Could corporate bonds be a way of the future?

Most people wouldn’t have noticed the Australian Government’s announcement of an inquiry into corporate bonds this week. So, what are corporate bonds and what’s the inquiry all about?

Bonds are a fundamental part of capital markets, providing access to debt capital.

According to the Moneysmart website, a bond is debt issued by a company or government.

Investors in bonds lend money to an entity in return for regular interest payments. When you hold a bond to maturity you receive the face value of the bond back.

The main reasons people invest in bonds is to provide a stable income stream, lower risk and diversify their portfolio. However, the level of risk depends on the type of bond being issued.

Most people have heard of government bonds. These are the safest bonds because you are guaranteed a rate of return.

While government bonds are considered very safe, the rate of return is generally quite low, especially in this low-interest rate environment.

But what about corporate bonds?

Corporate bonds are riskier than government bonds. If a company goes out of business “you won't get coupon payments and may not get your principal back”.

However, as the Moneysmart website goes on to say, corporate bonds are less risky than shares. This is because bond holders get paid out before shareholders in the event of a collapse.

A 2018 Deloitte report claimed there was more than $1 trillion of corporate bonds in Australia - 70% the size of the listed share market.

But with only 47% of the Australian bond market owned by Australian investors, the government is interested in investigating why.

According to Deloitte, private investors hold less than 1% of all corporate bonds in Australia. The figure is almost 20% in the United States.

This lack of interest appears to be fuelling the recently announced inquiry.

Why aren’t more Australians investing in corporate bonds?

With an average gross annual return on bonds of 6.1% between 2006-16, much higher than the 4.3% for Australian shares, why aren’t more Australian investors getting into the corporate bond market?

Deloitte claims a lack of understanding among investors is one key barrier to the take-up of corporate bonds in Australia.

It is also argued that market innovation is needed to create easier access to individual investors, but this is beginning to change.

With safe investments such as government bonds and term deposits offering limited returns to investors, it will be interesting to see if the government’s new inquiry will yield (pardon the pun) any benefits for older Australians crying out for alternative investment options.

You can read more about the inquiry here.

Our call for Snowy Hydro Green Bonds

National Seniors Australia welcomes government interest in the bond market.

We recently called for a government bond in our Federal Budget Submission.

This would give older Australians an opportunity to invest in green infrastructure projects, such as Snowy Hydro 2.0.

Learn more

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