer the duration, the bigger the risk".
Therefore any portfolio should have a good balance in terms of maturity.
Although I have a smallish holding in the 2029 bond (1% of portfolio), anything above 5% could unbalance a portfolio. My more recent purchases of PIBS & Preference shares has lengthened my average (weighted) maturity to 7.5 years (undated securities I treat as 35 years), which I believe may be getting too long. However should I believe interest rates will start to rise by say 0.25% every three months, then I'm likely to start ditching the longer duration holdings fairly quickly.
ps the Tesco 2029 bonds were purchased at 1.04 (currently 101.68) last November, so new investor would be picking up a better bargain.
Other Orb bonds which are currently under par should also perhaps be reviewed as part of a balanced portfolio, in particular those that have a duration of 5 years or less.
Regarding duration, etc. this is tricky. If you look back to when interest rates were "normal" (e.g. 10-15 years ago) such as when the Tesco 2033 was issued at 5.5% par, the long-duration bonds and preference shares actually had slightly lower yields (i.e. higher prices) than now. Even if interest rates were to return to the levels they were at around 10-15 years ago, the prices of these assets will not necessarily be affected. There are so many factors at play. I think the elephants in the room are probably inflation and defaults rather than interest rates, since these will affect asset allocations from fixed interest to equity to a greater extent than interest rates.
Finn2, Thank you for your comment, always interesting to be provided with other peoples views. Re duration, as you say when interest rates were normal, the price may factor in the possible "future lower interest rates", thus as you point out prices may not be so affected.
Complex world of "Fixed Interest Securities"!
Plenty to learn
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