By Bernard Hickey and David Chaston
Readers of this site will have noted that we have added a new Bonds section to our main menu a few days ago.
This is part of our expanding coverage for investors. This new section includes all you need to know about the technical data for every bond in our database, as well as a full set of stories relevant for bond investors to keep you up-to-date.
Bank deposits or finance company debentures - these seemed to be the only choices for fixed-interest investors.
And these days, it seems a limited choice.
Bank term deposits give returns barely better than inflation although they do seem safe. And we all now understand the risks involved with finance company debentures.
But there is another option - bonds.
Investors should school themselves in these products. They may not be for everyone, but most people know very little about them. Not so the professionals - the local bond market is bigger than the equity markets.
In New Zealand, there are NZ$68 billion of government securities on issue, including NZ$58 billion quoted on markets in NZ, and a further NZ$21 billion issued by other NZ enterprises. These are all part of the bond markets and a substantial pool from which to choose. The current market capitalisation of the equity market (NZX) is about NZ$55 billion.
And in 2012 there is likely to be a raft of new issues coming on to the local market. For example, local authorities have recently established a ‘bond bank’, a special vehicle for issuing rated local authority bonds. And some major SOEs are very likely to expand their offerings.
The down-side is that this market seems less accessible to ordinary investors. And it does require a bit of work getting used to the language and an understanding of what you need to look out for.
The up-side is that it is a tradable market. That is, you can buy without necessarily being in at the launch of an issue, you can cash-in your investment without necessarily having to wait until the maturity date, and you can use market signals to assess the changes to risk and yield as new information becomes known.
The bank term deposit market is big too - worth about NZ$100 billion, plus a declining NZ$5 billion or so in non-bank debentures.
But adding the bond market to your choices significantly expands your options.
Bonds are purchased for a capital sum, and they return a yield (interest). But while that yield (in $ terms) is usually a fixed return, the value of the underlying bond value often changes (up or down) to reflect two basic influences; firstly, current interest rates, and secondly market perceptions of risk. This can result in capital gains or losses in the value of the bond (much like a stock price).
If you hold your bond to maturity, you will get exactly what you signed up for, unless the company collapses and defaults.
But if you wish to get out early, the price you will recover will depend on market conditions at the time of your sale - and that could mean you earn a capital profit (or suffer a capital loss). Professional bond investors use these instruments to get both a good yield and that capital gain, which is why investing in bonds can be as lucrative (or otherwise) as investing in stocks.
Our bonds section allows you to find details about each bond on offer, a summary of the terms on which it was issued, its current price and yield, plus important details about the issuer. We also have convenient links to the legally required documents and disclosures that support the issue.
And finally, our page on "How to buy bonds" contains useful information when you are ready to start investing.
We always welcome feedback.