SMSF Investing Education & Strategies

Bonds & Fixed Income Investing

A Fixed Interest or Fixed Income investment is one that has a regular pre-determined interest payment (or has a discounted price to reflect interest payments) at a fixed interest rate over a specific period of time. Whilst the stockmarket gets the limelight, the fixed interest asset class for many trustees can be the most important one.

Apart from bank term deposits, fixed interest investments are not very well understood in Australia, with relatively few investors having direct ownership of fixed interest securities. This is partly due to the fact that until very recently, most fixed interest investments only cater to institutional investors with minimum investments of up to $100,000, and hence most individual ownership comes via managed funds that invest in these securities, or via term deposits at banks.

 

Another reason is that share market and property investment holds by far the greatest attraction to investors due to these investments offering income, the potential for significant capital growth, and some tax benefits. It also has to be said that the marketing material of many share market and property investment firms often deride fixed interest investment as they compare their own investment potential with that of boring old fixed interest.

 

But this really is unfair because it takes fixed interest totally out of context.

 

Fixed interest does not compete with shares or property – it has its own unique place in a diversified SMSF portfolio. The whole point of fixed income investing is that it offers very low (or no) capital volatility, and provides a steady reliable income stream that can be counted on.

 

If your in the pension phase of a SMSF and you need a certain amount of income to live on, or you simply do not want the volatility or risk associated with those other asset classes, the fact is that fixed interest is probably going to be your largest and most important asset class, as it will provide the ‘bedrock’ of your portfolio, give you certainly on your income return, and will allow you to sleep soundly at night if share markets are falling.

 

Click on the following educational articles to give you a much better understanding of the fixed income asset class.

 

Why Fixed Income ?

Understanding the Capital Structure

What is the yield curve ?

Factors to consider when consructing a fixed income portfolio

How changes to the cash rate impact bond prices

What keeps you up at night ? Fixed Income may be the solution.

 

CLICK HERE to sign up to a weekly fixed income newsletter.

 

There are a number of choices when it comes to fixed interest investing:

Traded interest rate products:

- Government bonds & notes (Commonwealth, State, and Local govt's)

- Bank Bills

- Company debentures, notes, and income securities

 

These are also known as ‘debt securities’ and may be traded on the fixed interest secondary market. This also implies that if the debt security is sold before its maturity date the investor may end up with a capital gain or loss. The alternative to holding these securities directly is to invest in a managed fund that invests in them. Note also that some corporate fixed / floating interest securities are traded on the ASX, however some will have maturity dates, while other will be perpetual in nature (i.e. no maturity date).

 

'Non traded' interest rate products:

These products do not have nominal capital gains or losses, with the most commonly known product being term deposits at the bank.

 

 

How to Invest

For term deposits:

Easy – pop into your local bank branch and they will be sure to fix you up. Or alternatively, some fixed interest brokers can now also help you with selecting term deposits that fit your needs from a variety of providers, and some be able to negotiate a higher rate.

 

For debt securities:

The primary market:

This is where you invest into a fixed interest security at the very beginning when they first get offered to the public. It will have an interest rate payable, and a maturity date at which time you get your money back (the face value). Alternatively, it will be offered at a discount to the face value, with the difference being the implied interest.

 

The secondary market:

This is where you invest in a fixed interest security that already exists, which pays a certain interest rate and has a specific date of maturity.

 

Buying or selling for either of these is done via a broker, fixed interest specialist, or even a bank.

 

 

Buy Govenment bonds directly from the RBA

Did you know you can buy Government bonds directly from the Reserve Bank of Australia !!

 

You can apply for amounts from as little as $1,000 face value and in multiples of $1,000 up to $250,000 per investor per day (all series combined). Requests to purchase amounts in excess of this are considered at the Bank’s discretion. You can download the forms from the bank's website (rba.gov.au) and lodge your application in person at the bank's Sydney or Canberra offices or via the post. There is an administration charge of $2.50 for every $1000 of face value bought or sold and no other fees or charges. So its the same as paying 0.25% brokerage for a buy or sell.

 

Subject to availability, the Bank will sell selected series of Treasury Fixed Coupon Bonds and Treasury Capital Indexed Bonds. Treasury Fixed Coupon Bonds pay interest on a semi-annual basis at the prescribed coupon rate, applied to the face value. At maturity, the face value amount is repaid. Treasury Capital Indexed Bonds pay interest on a quarterly basis at the prescribed coupon rate, applied to the face value. However, the face value is adjusted by indexing the principal to inflation. At maturity, investors receive the adjusted capital value of the security (i.e. the face value as adjusted for inflation over the life of the bond).

Subject to availability, a range of series across different maturity dates will be on sale at any one time.

 

Details of the individual series that are on sale can be obtained from the Reserve Bank (in Sydney or Canberra). Securities will be issued in the form of inscribed stock only. When you buy Commonwealth Government Bonds your investment will be recorded in a stock account in your name in the central stock register (the Registry) that is conducted by the Bank. Any subsequent transactions in the Bonds will be noted in the Registry.