If interest rates rise, what will typically happen to bond prices? That was a question posed to 30,000 US adults according to a report in the FT today. I would hope readers of this blog know the answer because it is quite important now that QE might be tapering off and interest rates rising. Only 28% got the answer right, which is of course that bond prices will fall.
People buy bonds in the belief that they are “safer” than equities. It is often recommended by IFAs, and other financial advisors, that the nearer you get to retirement age the more bonds you should have in your portfolio. But bond prices can be as volatile as equities. The only aspect that is more secure about bonds is that the income is more guaranteed and generally fixed (so long as you hold them to maturity).
Now the holders of Co-Operative Bank subordinated bonds (PIBS and preference shares) may not be concerned in the short term because trading in them has been suspended. This is because the bank has indicated it is in the process of revising plans for the refinancing so as to achieve “an acceptable outcome for bondholders, including private investors”. The bonds will likely stay suspended until the new deal is announced, which may be towards the end of October. It looks like the Co-Op will have a much reduced stake in the bank with the bondholders more control, so presumably a debt for equity swap will be part of the deal (most of the debt is held by institutions). But Mark Taber who is running a group for private investors has suggested they should be taken out by a “debt for debt” swap where they receive debt in the larger Co-Op group.
Certainly this is a more positive outcome than was first proposed by the Co-Op, and it is good that pressure has been brought to bear to get the deal revised. It still leaves the problem that the FCA has done little to protect the interests of retail investors in these bonds, the issue of the failure to disclose the financial problems faced by the Co-Op at an early date and whether the accounts truly reflected the position of the bank.