Government Bonds

Yet another integral asset to a growing investment portfolio. But what are they exactly?

Australian Government Bonds (AGBs) are issued by the Aussie Commonwealth, usually with promises to pay periodic interest payments and to repay the face value on the maturity date.

Until 2012, AGBs were only available for large ‘over the counter’ trades, making them inaccessible to the average retail investor. But new legislation gave the ASX the rights to commence electronic trade on these physical bonds as a CHESS Depository Interest (CDI).

These interests come in two forms: exchange-traded treasury bonds (eTBs) and exchange-traded treasury-indexed bonds (eTIBs).

How it works

If you own an eTB or eTIB, you thereby hold an Australian Government Bond. So you get all the perks (like payments) tied to that bond. But, because your hold is in the form of a CDI, you don’t have legal title of the bond.

This doesn’t really matter though, because the market makers must maintain decent liquidity between the physical and the exchange-traded bond. In fact, it needs to be a liquidity of at least $5 million — very enticing for retail investors.

And now that they’re trading on the ASX, you can buy or sell AGBs in the same way you trade shares. Just contact your financial broker, place an order, and within two business days…bam, you’re locked and loaded.

The perks

There a range of benefits to this type of investment, which vary between eTBs and eTIBs.

Both can provide you with regular, stable income. And they have the lowest credit risk out of all Aussie debt-based investments.

Best of all, you can choose the investment terms that best suit your strategy…whether you go from year to year, or trade with a 20-year vision in mind.

And as an added bonus for treasury-indexed bonds, their value moves alongside the Consumer Price Index, so your investment won’t be destroyed by inflation.

Is there a downside?

Of course there is. Any type of investment, whether large or small, comes with risks. Interest rates, credit and liquidity are all factors that can drive down the investment’s potential.

We recommend seeking financial advice before delving into such tricky forms of investment.

But by investing in more than just shares, you are broadening your chance for a potential success whilst also minimising risk.

And if the risk does arise, you can easily sell the bonds whenever the ASX is open. You aren’t obliged to stay in like other interest-earning investments.

When it comes to deciding which bonds to buy, when you should buy them and how much you should commit to, Money Morning can provide some key insight.

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