Proposals ease corporate bond access for retail investors

DIY investors will find it easier to invest directly in bonds issued by companies under policy changes that come into force today.

The changes, previously outlined by the Financial Conduct Authority (FCA), reduce the administrative burden for companies issuing corporate bonds that come with lower “denominations”, or minimum investment amounts. These will drop from the old minimum of £100,000 to as little as £1.

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Interest rate rises have pushed the yields on government bonds, and higher-quality corporate bonds, sharply upward in recent years. The yield on the 10-year UK government bond moved from around 1% to 3.5% in 2022 alone and comes to 4.4% at the time of writing.

These higher yields, and lower prices, have triggered a renaissance of direct gilt buying for DIY investors, including interactive investor customers.

But the higher minimum investment levels on corporate bonds – a way of issuers once avoiding higher disclosure requirements for selling bonds to retail investors - mean that they have been unable to do the same here.

Source: FE Analytics. Past performance is not a guide to future performance.

Investment-grade corporate bonds, or those issued by companies that have higher credit ratings and are seen as less likely to default on their debt, are riskier than developed market government bonds (such as UK gilts and US T-bills), and therefore come with a bigger yield.

However, they share many of the traits of government bonds. They can often be fairly stable and defensive, but are highly sensitive to moves in interest rates.

The table shows how the average fund focused on investment-grade bonds (in the Sterling Corporate Bond sector) has performed in different years versus funds focused on government bonds (UK Gilts). Those funds that buy high yield, or the riskier end of the corporate bond sector, are also included.

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As the table shows, both government and investment-grade bonds struggled amid the rate rises of 2022, and amid the disastrous “mini-Budget” of the same year. But such bonds should prove defensive if equity markets struggle, and as rates fall.

As with buying shares directly rather than using funds, investors should remember to diversify adequately. One question now will be whether enough different corporate bonds are available for retail investors to achieve that goal.

The changes come as the FCA launched a package of regulatory reforms aimed at making it easier for UK companies to raise money. The moves are part of Chancellor Rachel Reeves’ drive to attract household savings into UK investments and provide a boost to London’s capital markets.