So will investors in search of fixed-income assets chase Australian government bonds when retail trading starts on May 21? Tuesday’s surprise interest rate from the Reserve Bank seems to have undermined the other big investment destination for security-conscious investors – bank term and savings account deposits.
Will Federal government bonds, which are even safer, and carry a lower rate (yield) be as attractive?
There has been a lot written and talked about how the new retail bond market would be attractive to small investors in particular, but seeing many are now chasing bank shares yielding more than 5% (and close to 7% after taking dividend imputation into account), the answer will be ‘maybe not‘.
Seeing 10 year bond yields were around 3.06% yesterday and five year yields were 2.65% in the professional market, the attractiveness of bonds doesn’t look all that great.
Tuesday’s surprise rate cut by the Reserve Bank also diminishes the attractiveness of bonds as an alternative for investors – the only real attraction is that they are the ultimate safe investment with the Federal Government’s AAA stable credit rating.
Many brokers and analysts reckon the cut in interest rates will see small investors continue their chase for yield which has already seen the prices of the banks, Telstra and other dividend- paying industrials forced higher.
Yesterday’s strong day on the local market seems to support that idea with the banks all in demand, as well as Telstra and other high yield investments. The ASX ended higher with the ASX 200 index up 56 points (1.1%) at 5199.8 and the broader All Ords gaining 55.2 points, or 1.1%, to 5177.9. That was within sight of a five year high. Other markets across Asia also did well.
Helping was the better than expected trade data from China for April (which boosted resource stocks) and higher demand for big yielding shares. That saw the ANZ up 0.9%, Telstra, 1.2%, Westpac 1.1% and the CBA 1.3%.
After our solid day yesterday, another is expected here today following Wall Street’s second record close in a row. The Dow added 48.92 points to 15,105.12, the S&P 500 index rose 6.72 points to 1,632.68 and the Nasdaq was up 16.64 points to 3,413.26 points. European markets had another solid day as well. Commodities trading saw gold jump $US24 to $US1,473 an ounce and US oil rise 1% to $US96.66 after a better than expected supply report. In London Brent oil fell 6c to $US104.34. Watch today for more data later today from China on industrial production, investment and inflation. Poor figures could trigger a reaction different to the one yesterday when those surprisingly good trade figures for April were released.
ASX 200 12-Month Performance – Can Retail Bonds Really Compete With Shares?
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In a statement yesterday, Federal Treasurer Wayne Swan said the move "will enable retail investors to buy and sell AGBs in a similar way to how they buy and sell shares. The retail trading of AGBs will make it easier for mum and dad investors, including many self-managed super funds, to hold and trade Commonwealth-backed bonds.
"The Australian Office of Financial Management (AOFM) has made technical and commercial arrangements with the ASX and the selected registry operator to support the start of trading. The AOFM has also prepared concise disclosure documentation for retail investors."
The Australian Securities Exchange (ASX) said yesterday it had been working with the Federal government to give retail investors more opportunity to buy the assets which offer investors a fixed return and the opportunity to diversify away from equities-heavy portfolios, bank deposits and property.
It is also hoped the move will spur on Australia’s almost invisible corporate bond market, giving small and medium companies especially an alternative source of finance to borrowing from banks.
"The benefits of a retail government bond market are significant, allowing retail investors to diversify their savings and providing an important foundation for the development of a corporate bond market. These benefits will help improve Australia’s economic competitiveness," the chief executive of ASX Elmer Funke Kupper said.
The ASX estimated the change will increase the amount of ASX-listed fixed income assets eight-fold, from $35 billion to $280 billion. Under the new arrangements, investors will be able to buy and sell government bonds in a similar way to how shares are traded.
Each exchange-traded treasury bond would have a face value of $100 and would give the owner regular interest payments every six months and repayment of principal on maturity. Bonds on offer would have a range of maturities extending up to 15 years.
Mr Swan said the move is aimed at enabling the further development of the "AGB market, retail investors will have the opportunity to diversify their savings. Greater engagement by investors will also, over time, encourage companies to diversify their funding sources and offer opportunities for retail investor participation."
Investors have to remember that when the price of the bond rises, the yield falls (and produces gains) and that when the price falls, the yield rises (and produces losses).
