In Part I of our bond series, Azzet explained what bonds are, and in Part II, we delved into how bonds actually work. In Part III we look at how to actually invest in bonds, and why now might be a good time to review your options.
Missed Part I? Bonds... The fine art of investing in bonds - Part I
Missed Part II? Bonds... The fine art of investing in bonds - Part II
Is it time to jump back into bonds?
While the Reserve Bank (RBA) stopped buying bonds on 10 February, 2022, after supporting the economy during COVID, demand for bonds globally has been growing on the back of falling interest rates.
When interest rates fall, fixed interest payments of existing bonds become more attractive and this drives up demand (for existing bonds) and increases their market value.
Unlike its central bank peers, the RBA is yet to embark on a rate-lowering cycle. However, futures traders expect the first cut to be announced later this month.
When the RBA does cut rates it will create an inflection point for bonds, so now could be a good time to contemplate exposure to this asset class.
While many investors have been waiting for the RBA to begin cutting before jumping back into bonds, trying to be too clever about timing a jump back could see many miss out on a price boost when rate cuts finally happen.
It could also mean missing out on the rate peak and enjoying higher yields.
Assuming you are ready to jump back into bonds, here are some guidelines that might be helpful.
What options do you have?
Investors have several options for accessing the bond market.
Individual bonds
There’s a swag of corporate bonds listed on the ASX, which can be traded just as shares are traded. There is also a number of corporate bonds that are not directly listed on the ASX by the issuer, and whereas listed bonds typically have a face value of $100, non-listed bonds may require up to a minimum $250,000 investment on issue.
However, smaller investors can access these bonds through ASX-listed instruments called Exchange Traded Bond units (XTBs). Available using the same platform as shares, XBTs provide a listed fixed income alternative to a diversified investment.
XTBs break such bond issues down into $100 increments.
Each has a ticker code beginning with YTM. At the retail level, investors can also buy bonds from a retail bond broker.
A broker can inform clients of when there are new bond issues pending, while also providing a buy/sell price in a robust secondary market. Some bond brokers will also break more expensive corporate bonds into smaller increments, more suitable to retail investors.
Bond Funds
The next best alternative to buying individual bonds is to gain market exposure through bond funds. These investment funds comprise of numerous bonds and possibly other debt instruments. And many are indeed listed on the ASX.
Bond fund portfolios are designed around specific risk/reward metrics to suit different investors just as stock market funds offer such variations on investor goals.
Bond funds are the safest way to play corporate bonds, as most corporate bonds are complex.
Virtually all bonds issued by companies these days are “hybrid” bonds – a mix of debt and an option on conversion into the underlying stock. Bonds can be convertible, converting, redeemable, redeemable... the list is endless and that’s before we get to “preference shares”, which despite the name are actually a form of debt.
Bond exchange-traded funds
ASX-listed bond ETFs are available to anyone with an online share trading account. The benefit of investing in a bond ETF is the diversification that comes from tracking and replicating the returns from the bond market you choose.
For example, while some bond ETFs track corporate bonds or government bonds, others will offer a much broader universe of bonds and other debt instruments.
The other benefit of bond ETFs is they typically pay out interest monthly, while any capital gains are paid out through an annual dividend. As the market in ETFs is provided by the sponsor of that ETF, there will always be a buy/sell price available to investors.
Listed bond funds can suffer from illiquidity.
Managed funds
Investing in bonds through managed funds is not unlike buying bonds through ETFs.
Fund managers typically provide a collection of bonds and other securities that directly align with their clients’ appetite for risk.
However, unlike ETFs, managed funds are administered by professional fund managers, who actively try to beat the market, albeit for a higher fee.
Superannuation
Included within most diversified super funds is a defensive interest component which includes an element of bond exposure.
However, there’s nothing to stop you allocating more (or indeed all) of your super balance to a portfolio comprising a selection of bonds (assuming you are eligible to run a self-managed super fund).
It’s not uncommon for retirees to have portfolios heavily skewed towards defensive assets, including a high proportion of suitably rated bonds.
