Bonds, in particular government bonds, are considered a low-risk investment product and a much safer alternative to the volatile shares market.
If you are interested in pursuing this investment option, here is a detailed guide on how to buy bonds in Australia.
What Is Investing in Bonds?
In the simplest terms, a bond is a type of loan. When you buy bonds, you are lending money to the government or a corporation in need of finances. In return, you will earn money from interest and get the principal amount back when the bond matures.
Bonds are often seen as less risky securities to invest in since they provide regular interest payments (also known as coupon payments). You won’t get the same returns as you would from trading shares and other high-risk markets, but bonds are a more stable investment—they offer opportunities for portfolio diversification, and their prices don’t fluctuate as much as share prices do.
That is not to say that investing in bonds is not without risks.
Typically, bonds are categorised from AAA grade to D. AAA grade bonds are generally safer but offer lower returns, while D-grade bonds have higher returns but also come with bigger risks. For those with a lower risk appetite, high-quality bonds are the obvious choice, whereas those looking for more than a steady income from their investment, can try lower-grade bonds.
In addition, bonds are long-term investments and a lot can change by the time your bond matures—interest rates could increase, devaluing your bond, or the issuer might default on payments, putting your entire investment at risk.
Just like any investment, you need to carefully weigh out the pros and cons and decide if you can accept the risks involved before moving forward.
Types of Bonds
When investing in bonds in Australia, you have two options to choose from. Since the risk and return potential vary depending on your choice, carefully consider which one is right for you.
Where else can you invest your money right now?
Corporate Bonds
Corporate bonds usually form part of a company’s public offer. The corporation issues a prospectus and interested investors buy bonds directly.
A bonds investment is not the same as buying shares. With stocks, you own a part of the company and your earnings are affected by the company’s cash flow, so if you buy shares in one of the biggest US companies, your returns will be determined by several factors, including how well the company does.
With bonds, your return is calculated by the Yield to Maturity rate, i.e. the return you would get if you bought a bond today and held it until it expires.
Corporate bonds tend to offer higher interest rates but are considered riskier than government-issued bonds, especially if the issuer is a small, growing organisation.
Australian Government Bonds
Commonwealth Government Securities (CGS) are issued by the Australian Government to potential investors interested in lending money to the government.
Government bonds are usually fixed and have a maturity date of 25 years, while interest is paid out quarterly or semi-annually. The interest rate is lower, but since there is no default risk, government bonds are more attractive to investors who want to play it safe and get a steady income.
How can I buy and sell eAGBs?
You can buy Australian government bonds on the Australian Securities Exchange. You will need the services of a licensed ASX broker as well as a CHESS-sponsored account. If you don’t have one, the broker can open one for you.
Note: To date, the Australian Government has not defaulted on coupon payments or failed to repay the principal amount to investors.
Sustainable Bonds
If you are interested in ethical investing, sustainable bonds are something to consider. Also known as transition, green, sustainability-linked or social bonds, they are issued to finance green or social projects. Be aware that green bonds can’t be purchased directly. Instead, you will have to buy them through your superannuation fund, a managed fund, wholesale entities or insurance companies.
How to Buy Bonds in Australia
You can buy bonds in Australia through wholesale investing (buying directly from the issuer) or through investment products listed on the ASX, such as bond ETFs or AGBs.
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Individual bonds
Individual bonds can only be bought directly from the company that has issued them and are typically available to specific buyers, such as institutional investors. This is because most bonds are traded over the counter instead of being publicly traded. What’s more, there is usually a large investment required (around $500,000), which, along with the complicated investment procedures, may discourage most investors from pursuing this option.
Bond funds
The most accessible and cost-effective way to buy bonds is through bond funds, which pool together money from several individual investors and then use the funds to buy a diversified portfolio of bonds. These funds are traded on the stock exchange just like shares, so to get started you need a share trading account with a broker that supports securities trading on the ASX.
Unlike individual bonds, bond funds require a lower minimum investment—usually no more than a few hundred dollars.
Bond ETFs
An ETF is a basket of securities listed on a stock market. Bond ETFs usually track a bond index (government and corporate) and mirror its performance. Since bond ETFs are traded on the ASX, you could open an online share trading account with a licensed ASX broker to access them.
Exchange-traded Australian government bonds
Unlike bond ETFs that track the performance of an index, exchange-traded Australian government bonds (eAGBs) are tied to a single government bond.
