It's time to jilt Pibs and get a firm date: Bull market in bonds is over, say the experts

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ROCKED by market volatility and the recent base rate cut, permanent interest bearing shares (Pibs) have slipped in price, prompting the view by some bond watchers that now may be the time to sell.

If you had bought the first ever Pibs, Leeds Permanent 135 8 per cent, at par, you would have been sitting on a capital gain of 56.5 per cent two weeks ago. By last Wednesday, this had been eroded to 46 per cent.

Graeme Anderson, group economist at Britannia Life and a bond expert, thinks that after a good run in fixed interest over the past two years, the bull market in bonds has ended and that undated instruments such as Pibs are vulnerable. He also fears that private investors holding Pibs may not realise the capital gains they have made could evaporate - since Pibs, though technically equities, perform much more like gilts.

The worry affecting Pibs is that, as the economy improves, inflation will take off. All fixed- interest investments are affected by projected real returns. Rising inflation would mean fixed-interest yields having to rise to stay competitive - and rising yields would mean falling prices.

Pibs would suffer more than dated fixed-interest stocks because the investor has no certainty that the capital will be returned on a specific date. Pibs buyers are therefore dependent on the current market price as to the capital value of their investment when they sell. They are 'totally exposed if anything goes wrong on the interest rate front', said Terry Bird at the stockbrokers Tilney & Co.

Mr Bird has advised clients who are holding Pibs for total return, and who expect interest rate changes, to consider taking profits. He feels that the run of capital gains on this type of investment is over, though the market may harden again by a few points in the short term before the ideal moment to sell.

Working at Britannia Life, Mr Anderson is well aware of the interplay between institutions and the private investor in the Pibs market. At present, he said, the institutions are not heavily exposed to Pibs. If private investors decide to pull out, prices will have to fall significantly to attract institutions back into the market.

Where should you look if you are thinking of moving out of Pibs? 'The only way to preserve capital gain', said Mr Anderson, 'is to pick up something with a coupon and a date on it.' In practice, this means accepting a lower yield by investing in a gilt and preserving your capital at the expense of income - perhaps with the hope of picking up a high yield again when market conditions change.

This advice will not be good news for the income investor. Many private investors who hold Pibs do so for the high yields they can get. If they sell, there is no other fixed-interest investment that can match the returns, mostly between 9.5 and 10 per cent, which Pibs currently offer.

Robin Boyle, a stockbroker at Dunbar, Boyle & Kingsley, runs an income portfolio using five Pibs and a preference share to produce a monthly income with an average annual yield of 9.25 per cent. He feels that inflation fears are greatly exaggerated at the moment - a view supported by the latest figures on the retail price index - and that private investors wanting income cannot just move in and out of this sort of investment - even if their capital gain is at risk.

In his view, investors with a high income, or a growth and income objective, should have 15 to 20 per cent in fixed interest 'with Pibs an important factor in this'.

All parties acknowledge that there is some disagreement on prospects for Pibs at present. At least one big research broker is calling them a 'buy', said Mr Bird.

Iain Lindsay at Hoare Govett, the broker that pioneered the launch of Pibs, thinks they look cheap at the moment given the recent price fall. He is encouraged by the inflation figures and also by the optimistic prospects for the upcoming season of building society results, where expected increases in profitability should help the Pibs market.

Mr Lindsay expects interest rates to move slowly upwards. He said this would 'erode the handsome gains investors are now getting in the marketplace'. But against this, he echoed Mr Boyle's view in questioning where investors can go to find a similar yield.

Pibs therefore pose a dilemma for the private investor. Those who have made substantial gains on their holdings may feel that future interest rate fears warrant selling - at the loss of some yield. If they are more sanguine about inflation and interest rates, they may choose to hold. However, investors for whom high income is an absolute priority have little choice but to stick it out, though they should be aware that any capital gain they have accumulated is at risk.