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Investing in Exchange Traded Bonds

Discussion in 'General Investing Discussion' started by ltcommander, 10th Jul, 2013.

  1. ltcommander

    ltcommander New Member

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    Hi guys,

    I am hoping to ask for some newbie advice. I want to preserve my capital and earn a decent interest rate and my research lead me to this http://australiangovernmentbonds.gov.../list-of-etbs/

    Here are my questions:

    1) I have a bank account at NAB. If I open a Securities account with them, I can just buy these bonds through their online trading platform, right? Does anyone know a cheaper way to buy them

    2) Once I buy bonds (say) this one
    15 April 2015 6.25% GSBG15 15 October 2013 312.5 76KB 899KB

    then, I just have to hold on to it until 15 April 2015 to get my principal back (without risk) and I will get 6.25% coupon payments, right?

    3) I read also that there is no withholding tax for non residents (I don't live in Aus), so essentially, this is a low risk investment yielding 6.25%, right?

    Would welcome any suggestions on which platform to use or if there are other suggestions than buying ETBs. I don't want to risk my principal so I don't want to go the stock route. Time frame for my investment is 3 years.

    Thank you
     
  2. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi Itcommander,

    Bonds are held captive to interest rates.

    If you buy a new bond of $100 at 5%/year for 2 years, you will get $10 interest plus your $100 at the end of 2 years.

    If the rate stays a 5% and you buy a 1 year old bill for $100, you will get $5 interest plus $100 at the end of one year.

    Now if the interest rate rises to 10%, no-one in their right mind would buy a one year bond of $100@ 5% for $100, so the value of the bond drops.

    Conversely if the interest rate drops to 2.5%, every body wants to buy a one year bond of $100@ 5% for $100, so the value of the bond rises.


    Bond funds also can also be a little less liquid because they are traded less than equitys. Australian bonds have been popular over the last 5 years. While not risk free, they offer less volatility than shares.


    Johny. :)
     
  3. Redwing

    Redwing Well-Known Member

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    Hi Johny

    How about some of the Aussie Bonds offered by Vanguard, iShares etc, any thoughts on these

    I guess LT as a non resident is also engaged in currency plays between Aus and N/A?
     
  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    My Vanguard Bonds have been tanking for the last month. They have fallen 4.40% since June 13. Not much compared to the stockmarket, but a big drop for Bonds. :(

    The Vanguard ETB holds Aussie Govt debt while the iShare follows the USB index. Unfortunately, the present 10year rates have followed US rises. Perhaps Au Bonds were overpriced, and with the Au$ falling and the overseas bondholders(70%) selling, our bond bubble is deflating. :mad:




    Johny.
     
  5. Redwing

    Redwing Well-Known Member

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    Hi Johny

    According to Vanguard, in Australia…

    We have VGB also though have wondered if VAF is better suited?
     
    Last edited by a moderator: 13th Jul, 2013
  6. Johny_come_lately

    Johny_come_lately Well-Known Member

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    On guard against a bond fall

    "Investors like to think Australia’s AAA-rated government bonds are bullet-proof. While the Commonwealth is unlikely to default on its debts, this does not mean the market price of its bonds cannot collapse. Between January and October 1994 the value of long-term Australian government bonds slumped a stunning 17.8 per cent .

    Fortune  magazine describes the “Great Bond Market Massacre” in eerily similar terms: “In January 1994, the 34th month of economic expansion, bond yields were historically low and inflation seemed negligible. Wages were going nowhere, and companies dared not raise prices. But within seven short months of that promising start . . . 1994 became the worst bond market loss in history."

    Financial review.

    This article shows that a 50 basis points rate rise will have a 2% drop in bond value, while a 100 bp rate rise will have a 3.8% drop in bond value and a 200 bp rate rise will have a 7.3% drop.




    Johny.
     
  7. Redwing

    Redwing Well-Known Member

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    Interest rates are falling, should Bond's not be increasing?

    OR are the overseas investors impacting?
     
  8. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Australian Government Bonds - Bloomberg

    Aus Govt Bonds

    2 year yeild: 2012 2.26% - 2013 2.45%

    5 year yeild: 2012 2.34% - 2013 2.99%

    10 year yeild: 2012 2.88% - 2013 3.74%

    15 year yeild: 2012 3.14% - 2013 4.24%

    As you can see interest rates are not falling, and this has resulted in the bond drop. Only 1/3 of my bonds are Australian Govt, with rest being o'seas and corporate. Hopefully this diversity will be to my advantage.




    Johny.
     
  9. Redwing

    Redwing Well-Known Member

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    I'm topping up at present with the discounts on offer
     
  10. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Redwing,

    What percentage of your total portfolio do you have in bonds?





    Johny.:)
     
  11. Redwing

    Redwing Well-Known Member

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    Hi Johny

    25% for VGB
     
  12. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Redwing,

    My second portfolio holds 40% VGB, while Portfolio No 1. holds about 60% of bonds and cash.

    Vanguard has a funny distribution time, with payments made in July. I use their distribution re-investment program. This comes in ,from memory, on the 18th.

    Do you use DRPs?




    Johny. :)
     
  13. Redwing

    Redwing Well-Known Member

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    I've been looking at VAF also; Is there a "better" bond when comparing the two?

    VAF is relatively new listing on 31 October 2012, it is also already a larger fund

    Vanguard® Australian Fixed Interest Index ETF
    https://www.vanguardinvestments.com.au/retail/ret/investments/etfdetailVAFIIE.jsp

    OR

    Vanguard® Australian Government Bond Index ETF
    https://www.vanguardinvestments.com.au/retail/ret/investments/etfdetailVAGBIE.jsp

    I'm also contemplating changing from STW ASX200 to VAS ASX300, lower MER and they 'almost' track each other

    Yes Re: DRP :)
     
  14. Johny_come_lately

    Johny_come_lately Well-Known Member

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    I don't think there is one 'better' bond than another. Bonds are meant to be the safe side to your portfolio. The more diverse types held, the safer you are.(Lower default risk) The more negatively correlated the better.(One bond goes down when the other goes up)

    So a mix of domestic and foreign Govt (with state and municipal) bonds, Australian and foreign corporate bonds, and emerging country bonds- all help to lower risk. These can be held in short, medium and long terms and inflation indexed.

    The thing I can't tell you is how much % of bonds to use. 25% may be all you need or 75% might suit you. It depends on how old you are, what are your goals, and how much you can stomach a falling market.:p



    Johny. :)