Listen to a typical pub conversation and you’ll likely get a sharing tip, along with an evaluation of the referee’s weekend performance. But unless it’s a hostel frequented by high finance types, you’ll never listen to the best yields in the bond market.
Compared to equities, debt markets (i.e. bonds) are poorly understood here and this is particularly the case for corporate bonds.
“Australia doesn’t really have a fixed income culture. [bond] invest,” says Betashares Chief Economist David Bassanese.
“This applies not just to retail investors, but to our larger super funds which have significantly lower fixed interest allocations than their global pension fund counterparts.”
In the first half of the year, avoiding bonds was not such a bad idea because their value fell due to rising interest rates (the market value of a bond and interest rates move in opposite directions) .
Rates rose as a result of deliberate action by the central bank to calm overheated economies and hence inflation. But they can’t go that far, otherwise they will induce a recession and the big guessing game is what that tipping point is.
Arguably, long-term bond valuations are already pricing in the further rate hikes needed to keep inflation in check – and more. If so, bonds are an attractive investment at rampant valuations.
We hasten to add that there are many “whys” and “whys” and that prices can move violently on the single action – or even utterance – of a central banker.
Look no further than the dramatic reaction to the Reserve Bank’s 25 basis point official exchange rate hike in October, which was half of what bettors expected and construed as the magic signal that the inflation began to decline.
The local equity market surged, while Australia’s 10-year bond rate – a signal of where investors expect rates to settle in the longer term – also fell more than 4% to 3 .72%.
So, has inflation really been defeated? Yeah, no: renewed volatility in global equities and bond markets last week shows that even the experts are guessing.
In the case of corporate bonds, investors benefit from a double whammy. This is because the base interest rate (referenced to Treasury yields) has risen, but so has the spread (the extra margin the holder receives to accept risk beyond the super-safe government papers).
As with all bonds, investors will get back the face value of the paper at maturity – unless the issuer defaults. This makes investment-grade bonds inherently safer than stocks, with shareholders being last in line for a return if the liquidator calls.
Examples of yields include Qantas paper maturing November 2029 (current yield to maturity 5.5%), Downer (April 2026, 5.1%) and Chadstone half-owner Vicinity Centers ( April 2027, 4.8%).
Given the underdeveloped nature of our bond markets, retail access to products can be difficult, albeit easier than in the past.
Exchange Traded Bonds (XTB) listed on the ASX provide direct exposure to bonds issued by some of Australia’s largest listed companies, including Qantas, Telstra and Origin Energy. XTBs are tradeable as stocks.
Betashares Australian Investment Grade Corporate Bond ETF (CRED) holds investment grade paper from up to 50 local issuers, mostly listed on the ASX.
For the more adventurous, Global X ETFs Australian US Dollar High Yield Bond ETF (USHY) invests in 1,230 global companies with a yield to maturity of 8.3%.
There are also a dozen exchange-traded investment funds (LIT), which invest in a mix of corporate and government bonds and private debt (corporate loans).
Examples of LIT are the MCP Master Income Trust (MXT) and the KKR Credit Income Fund (KKC) of investment giant Kohlberg Kravis Roberts.
Like ETFs, LITs spread risk across hundreds of exposures, but like an old-fashioned banger, you never really know what’s inside.
Any views, information or opinions expressed in the interviews for this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse, or take responsibility for the financial product advice contained in this article.
Listen to a typical pub conversation and you’ll likely get a sharing tip, along with an evaluation of the referee’s weekend performance. But unless it’s a hostel frequented by high finance types, you’ll never listen to the best yields in the bond market.
Compared to equities, debt markets (i.e. bonds) are poorly understood here and this is particularly the case for corporate bonds.
“Australia doesn’t really have a fixed income culture. [bond] invest,” says Betashares Chief Economist David Bassanese.
“This applies not just to retail investors, but to our larger super funds which have significantly lower fixed interest allocations than their global pension fund counterparts.”
In the first half of the year, avoiding bonds was not such a bad idea because their value fell due to rising interest rates (the market value of a bond and interest rates move in opposite directions) .
Rates rose as a result of deliberate action by the central bank to calm overheated economies and hence inflation. But they can’t go that far, otherwise they will induce a recession and the big guessing game is what that tipping point is.
Arguably, long-term bond valuations are already pricing in the further rate hikes needed to keep inflation in check – and more. If so, bonds are an attractive investment at rampant valuations.
We hasten to add that there are many “whys” and “whys” and that prices can move violently on the single action – or even utterance – of a central banker.
Look no further than the dramatic reaction to the Reserve Bank’s 25 basis point official exchange rate hike in October, which was half of what bettors expected and construed as the magic signal that the inflation began to decline.
The local equity market surged, while Australia’s 10-year bond rate – a signal of where investors expect rates to settle in the longer term – also fell more than 4% to 3 .72%.
So, has inflation really been defeated? Yeah, no: renewed volatility in global equities and bond markets last week shows that even the experts are guessing.
In the case of corporate bonds, investors benefit from a double whammy. This is because the base interest rate (referenced to Treasury yields) has risen, but so has the spread (the extra margin the holder receives to accept risk beyond the super-safe government papers).
As with all bonds, investors will get back the face value of the paper at maturity – unless the issuer defaults. This makes investment-grade bonds inherently safer than stocks, with shareholders being last in line for a return if the liquidator calls.
Examples of yields include Qantas paper maturing November 2029 (current yield to maturity 5.5%), Downer (April 2026, 5.1%) and Chadstone half-owner Vicinity Centers ( April 2027, 4.8%).
Given the underdeveloped nature of our bond markets, retail access to products can be difficult, albeit easier than in the past.
Exchange Traded Bonds (XTB) listed on the ASX provide direct exposure to bonds issued by some of Australia’s largest listed companies, including Qantas, Telstra and Origin Energy. XTBs are tradeable as stocks.
Betashares Australian Investment Grade Corporate Bond ETF (CRED) holds investment grade paper from up to 50 local issuers, mostly listed on the ASX.
For the more adventurous, Global X ETFs Australian US Dollar High Yield Bond ETF (USHY) invests in 1,230 global companies with a yield to maturity of 8.3%.
There are also a dozen exchange-traded investment funds (LIT), which invest in a mix of corporate and government bonds and private debt (corporate loans).
Examples of LIT are the MCP Master Income Trust (MXT) and the KKR Credit Income Fund (KKC) of investment giant Kohlberg Kravis Roberts.
Like ETFs, LITs spread risk across hundreds of exposures, but like an old-fashioned banger, you never really know what’s inside.
Any views, information or opinions expressed in the interviews for this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse, or take responsibility for the financial product advice contained in this article.