Risk of bailins

[ResourceOgre]

Two main factors drove the fall in bond prices. Rising interest rates of course: rates go up, bond prices go down.

But, also the prospect of bailins. The mini-budget event came close to forcing a fire sale of liquidity of the very assets whose price had been falling due to the unfunded promises of the mini-budget itself, i.e. gilts.

In that case, many of the very financial institutions that issued my bonds&prefs, would breach their capital adequacy limits and bail in the instruments. "A swathe" of them. That's why RSAB is currently just under par, and was lower.

I have been lazily thinking, bonds were cheap just because of the interest rate rise, but ignoring the risk of bailins.

Fixed income instruments have many variations in conditions, some instruments are closer to breach than others, although this can sometimes be unclear (deliberately so, as in the case with Nationwide CDDS, dropped from 184 to 117 and below). What happens then, can be conversion to ordinary share capital, or pause in coupon payments, or potentially wipeout in case of insolvency.

If I had cash, would I be devoting it to the bond market ? Reasons not to include waiting until maximum interest rates and therefore lowest bond prices, in theory at least. But risk is also a factor. If I had cash ... perhaps I'd just sit on it for now.

Good luck everyone.

https://www.youtube.com/watch?v=OjTOMqQFCEw

[88V8]

That's why RSAB is currently just under par, and was lower.

Interesting point.
But many prefs are currently yielding in the 7% range, including yes the RSA's 7%s.

I'm not a buyer, yet.

V8

[hiriskpaul]

Yes, I know the reason put forward for the BoE intervention was to enable pension funds to sell gilts without totally crashing the market, but I think there was likely to be more to it than that. Banks of course are stuffed with gilts. Many are also likely to be sitting on the other side of the swaps being used by the pension funds and a default by the pension funds on their margin calls could have had a domino effect through to banks, who would have stopped lending, and on into the rest of the market. Whether it would have triggered conversion of cocos, etc. is really hard to judge, but these would have got bailed in before prefs.