When I wrote up my rationale for investing in Lloyds shares [1], 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 [2] 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 [3] 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 [4] 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 [1] with a big future, provided there’s no meltdown.