Last updated: April 24th, 2024
Continuing inflationary pressure, a rising cash rate and murmurs of a recession in 2024 have meant investing in Australian Government bonds is back in vogue. But how do you buy corporate bonds and Australian government bonds on the bond market?
Many investors view government bonds as a relatively low-risk investment that offsets the risk of company stocks falling in a volatile economy.
However, purchasing Australian government bonds means navigating some complexity.
I’ll provide clarity by explaining:
- How to purchase bonds step-by-step.
- Variables and risks to consider before investing in bonds.
- How investors use bonds as a hedge for balancing risk in your portfolio.
(Related: 13 Best Share Trading Platforms In Australia).
What Are Australian Government Bonds?
When you buy an Australian government bond, you’re essentially loaning money to the government.
In return, the government commits to paying you back the principal amount after a certain period, plus interest on the loan at regular intervals for your trouble.
- Australian and state governments use bonds as a fundraising mechanism.
- Bonds might be issued to fund infrastructure projects or unforeseen costs (like pandemic relief).
Important!
When rates offered on government bonds exceed those offered by banks, many retail investors begin to view them as an appealing, long-term, low-risk investment.
How Do Corporate Bonds Differ From Government Bonds?
When most investors talk about “bonds”, they usually mean “Australian commonwealth government securities”, aka “Australian government bonds”.
Corporate bonds are similar to government bonds in the sense that they’re also:
- Loans to an issuer.
- With a fixed maturity date and coupons (I’ll explain these in a moment).
- Defensive assets.
- Used to raise money.
Corporate bonds typically have higher yields because private companies are more likely to go bust. The government has other ways to raise funds in a pinch (hello, Quantitative Easing).
(Related: How To Start Investing In Gold).
This means lower risks and, therefore, lower yields.
Here are the top 5 differences between corporate and government bonds:
| Government Bonds | Corporate Bonds |
|---|---|
| Issued by governments | Issued by companies |
| Pay interest annually, semi-annually (eTBs) or quarterly (eTIBs) | Pay interest more frequently (monthly, quarterly, semi-annually) |
| Considered one of the safest investment options as they carry sovereign guarantees | Riskier because of the higher market, credit and interest rate risks |
| Lower returns because of the lower risk | Potentially higher returns |
| Issued for terms ranging between 5 and 30 years | Maturities range between 1 and 25 years |
How does owning a government bond compare to owning stock?
- Bonds are debt instruments, while stocks are equity instruments.
- Bonds offer guaranteed returns. You’ll receive regular interest payments on your bond for the lifecycle of the bond, unlike dividends, which can fluctuate significantly or be discontinued in downturns.
- Bonds don’t signify ownership and have a fixed end date, unlike owning a stake in a company. Once your government bond matures (reaches the end of the loan period), you’ll be paid back in full and can keep the cash or reinvest elsewhere.
- You can trade Australian government bonds you hold with other investors on the bond market, via the ASX. Just like stocks.
- Like shares, the value of the bond on the market can change over time. If you sell before your bond reaches maturity, you’ll do so at market rates and potentially lose capital.
What Are The Different Types Of Australian Government Bonds?
There are two main types of bonds Issued by the Australian Government (TBs and TIBs), plus three lesser-known securities.
| Treasury Bonds (TBs) | Medium to long-term debt securities with a maturity of over 10 years. TBs are fixed-interest rate bonds, meaning the amount of interest paid doesn’t change over the duration of the bond. |
| Treasury Indexed Bonds (TIBs) | Debt securities indexed to inflation. TIBs are indexed bonds, where the amount of interest paid is adjusted based on inflation as determined by the Consumer Price Index (CPI). |
| Treasury Notes | Short-term debt securities with a maturity of less than 1 year. |
| Treasury Discount Securities | Short-term debt securities with a maturity of 1 year |
| Infrastructure Bonds | Used to fund Australian infrastructure projects. |
| Defence Bonds | Used to fund the country’s defence initiatives. Enable retail investors to gain exposure to Australia’s major defence procurement projects. |
How To Buy Individual Bonds In Australia.
You can buy and sell an exchange-traded Australian Government Bond (eAGBs) over the counter from the Australian Securities Exchange (ASX) – or via an online trading platform.
