INVESCO BOND INCOME PLUS LIMITED (BIPS)

[yieldhog]

The price of BIPS dropped about 7% last Friday and I've been searching for a reason for such a relatively large decline. Comparing BIPS with NCYF, the divergence of these two high-yield bond funds over the past year has been quite stark - BIPS is down about 21% while NCYF is down only 1%. However, BIPS still yields only 7.5% compared with NCYF at 8.18%. BIPS is now at a discount of 6.3 agaist NAV while NCYF is at a premium of 6.2%.

Clearly the risk profile of high yield bond funds in the current environment is very significant. I would expect yields on high-ayield bonds to continue to rise as inflation rises and economic growth goes negative. It's likely many firms will cease trading and bond defaults will increase. I can't really understand why we've recently seen a mini-rally in some high-yield type fixed income securites such prefs, PIBS and undated subordinated debt. Am I missing something here or is this rally just another false dawn driven by FOMO?

One possible explanation for the relative weakness of BIPS is the way the fund gearing is funded. Gearing of BIPS has risen steadily this year to near 20% and is funded by repos. By contrast, gearing on NCYF is lower at 13% and funded by a new (end of 2021) 2-year loan facility from Scotia Bank. In the event of a severe shake out in the high-yield sector, NCYF is well placed to take advantage of higher yields while BIPS could come under pressure to sell some of it's portfolio at fire-sale prices.

I note there was a large (£350k) trade in BIPS last week which could have something to do with last week's sharp drop, but it doesn't explain the longer term trend.

I sold out of BIPS from my SIPP earlier this year but stll own some in other portfolios. I will probably sell them soon and reinvest opportunistically as and when. In my view, yields on high-yield fixed-income securities needs to be at least 8-10% to make any sense at all in the current situation.

Any constructive thoughts on this topic welcome.

Any thoughts on BIPS and similar

Y

[Jam1]

Yieldhog, the following maybe complete tosh (and would be happy for anyone to point out my ignorance), but I hold and think I have observed such extreme decreases at the very end of the trading day before. Indeed the same appears to be the case for CLIG, unless the same external issues applies. If one looks at the last trades before 16:30 Friday, sales of BIPS are marked at around 153p. As such I expect (hope) this to correct on opening on Tuesday.
Jam (tomorrow)

[Jam1]

Apologies, now note two price mode rating extensions, so expect to see a material variation, albeit I do not understand why. Tried to delete my last post, but failed in that regard as well!

[yieldhog]

Jam1,
Thank you for your posts. You're right to point out more detail about the trading pattern of BIPS. If I have time today I will look more closely at volume history. A quick glance shows recent volume to be high and towards the top end of peaks over the past few years.
It may be that as investors get more nervous about the outlook for lower quality fixed income then lack of demand drives the price lower and the lack of liquidity exagerates the falls. As the price of BIPS has fallen so far it may be that holders become more reluctant to lock in losses by selling at fire sale prices. On the other side maybe potential buyers still see more downside potential and prefer to wait for a bigger sell off and greater discount to NAV. Simple supply and demand in a difficult economic environment.
What's puzzling though is the very marked divergence of BIPS from other high yield debt instruments. Is this down to leverage and worries about funding in a crisis or something else?
Y

[Newroad]

Hi Both.

Here is the daily volume (though it's missing last Friday's still - probably a function of delayed data) - source IBKR.



The big block late Friday was around 260K shares so my guess around 300K for the day. Interesting to see another big day that looks like the previous Friday.

I hold them as well - no doubt will buy a few more this week.

Regards, Newroad

[Gan020]

Hi,

Just seen your post. Friday was triple witching otherwise known as quarterly options expiry.

Options get force closed at whatever price people can get unless they roll them. Most of the time there are options closing in both directions so it has little impact on the market. On Friday that didn't happen. Two parties both closed out largish positions and there was little volume in the other direction.

As you can it's bounced back half the drop today and I suspect if FTSE hadn't been in a lousy mood it would have closed two thirds not a half.

[Jam1]

Thanks Gan for the clarification.

I have LTBH mentality/preference, so rather than selling, I am more minded to top up as I assume that as the fixed rate agreements turnover the rates should normalise compared to the base rate. If correct, when should such a point occur?

[Gan020]

Thanks Gan for the clarification.

I have LTBH mentality/preference, so rather than selling, I am more minded to top up as I assume that as the fixed rate agreements turnover the rates should normalise compared to the base rate. If correct, when should such a point occur?

If I understand your question correctly you are asking at what point do the new underlying investments at a higher coupon outweigh the capital losses on the existing portfolio.

I'm afraid to answer that you would have to get a spreadsheet with every single underlying investment and work out where the underlying prices are likely to go based on your best guess on what interest rates are going to do over time. That's beyond my skill.

There is a possible shortcut by looking at the duration. This is a measure of the interest rate sensitivity of the fund to movements in interest rates. IIRC the duration on BIPS is around 3.5 which means that for every 1% rise in interest rates the fund will lose 3.5% of it's value. But, the market will have already priced in where interest rates are going so you have to then estimate how far from the market estimate things will actually occur.


Broadly speaking we've only had just a few months of higher interest rates on corporate bonds so that amount that have been replaced compared to those maturing has been small. BIPS have increasing the gearing though as presumably they see bargains out there. The gearing is now 20% which is the upper limit I'm personally comfortable with and I think they should have gone more slowly and kept more in reserve.

Imho, I don't think we are yet near the tipping point. Having said that I do own a few BIPS. I paid 155p. I can't say I'm too excited about my position but it's a decent enough fund, run acceptably well, has low management charges and is trading at a decent discount.

[Bagger46]

https://www.londonstockexchange.com/new ... n/15637190

Increased Divi. Might be of interest to the thread.

Bagger

PS: I don't hold this type of investment, but Mrs has a medium size holding and mentioned it.