London Stock Exchange beefs up retail bond offering

Number of corporate bonds available for trade triples as London Stock Exchange provides for safety-first investors

Trading in government and corporate bonds has traditionally been the preserve of the big financial institutions, but the London Stock Exchange launched an initiative this year to make the market more accessible to retail investors.

The retail platform for trading bonds was launched by the London Stock Exchange in February, and things must be going reasonably well because the exchange tripled the number of corporate bonds available for trade in the last week of September.

Private investors can now deal in 89 corporate bonds – loan notes issued by companies - on the London Stock Exchange’s Order Book for Retail Bonds (ORB). Among the companies featured on the platform are heavy hitters such as insurers Aviva and Legal & General, publisher Daily Mail & General Trust, transport firm FirstGroup and the big four banks, Barclays, HSBC, Lloyds Banking and Royal Bank of Scotland.

The London Stock Exchange has also added new types of issues: subordinated bonds and callable bonds.

Part of the appeal of bonds to safety-first investors is that when a company goes bankrupt, bondholders rank higher than shareholders when it comes to dishing out what remains of the bankrupt company’s funds. 

Subordinated bonds are not the highest ranking of bond types, but typically the interest rates on these types of issue are higher than they are on standard corporate bonds, precisely because subordinated bondholders are behind standard bondholders in the creditors’ queue in a bankruptcy situation.

As for callable bonds, their defining feature is the option for a company to buy back the bonds early, ahead of term; typically a bond is issued at a “par” price (e.g. 100p), with a fixed interest rate (called a “coupon”) based on the par price, for a fixed term. Once an investor has bought a bond the investor can either sell it on or hold it to end of its life, at which point it will be redeemed "at par".

Bonds are simply loans by another name, and as with loans, the credit worthiness of the borrower is a factor in determining the rate at which the money is lent. It should also be a factor in determining the investment decision, though if the market is being efficient then the price of riskier bonds should go down, thereby increasing the rate of return, while the price of safer bonds should rise, thereby decreasing the rate of return.

The London Stock Exchange also offers the chance to invest in UK government bonds, known as “gilts”, with 50 currently available for retail investors to trade.

These types of bonds are traditionally regarded as safer than corporate bonds because countries rarely default on their bond repayments – the UK, in fact has never defaulted – but in the current environment it is arguable whether investing in sovereign debt is as safe as it once was.