There are two kinds of Exchange-traded Australian Government bonds: Exchange-traded Treasury Bonds (ETBs) that give fixed interest payments and Exchange-traded Treasury Indexed Bonds (eTIBs) whose interest rate is adjusted to inflation.
Managed fund
Managed funds were traditionally used to invest in the bonds market, especially for the purchase of corporate bonds.
Managed funds are similar to ETFs (with a few key differences), the main one being that the fund manager chooses the bonds and other securities to invest in. If the fund is actively managed, it will try to outperform its benchmark, if it is passively managed, like an index fund, it will track an underlying market index.
Note: Since super is a type of managed fund, you can use it to buy bonds in Australia. In fact, many super funds in Australia offer members investments in low-risk instruments only, like cash and bonds, although this option is typically reserved for members closer to retirement.
Exchange-traded corporate bonds
Exchange-traded corporate bonds (XTBs) work in the same way as eAGBs, but they track a corporate bond issued by an ASX-listed company, like Telstra or Qantas.
XTBs give investors the chance to choose their exposure to specific companies and maturity dates, which makes them a much better choice than managed funds (whose biggest drawback is lack of transparency).
That said, XTBs are a relatively new product (they were introduced in 2015 in Australia) and there is still a limited range of bonds to invest in.
Investing through CFDs
A final option is to invest in bonds via CFDs. CFDs, or a Contract for Difference, allow you to bet on the price movements of bonds, so you could earn a profit even when bond prices are going down. You can easily find CFD brokers in Australia that offer bonds investments in addition to shares, crypto and FX CFDs.
Note that this investment strategy is typically reserved for more experienced investors—CFDs are traded using leverage which can be very profitable, but it can also enhance losses.
How Much Do Australian Bonds Cost?
The price of bonds can go up and down according to the interest rate. If the interest rate of newly released bonds goes down, your existing bonds will become more valuable. For instance, if the interest rate for your purchased bond is 3%, but the current interest rate is 2%, the value of your bonds will increase.
The opposite is also true—if the interest rate goes up, the value of your bonds will decrease. Bear in mind that this only applies to those investing in floating rate bonds as opposed to fixed rate bonds, where the interest rate is set when the bonds are issued and remains fixed until maturity.
Investors who want protection from inflation can choose indexed bonds, where returns are indexed against the CPI (Consumer Price index) or another index tied to the price of a given commodity.
The table below shows the price, Yield to Maturity rate and interest rate on a fixed-rate bond issued by the Australian Government.
Another potential factor affecting the value of bonds is the issuer’s creditworthiness, although this only applies to corporate bonds. If the company issuing bonds has seen an increase in credit rating, their bonds will also go up in value since the chances of the issuer becoming insolvent are lower.
Bond traders use both of these factors to make a profit when they sell and buy bonds.
Some investors may choose to hold on to the bonds until they reach full maturity—collecting both the interest over the years and the principal. It’s important to note that keeping the bonds until the expiry date may be risky—the interest rates may increase and you could miss out on higher interest opportunities elsewhere. Plus, your money is locked away for an extended period of time, which means you will have to go for other financing options if you are in need of quick cash.
Bottom Line: Are Australian Bonds a Good Investment?
An investment in bonds in Australia can be a great option for those who wish to minimise risk and are interested in getting regular income rather than playing the stock market. They can also help you diversify your portfolio and hedge your investment against market volatility.
There are downsides to consider as well. Although rare, there is always the risk of the issuer defaulting on payments or the interest rate increasing and decreasing the value of your existing bonds. If this is the case, you might be forced to sell your bonds before maturity and risk not getting the full value of your investment back.
The best way to approach a bonds investment is to look it at as any other investment—think about the pros and cons, consider your risk appetite and financial situation and make a decision accordingly.
1. How to buy government bonds in Australia?
Exchange-traded Australian Government Bonds can only be bought and sold through a licenced ASX broker with a CHESS-sponsored account. Keep in mind that in addition to paying for the price of the bond, you will be charged a brokerage fee, as well as other charges the broker might impose, such as administration fees and inactivity charges.
2. Do you pay tax on bonds?
Yes, bonds are subjected to the same tax rules as other asset classes, meaning investors will have to pay capital gains taxes on the return they receive. There are ways to reduce capital gains in Australia, although you need to see if any of them apply to your particular situation.
3. How to buy bonds in Australia through Commsec?
You can trade government bonds, bond ETFs and XTBs through Commsec, as well as over-the-counter (OTC) bonds, although to qualify for last option you must register a Sophisticated Investor status with the bank and provide a minimum investment amount of $500,000.
