2012 was an unexpectedly good year for bank bonds. The second half of last year saw a sharp rally across the bank debt sector, particularly the long maturity ones. The Lloyds 6.5% 2040 bond (covered here), Citigroup 6.5% 2030, and Barclays 7.125% 2049 all saw heady gains of more than 10 points. Some even traded at new all-time highs.
Since the start of the year, however, the price action of these debt have been more volatile. Gone are the days when investors of these bonds can sit back and count their portfolio gains with new long-term highs made week after week. The steady uptrends have given way to potential near-term tops.
But, following a setback, are these bank bonds a buy now? This is an interesting proposition because some of the them are still ‘reasonably priced’. An example is the HSBC 5.375% 2033. The bond, issued in 2003, has about 20 years in maturity. (Note: In a low-yield environment, there are a few ways to increase the yield of an instrument. One is to move down the credit ladder, i.e., from A+ to B+; from investment grade to High-Yield. The other way is to stretch the maturity, i.e., moving from 5 to 20 years. Obviously, in highlighting this bond we are pursuing the second tactic.)