
Get exclusive money-saving offers and guides
Straight to your inbox
Updated
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
Government and corporate bonds are considered one of the safest investments in the market. When you invest in the bond market, you're essentially lending money to a business or to the government at a fixed interest rate.
While you can’t usually expect the same high returns by investing in bonds as you get from shares, you can expect a lot more security. For this reason, the bond market does especially well as the share market becomes more volatile and interest rates fall.
If you're ready to start investing in bonds, there are several avenues that you can take, including wholesale investing via a company or broker, and through investment products listed on the ASX, such as exchange traded bonds and bond-themed exchange traded funds (ETFs).
Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Simply put, a bond is a loan that you make to either the Australian government or a company at a fixed interest rate for a pre-determined period of time. In return, you receive interest payments on your investment on a regular basis, with the principal amount paid back to you at the end of the term.
Where shares normally return value as the stock markets rise, bonds act as a counterweight to a portfolio because they tend to do better when the economy is under-performing. Before making a choice, you should carefully compare your options as some will pose more risk than others.
In Australia you have a few different options when investing in bonds. Each choice has its own risk and return potential, making it important that you compare your options carefully before deciding on any one product:
When looking at your bond options, you should also check how the interest rate works. In some cases you could find a floating rate bond, where the interest varies in line with the benchmark interest rate. You have the opportunity to earn higher returns with this type of investment, but there is also a risk of lower returns if the interest rate drops.
A bond’s capital value can increase or even decrease before the maturity date based on current interest rates. The amount of interest accrued since the last coupon payment will also have an effect on the value of a bond. If interest rates drop, you will see an increase in the value of your bonds, whereas when they rise the value of your bonds will drop as a result. These fluctuations are only relevant if you have invested in floating rate bonds as opposed to fixed rate bonds.
You can invest in bonds either over the counter (OTC) or via the Australian Securities Exchange (ASX). In both cases you'll be required to have a broker or fund manager. OTC bond investing usually requires a high minimal investment (upwards of $500,000); however, your rate of interest and return is guaranteed for the life of your investment. Investing in bond products via the ASX means you can invest for as little as a few hundred dollars through a broker or online trading platform.
An easy and relatively cheap way to access the bond market is through exchange traded funds (ETFs) or exchange traded bonds (XTBs + ETBs). These products can be bought and sold on a stock exchange through an online trading platform or a full service broker. If you're considering investing in bonds through an online broker, be aware that there may be additional risks involved – especially if you don't understand the product.
An alternative to buying bonds is to speculate on their price movements through CFD investing in the futures market. CFD investors seek to profit from bond price movements – whether up or down. That means that even if bond values are falling, CFD investors can still make a profit. However, because CFDs can be highly risky and are complex derivative products, CFDs are better suited to advanced traders. You can read more about CFDs in our comprehensive guide.
Are you thinking of moving your funds from a savings account into government bonds? If so, there are several considerations you need to be aware of, such as the bond's maturity date and minimal investment requirement. Below are some pros and cons of investing in bonds versus keeping funds in a savings account.
Bonds | Savings accounts | |
---|---|---|
Pros |
|
|
Cons |
|
|
Remember, before you get started, it pays to asses your financial situation to determine whether investing in government bonds is right for you.
Back to topDisclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involve substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
We've compared the fees, investment options and performance for both Sunsuper and HESTA to help you choose between these two popular super funds.
Hostplus and HESTA are two popular industry super funds, but which is right for you? We've compared their fees, investment options and performance side by side to help you choose.
Here is the essential info you need to know about investing in the stock market for your children.
AustralianSuper and Rest are two popular industry super funds, but how do they compare on fees, performance and investment options?
The recession is apparently over – but what does this actually mean for your money, and what impact does it have on your savings, loans and investments?
Everything you need to know about this highly anticipated Chinese IPO.
SPONSORED: No bull, here are 9 stocks that are riding the vegan wave.
This is the final week of our 4-week financial fitness challenge, where we help you understand your savings, super and investments.
The online retailer is expected to raise $40 million as it launches onto the ASX. Here's what you need to know.
SPONSORED: 10 air travel stocks that are winning despite COVID-19 restrictions.
Hi, Thanks for the useful article. You mentioned that we could buy bonds over the counter (OTC), could you provide some details – where to buy government bonds over the counter?
Hi Sumon,
Thanks for your comment and I hope you are doing well.
You are able to buy bonds over the counter from a broker or fund manager. Hope this helps and feel free to reach out to us again for further assistance.
Best,
Nikki
Say there is a severe global financial crisis (much worse than 2008 GFC) and the Australian Government cannot or decides not to meet its obligations under Australian Government Guarantee Scheme would a deposit in Australian Government bond be safer?
Many thanks, Dan
Hi Dan!
Interesting question you have there! :)
Bonds, even government bonds carry a little risk than the average deposit account, because of they are influenced by several economic factors and political instability. But compared to savings account, interest payments or also known as “coupon payments” are usually higher.
Most savings account have fixed rates and are covered under Australian Guarantee. But their rates are lower than bonds.
This is where diversification and thorough research are both very important. Different precautions you might take are to never “put all your eggs in one basket”, invest in different bonds if you’re uncomfortable with stocks, and spreading out your deposits.
IF you’re uncertain about the strategy you’d take, you may speak to a financial adviser.
Hope this helps.
Cheers,
Jonathan