When I wrote up my rationale for investing in Lloyds shares, I mentioned how profitable vanilla banking products are today for the retail banks.
A good example is the new Lloyds 5.375% retail bond, which runs for five years until 2015, and which has seen huge demand.
The closing date for applications was today; it should be trading electronically via your broker by the start of next week. (Update: Now listed at my broker as LBG1).
The Lloyds 5.375% bond in detail
Income – At par the new bond pays 5.375%, divided across two payments twice a year.
Maturity – The bond matures in September 2015, and is non-callable. You can hold the bond in an ISA for tax-free income, provided you buy it in the next three months while it still has five years to run.
Security – It’s a senior, unsecured note. It’s rated AA-. Given the UK owns 41% of this bank, I think it’s a secure investment.
Value versus gilts – Five year gilts are paying around 2.4%, so you’re getting 3% above the risk-free rate here for holding what’s not a very risky product. I’d say that’s relatively good value.
Value versus cash – Like with all corporate bonds, buying this Lloyds security does NOT grant you any protection under the FSA’s £50,000 compensation scheme. So-called savings bonds are protected, with the Nationwide currently paying 4.25% on its five-year saving bond. Arguably that’s much more attractive, giving bond prices fluctuate unlike savings and your money is safe in cash.
Should you buy this Lloyds bond? It depends on your circumstances. As with the similar RBS Royal Bond last year, I’d suggest cash savings are more attractive for most private investors. (Make sure you get an savings account with a break clause if you might need your money before 2015).
Where the Lloyds bond could come in handy is if you’ve got a stocks and shares ISA and you want to diversify away from equities.
Then again, you’d have to do it in the next couple of months – and I’d personally prefer to buy cheap UK shares!
This bond is another example of how Lloyds is sorting out its funding requirements. Indeed, it just issued a well-covered €500 million eight-year corporate bond. Lloyds is a strong bank with a big future, provided there’s no meltdown.