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How do you invest in the bond market? A beginner’s guide

Protect your portfolio against volatility by investing in government or corporate bonds.

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 through investment products listed on the ASX. We'll go through what you need to know in this guide.

What is a bond?

Simply put, a bond is a loan and you're the owner of the debt to be paid.

This loan can be to either a government or to a company. 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. The rate of return is known as the coupon rate.

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 underperforming, even if 2024 proved the exception to this rule.

When it comes to bonds, they are scaled based on risks of repayments. The lower the risk, the less the reward in terms of the coupon rate. If a bond is rated triple-A, then it's likely the debt issuer will pay, meaning the interest rate falls. Anything lower than a triple-B rating is usually considered a junk bond and the rating can go as low as D. Before making a choice, you should carefully compare your options as some will pose more risk than others.

What are the different types of bonds?

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 product:

  • Australian government bonds. Commonwealth Government Securities (CGS) are issued by the Australian government. These can be bought directly over the counter (OTC) or via the ASX through a broker or an online trading account. The face value of these types of bonds is fixed along with the interest rate, with payments made to you every 3–6 months over the life of the security.
  • Corporate bonds. This type of bond is usually a part of a public offer, where a company will issue a prospectus and investors are able to make a direct investment. This is different from buying shares, where you are a part owner and your investment is affected by the cash flow of the business. With corporate bonds, you are a creditor and your return is limited to the agreed-upon interest payments and the return of your principal investment.
  • Sustainable bonds. There are also a number of sustainable bonds available through wholesale markets, superannuation and through exchange-traded funds. These act in the same way as regular bonds, but are used to fund sustainable projects. It should be highlighted these are exclusively through a third party. These include green, blue, transition, sustainably linked and social bonds.

Watch: How to invest in bonds in Australia

How are bonds valued?

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 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. 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.

How do I start investing in bonds?

You can invest directly 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.

Indirectly you can also invest in bonds through a bond-themed managed fund or exchange traded fund (ETF). If you're investing in an ETF, you can do so with a stock broker or online trading platform. To invest in an unlisted managed fund you can apply to invest directly through the fund manager.

How to invest in bonds over the ASX

If you're looking to invest in bonds, you can do so directly on the ASX. 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.

There are 5 main ways to invest in bonds over the ASX:

1. Invest in Bond ETFs

An exchange-traded fund is a bundle of securities that have been listed on a stock exchange. Bond ETFs typically track a corporate or government bond index to imitate its returns. However, it's important to note that not all fixed-interest ETFs are the same or are necessarily safe. Hybrid bond ETFs may contain additional riskier derivatives products – always do your research.

2. Invest in exchange-traded corporate bonds

While most bond ETFs track an index or basket of bonds, an exchange-traded bond unit (XTB) relates to a single ASX-listed corporate bond. Each XTB mirrors a specific underlying bond. This means they provide predictable income amounts, dates (coupons) and fixed maturity dates before you invest. Still relatively new, XTBs launched in Australia in 2015. Like ETFs, you buy and sell XTB units on the ASX with minimum amounts starting from $500. There are currently around 50 XTBs available on the ASX.

3. Invest in exchange-traded Australian government bonds

Exchange-traded treasury bonds (ETBs) and exchange-traded treasury-indexed bonds (eTIBs) work the same way as XTBs, but they track government bonds. Both provide fixed interest returns for the life of the security, but the value of eTIBs is adjusted with the consumer price index (CPI), meaning the interest received can fluctuate.

4. Invest in managed funds bonds

Most managed funds will allow you to gain exposure to the bond market. In many ways, these are similar to ETFs, but the key difference is a professional will look after your investment. The managed fund will usually try to beat a benchmark, which could mean stronger returns. But it will come at a cost, with managed funds costing more than ETFs.

5. Invest through your superannuation

An easy way to gain access to the bond market is through your superannuation. Most superannuation funds will by default have a mix of shares, bonds and alternative assets to smooth out returns. Most funds will also allow you to change your allocations to assets based on your wants or needs.

How to invest in bonds via CFDs

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.

However, it's worth pointing out that CFDs are more sophisticated trading products and are more risky than traditional bonds.

Bonds vs savings accounts

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.

BondsSavings accounts
  • Australian government bonds are considered safe due to Australia's credit rating
  • Deemed low risk
  • Could receive a higher return than savings
  • Protected by the Government Guarantee
  • Deemed low risk
  • Able to earn compound interest
  • At-call access to funds
  • Required to wait until the maturity date
  • Interest payments are less frequent
  • Requires a high investment amount
  • Could receive a lower return than bonds

Remember, before you get started, it pays to assess your financial situation to determine whether investing in government bonds is right for you.

Risks in bond investing

Even though bonds are considered to be one of the least risky assets, it all depends on what you invest in.

There's a range of bonds, from triple-A rated bonds to D. A triple-A bond is usually a government-backed bond and it's incredibly likely the entity will repay. This also means the rate of return will fall as your money is theoretically more secure.

On the other end of the scale are D bonds or default bonds. These are bonds that have missed a principal and interest repayment. The risk of defaulting increases during economic downturns.

If you're looking to reduce risk, you can do so by buying higher-quality bonds.

Another key risk to bond investors (especially in today's market) is rising interest rates. Usually, interest rate rises mean the value of a bond falls because investors can simply hold cash, making the bond less attractive as an investment option.

The primary consideration is interest rate risk. If interest rates continue to go up, it will reduce the value of the bond. The second consideration is credit risk which means that the issue could default. In general, corporate bonds are riskier than government bonds. The third consideration is to make sure the investor's time horizon fits the bond's maturity date, which can be anywhere from a few years to a few decades.

Tax implications for investing in bonds

Investors who purchase bonds will be subjected to similar tax rules like any other asset class.

As such, they will be required to pay capital gains taxes on all profits made.

According to the Australian government's site, Coupon Interest Payments on exchange-traded Australian government bonds (eAGBs) are exempt from non-resident interest withholding tax.

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Disclaimer: 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.

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6 Responses

    Default Gravatar
    MarzenaJune 20, 2023

    Are there any bonds covered by FCS $250,000.00 protection?
    Thank you kindly

      KylieJuly 4, 2023Finder

      Hi Marzena, Australian government bonds are fully protected, backed by the government and are one of the safest investments you can make. Corporate bonds are however not afforded that same protection, unless explicitly stated. The FCS protection scheme refers to cash deposits held with banks, building societies and credit unions, rather than investment products, which can go up or down and are typically not guaranteed.

    Default Gravatar
    SumonJanuary 21, 2020

    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?

      Default Gravatar
      NikkiJanuary 22, 2020

      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.


    Default Gravatar
    DanJune 26, 2017

    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

      Default Gravatar
      JonathanJune 27, 2017

      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.


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