You also have the option of purchasing bonds directly from some State Governments.
1. ASX Trading Services.
You can buy Australian government securities on the ASX through a full-service broker or via a self-service online broking account.
To self-manage your investment in Australian government bonds, follow this process:
- Open a brokerage account: Find a broker that sells bonds and follow their prompts to open an account (best online brokers in Australia). The process takes anywhere from 1 hour to a few days.
- Determine your investment strategy: Conduct research to decide on the type of bond you want to buy, the amount you want to invest, your appetite for risk and the length of time you plan to hold the bond.
- Place an order: Place a buy order via your broker. Although you can do this over the phone or online, the former method attracts considerably higher fees (as much as $50 per transaction), which eat into your profits.
- Hold or sell the bond: Once the trade has settled, you can hold it until maturity or sell it before maturity. If you choose to sell the bond before maturity, the price you receive will depend on market conditions and the remaining time until maturity.
(Related: How To Start Trading Futures In Australia).
2. Directly From The Government.
While the facility to buy directly from Australia’s Federal Treasury closed in 2013, buying bonds directly from some state governments is still possible.
For instance, through NSW Government’s TCorp, and the Queensland Treasury Corporation.
These bond issuers have varying requirements for applying and creating accounts and differing levels of minimum investment.
(Related: Is eToro Still A Good Trading Platform?)
Important!
There are also several bond-themed Exchange Traded Funds (ETFs) listed on the ASX, and managed funds that invest in bonds — both of which can give investors indirect exposure to a collection of Australian government bonds in one product. Contact a manager at a managed fund to learn more about your options.
Variables To Consider Before Buying A Bond.
When selecting individual bonds, consider these critical factors.
1. Credit Rating.
The credit rating of the government bond issuer is an essential data point to which you must pay attention. It indicates the likelihood of timely repayment of the bond’s principal and interest.
A lower credit rating indicates a higher risk of default and may result in higher yields to compensate for the added risk.
What’s an acceptable credit rating?
AAA is the highest, then AA, A, BBB, and so on. Anything below a BBB rating is generally considered ‘junk bond’ territory.
(Related: How Do Franking Credits Work?)
2. Maturity Date, Coupon And Yield.
The maturity date determines when you will receive the principal amount back, while the yield will determine the amount you receive.
Maturity Date:
- Clarifies when the bond will be redeemed, with the principal paid back to you.
- Offer higher yields for longer investment periods, but carry more uncertainty and market risk.
Coupon:
- The annual interest rate paid on a bond, expressed as a percentage of the bond’s face value (its value when first issued).
- Coupon payments are made throughout the bond’s life, every six months for eTBs and every three months for eTIBs.
Yield:
- Rate of return that you will receive from holding the bond.
- Yield to maturity can change if the underlying value of the bond changes in the market. Yield to Maturity is based on the assumption that the holder of the bond will reinvest coupon payments at the same interest rate and hold the bond until maturity.
Important!
Generally, bonds with longer maturities and lower credit ratings offer higher yields to compensate for the added risk.
4. Minimum Investment.
The minimum investment for Australian government bonds issued through the electronic platform, known as eTBs (Exchange-traded Treasury Bonds) or eTIBs (Exchange-traded Treasury Indexed Bonds), is equivalent to $100 of the face value.
You can purchase eTBs or eTIBs in smaller increments, but in those scenarios, make your purchases through a broker (not directly through the ASX) – and doing so may attract higher brokerage fees.
(Related: How To Day Trade In Australia).
What Are The Risks Of Buying Bonds?
Investing in government bonds in Australia is not without risks. Learn about the downsides before you proceed.
1. Interest Rates & Inflation.
eTBs are fixed-rate bonds, so the interest rate determining your coupon payments doesn’t change.
However, government bond prices usually decrease as the RBA’s cash rate rises.
This means the yield on the bond becomes less attractive, and the bond’s market value may decrease, which is problematic if you want to trade your bonds before maturity.
Interest rates also affect the market value of eTIBs.
(Related: What Is Options Trading?)
And while eTIBs are indexed to help protect against rising inflation — meaning coupon payments increase if the CPI increases — the inverse is also true.
If CPI declines, the size of coupon interest payments can also shrink, although not below the floor interest value of the bond.
