How to buy government bonds
Dominic Beattie
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- Government bonds are medium- to long-term debt securities issued by the government.
- Government bonds are generally viewed as defensive and considered a low-risk asset class.
- Investing in government bonds means you are lending money to the government in return for regular interest payments plus your principal back if you hold the bond until maturity.
- You can buy and sell Australian Government Bonds (AGBs) on the ASX, while semi government bonds can be bought and sold through state and territory treasury corporations.
People who don't understand bonds may not consider them a 'sexy' investment option compared to stocks, properties, or even ETFs and cryptocurrencies.
The lack of street appeal of government bonds may deter some, yet if properly utilised, they can prove to be a valuable component of your investment portfolio.
As an asset, bonds are generally viewed as defensive and low risk, along with cash in savings accounts or term deposits, which are protected by the government deposit guarantee. Here's what you need to know about government bonds, including how to buy them.
What are government bonds?
Government bonds are medium- to long-term debt securities issued by the government.
They are generally considered a low-risk asset class, as investing in them means you’re lending money to the government, which is unlikely to default on this debt. In return, you get regular interest payments, called coupon payments.
All bonds have a set value, called ‘face value’. If you hold the bond until maturity, you will receive the face value (or principal) back.
There are two types of government bonds:
- Australian Government Bonds (AGBs) – Also known as Treasury Bonds, AGBs represent sovereign debt issued by the Australian government. Investors are guaranteed a rate of return if held until maturity. You can buy and sell listed AGBs on the Australian Securities Exchange (ASX). More information below
- Semi Government Bonds (Semis) – These are semi sovereign debt issued by Australian states and territories. Buying and selling of semis are only through state and territory treasury corporations.
- Take note: In addition to government-issued bonds, there are also corporate bonds, which are issued and traded on the over-the-counter (OTC) market.
How to buy government bonds
Institutional investors buy and sell government bonds on what is known as the primary and secondary markets. Meanwhile, everyday 'mum and dad' investors may find it easier to invest in exchange-traded Australian government bonds on the ASX.
This can be done through a stockbroker, financial adviser, or through an online share trading account. These exchange-traded government bonds can be bought and sold on the ASX like shares. The ASX provides a comprehensive list of all government bonds.
There are two types of exchange-traded Australian Government Bonds listed on the ASX:
- Exchange-traded Treasury Bonds (eTBs) – Give fixed interest payments
- Exchange-traded Treasury Indexed Bonds (eTIBs) – Give interest payments adjusted to inflation
Government bond interest rates
Unlike your traditional interest rates earned on a savings account or term deposit, bonds don't have standard interest rates. Instead, they are comprised of two components: the coupon interest rate and the yield to maturity (YTM).
What is the coupon interest rate?
The 'coupon' interest rate on a bond is the fixed rate set by the Australian Government when the bond is first issued. It determines the regular interest payments to the bondholder.
This rate remains constant throughout the life of the bond.
For example:
A Treasury Bond with a 5% coupon interest rate pays $5 per year for every $100 of face value, distributed as $2.50 per $100 face value semi-annually until the bond matures.
These payments are known as coupon interest payments.
What is yield to maturity (YTM)?
Yield to maturity (YTM) is the rate of return on a bond if purchased at the current market price and held until the maturity date.
The calculation of the yield assumes all coupon interest payments are reinvested at the same rate. Unlike the fixed coupon interest rate, yield to maturity will vary through time based on changes in the bond’s market price.
What is a floating rate bond?
A floating rate bond can go up or down over the term of the bond as the rate changes with fluctuations in benchmark interest rates. The coupon rate is based on an underlying interest rate, plus a specified percentage or margin (for example, cash rate + 2%).
Are government bonds risk-free?
Australian Government Bonds are generally considered risk-free in terms of credit risk, as they are backed by the government (which has a AAA rating) and there are so far no Australian government that has ever defaulted on its debt.
However, bonds are not completely risk-free. You'll generally always receive the face value of your bond back if you hold it until maturity. However, bonds are subject to interest rate risk and market fluctuations if sold before maturity.
Bonds are classed as a defensive asset because they can reduce your portfolio's vulnerability to share market returns. Before committing to government bonds, seek out professional financial advice from a financial adviser or related finance professional to determine whether you should add government bonds to your investment portfolio.
Other alternatives to government bonds
Corporate bonds
Corporate bonds operate in a similar way to government bonds, except you lend money to finance business activities. The company issuing the bond pays you the regular interest plus the initial principal at the maturity date. You can purchase corporate bonds through a public offering or through the ASX.
- Take note: Consider the credit risk of corporate bonds, because if the company becomes insolvent, you won’t get coupon payments and may not get your face value back.
Insurance bonds
Insurance or investment bonds are a long-term investment offered by insurance companies, designed to be held for at least 10 years. They're similar to managed funds in that your money is pooled together with other investors, with a portion of these funds invested in something that each investor chooses.
Term deposits
Term deposits are a low-risk investment product where investors lock away a lump sum of money in an authorised deposit-taking institution or ADI (such as banks, credit unions, building societies) for a set term in exchange for a fixed interest rate.
Terms can be as short as one month or as long as five years.
Many term deposits allow depositors to choose the frequency of their interest payments, e.g., fortnightly, monthly, semi-annually, annually, or at maturity (end of term).
Want to earn a fixed interest rate on your cash? The table below features term deposits with some of the highest interest rates on the market for a six-month term.
| Bank | Term Deposit | Interest Rate | Interest Frequency | Term | Automatic Rollover | Maturity Alert | Early Withdrawal Available | Minimum Deposit | Maximum Deposit | Notice Period to Withdraw | Account Keeping Fee | Online Application | Joint Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.25% p.a. | At Maturity | 6 months | $5,000 | $19,999 | – | – | |||||||||||||
5.20% p.a. | At Maturity | 6 months | $10,000 | $5,000,000 | – | – | |||||||||||||
5.15% p.a. | At Maturity | 6 months | $1,000 | $1,000,000 | – | – |
Savings accounts
For short-term savings goals, you may consider parking your funds in a high-interest savings account. Some savings accounts pay a flat interest on the balance in your account, while others require you to meet certain deposit conditions each month to qualify for the ‘bonus interest rate’.
Savings.com.au's two cents
Government bonds are ideal for risk-averse investors seeking safety, regular income, and portfolio diversification. Having defensive assets like bonds and other fixed-income assets in your portfolio can provide some stability.
As with any investment move, consider consulting a financial advisor before making any investment decisions. Keep in mind that past performance is not an indicator of future performance.