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Fixed income or interest? - 26/06/2024

The Bank of England Base Rate commenced 2022 at 0.25% and consistently rose to reach 5.25% in August 2023. We are assuming this to be, the terminal rate especially since financial markets are pricing in at least one rate cut before the end of the year and other major central banks having commenced their rate cuts. Here we will take a look at how capital-at-risk and deposit-based fixed income plan offers have fared in the last two years.

Reverse Convertible Notes/ Fixed Income plans are a specific type of structured investment that generate unconditional income over a fixed term. Capital is still placed at risk, albeit with a degree of downside protection through the incorporation of a capital protection barrier. To compensate for the risk of loss, fixed income plans pay interest that is greater than conventional debt with the same maturity and seniority from the same issuer– potentially making them attractive for income seeking investors.

The main risks stemming from Fixed Income Plans are first of all counterparty risk, in the event that the issuer becomes insolvent or defaults, a significant loss could result. Then there’s market risk, observed at the end of the term when falls in the underlying over the term could lead to losses in the event the market drops below the protection level.


Source: Bank of England and

The chart above shows the rise in the BoE’s Base Rate from the lows of 0.25% over the hiking period, reaching 5.25% in August 2023. For reverse convertibles this has directly resulted in an increase in the annual coupons offered – consistently higher than the base rate as well as the effective rate on 2 year + fixed rate term deposits. Intuitively this should always be the case given that investors are taking on a) market risk should at the end of the term the underlying falls drastically (often by more than 35%) and b) credit risk, the investor is reliant on the issuer remaining solvent/honouring the contract.

Not until late 2022 do we see the emergence of deposit based fixed income contracts that offer investors all the benefits of standard rev cons but without the underlying risks of a) severe market downturn and b) deposit taker default - investors are protected by the Financial Services Compensation Service (FSCS) limits (currently £85,000 per claimant per banking institution).

The effective interest on greater than 2-year fixed term deposits is included on the chart to demonstrate an opportunity cost of structured deposits – as can be seen the rates offered by fixed interest deposit-based plans have largely been superior to the effective rate albeit tight, thus demonstrating an uplift in interest for investors over opting for fixed term bonds.

The trend of annual income/interest is clearly following the Base Rate and we have likely already witnessed the highest paying of these types of structured products given we are expecting the Bank of England to cut rates this year. However, uncertainty remains over the ‘higher for longer’ stance that central banks seem to be taking to ensure that inflation is kept under control. Should this be the case we may see continued competitive rates for fixed income structured plans and deposits. Some of the latest Barclays fixed interest structured deposits offered c. 4.4% per annum vs. c. 5.5% per annum for putting capital at risk. Notably some capital at risk fixed income plans may have a kick-out feature that will trigger early maturity if the underlying is at or above, or some increased percentage of the initial level on annual observation dates.

Since 2022 to the time of writing, there has been just shy of 80 capital at risk fixed income plans offering average returns of 5.95% p.a with MB, Meteor and Walker Crips as the largest contributors to the market. Whilst the emergence of fixed income deposit plans has only been since November 2022, we have had 42 of such with average annual interest rates offered of 4.46% with MB and Barclays as the clear front runner.

Structured investments put capital at risk.

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