Government Bonds are considered to be one of the safest investments in Australia. Bonds can be purchased from either Federal or State governments. While interest payment and the face value payment at maturity are guaranteed by government, it is possible for capital gains or losses to be made if bonds are sold prior to maturity. The market price of bonds will vary with interest rates. As interest rates rise, the market price of a bond will fall and when interest rates fall, the market price of a bond will rise. The ASX have a very useful bond price calculator.
There are two types of federal government bonds:
Treasury Fixed Coupon Bonds:
- pay interest on a semi-annual basis at the coupon rate on the face value
- repay the face value at maturity.
At the time of writing, there are 16 series of these bonds maturing at various dates from about 9 months time, going forward with various maturity dates spread out about 6 months to a year after the previous series with the final series maturing in about 11 years and 9 months time. The different series are all for the same face value but have different coupons depending on prevailing interest rates at the time they were issued.
Treasury Capital Indexed Bonds:
- pay interest on a quarterly basis at the coupon rate on the face value
- payout the face value plus an adjustment for inflation over the life of the bond upon maturity
You can think of this series of bonds as having two interest components, the coupon which is paid to you plus an allowance for inflation which increases the capital value. There are currently 4 series of these bonds with the first series maturing in about 4 years and the subsequent series spread with five year intervals with the final series maturing in about 19 years time.
Essentially the Reserve Bank maintains a secondary market in these bonds for retail investors. Some points to consider:
- you don't get to buy a bond at issue
- you can buy in lots of $1,000 to $250,000 per day from the government at the prevailing price
- you can also sell back to the government rather than waiting till maturity
- there is a fluctuating buy/sell price for each series
- the price for the older indexed bonds already have substantial amounts of capital appreciation in the current price.
See the Reserve Bank site for further information.
The Queensland Treasury Corporation (QTC) offers retail investors bonds with a minimum of $5,000 (thereafter multiples of $100) of differing maturities and differing interest rate earnings. Interest can be paid quarterly or half-yearly. These are sold through Link Market Services.
The NSW Treasury offers bonds for sale. These have a face value of $20,000 and are sold at par with six monthly interest payments.
The South Australian Government Financing Authority (SAFA) offers bonds with a face value of $500 and you can choose quarterly or half yearly interest payments.
The Northern Territory offers bonds with a face value of $1,000 and a variety of investment terms from one to five years. Interest can be paid quarterly, half yearly or annually and interest rates vary from 5.05% to 5.6%.
You could explore bonds from other states by going to a fixed interest broker for more information.
Let’s take Bill, a reasonably experienced investor and see how Bill might analyse where he should put his fixed interest funds if he is looking for very safe investments. For more information explore the case study.
Bill is a experienced sophisticated investor and is looking for a very safe investment.
Let's suppose that the lowest level risk (i.e. the safest) at the moment in Australia is a deposit with a major bank of up to $250,000 which is guaranteed by the Government. If Bill can get an interest rate of 5.2% for an at call account (i.e. he can get his money out on demand), he might consider this as a base rate for his choice of investment.
But suppose he believes that interest rates are about to go down. He might want a longer term investment to protect against that risk. One possibility might be a term deposit with a similar institution which sets the interest rate for a period from 30 days to 5 years. This will not only protect against interest rate reductions but will pay him a higher rate through the period. This is because his money is no longer 'at call' but he will lose a lot of the interest if he needs to withdraw the money ahead of the agreed term.
Bill considers that this type of account is safe partly because it is guaranteed by the Federal Government. Perhaps Bill is worried that the Government may withdraw the guarantee or he doesn't want to tie his money up for a long time and is still worried about interest rates going down. He might then consider investing directly with the Government. As a retail investor he can buy bonds from the Australian Government which are considered as safe as it gets and set the benchmark interest rates for the bond market. Bill does some further research on the "Buying Bonds from the Reserve Bank" information site and explores Government bonds. Although many of these do not meet his 5.2% benchmark, they are very safe, they are liquid (he can get his money back quickly) and they protect against falling interest rates, in fact, if interest rates fall, the market price is likely to rise and he could sell his bonds back at a higher price before maturity. He also understands that if interest rates rise he will get less captial back than he invested. He can now compare interest rates for various dated term deposits with yields from bonds to make a more informed investment decision.