Important!
This risk can be particularly relevant for long-term bonds, which are more sensitive to changes in interest rates. In Australia, current interest rates are a topic of great discussion, reflecting instability in the broader economic market.
2. Credit Risk.
Although the Australian government is considered a safe issuer of bonds, the credit default risk is never zero.
3. Liquidity Risk.
Government bonds are a liquid investment. They can be easily bought or sold without significantly affecting the market price.
However, there may be times when the market for government bonds is illiquid, meaning it may be difficult to buy or sell the bonds at the desired price or within a reasonable timeframe (e.g., in the event of a default).
(Related: What Is Leverage In Trading?)
The likely outcome result is higher transaction costs or the inability to liquidate the investment at an acceptable price.
4. Market Risk.
Government bonds, like any other investment, are subject to market risk.
Market risk can be affected by a variety of factors, including:
- Geopolitical events in Australia and abroad (e.g., the Ukraine war, the pandemic).
- Leadership changes (e.g., the election of a leader with a poor economic track record).
5. Reinvestment Risk.
Your reinvestment risk is higher when you purchase a government bond with a fixed interest rate.
As the bond matures or the interest payments cease, you may not be able to reinvest the proceeds at a similar or better rate of return.
6. Call Risk.
Some government bonds may be callable, meaning the issuer can redeem the bond before maturity.
7. Currency Risk.
We’ve focused on Australian government bonds, but you might also consider bonds issued by international governments like the US Treasury.
If you decide to buy international bonds denominated in a foreign currency (e.g., US dollar or euro), you must absorb the risk of currency fluctuations (what are the best forex platforms in Australia?).
Expert Tip.
Currency risks often compound with market risks. For example, a hypothetical pandemic in the United States would trigger quantitative easing, increasing the value of bonds. However, the move would have an inflationary effect on the US currency, offsetting your net gains.
How Bonds Can Improve Your Investment Portfolio.
Government bonds can be an effective method of balancing an investment portfolio.
They counterbalance other investments, such as stocks (how to invest in stocks), by providing stability and income during market downturns.
Let’s unpack:
1. Less Volatility, More Stability.
Government bonds are a more dependable source of returns — even if they’re modest — during economic uncertainty or stock market volatility.
2. Diversification.
Because they typically have a low correlation with other asset classes, such as equities or commodities, government bonds can help reduce overall portfolio risk and increase returns.
You can further diversify by considering different bond types and lengths till maturity to further spread your risks.
3. Regular Income.
Government bonds provide a reliable source of regular income through interest/coupon payments, which can be particularly attractive to investors seeking a consistent passive income stream.
4. Tax Benefits.
Government bonds issued in Australia may provide tax benefits for investors, depending on the specific bond and the investor’s tax situation.
(Related: What Is Copy Trading?)
5. Fixed Interest Payments.
Many government bonds pay fixed interest payments, providing a steady, predictable cash flow, which helps investors plan for expenses during periods of low or uncertain market returns.
What Is The Right Balance Of Bonds To Other Investments In My Portfolio?
I recommend you seek guidance from a financial professional, thoroughly research the bond market, and carefully review the bond information provided by the ASX and Australian Office of Financial Management to create a balanced investment portfolio.
You should also read the relevant Investor Information Statement and Term Sheets and a product disclosure statement of any managed fund you deal with.
The popular “age-based rule” is used by some investors to determine the percentage of their portfolio allocated to stocks, with the remaining portion allocated to bonds. However, this is just a general guideline and may not be suitable for everyone.
Australian Economic Conditions Outlook.
Current economic conditions in Australia are shaky.
Many investors are understandably cautious, but it’s important to remember that when markets look likely to slump, it is traditionally an attractive time for buying bonds.
Yes, it’s not perfect, but it has a rock-solid reputation on the world stage, which allows you to share in its success by purchasing Australian bonds.
Final Words On How To Buy Bonds In Australia.
Government bonds are a viable investment option for Australian retail investors seeking stability and portfolio diversification.
Government bonds may deliver lower returns than what you’d expect from stocks, but in volatile times, you may prefer the peace of mind of a government-backed security issued by the Reserve Bank of Australia.
Jody
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John Keys says:
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Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
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