Bonds are a significant option that fixed-interest investors should be aware of

Bonds are a significant option that fixed-interest investors should be aware of

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.

All data on our new section is updated daily.

If you are new to bond investing, we strongly suggest you read this page first, and use our convenient Glossary to get an understanding of the terms used.

For a list of all bonds on issue, go here »
For information of each issuer, go here »
For an explanation of the different types of bonds on issue, this page » will be helpful.

And finally, our page on "How to buy bonds" contains useful information when you are ready to start investing.

We always welcome feedback.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

14 Comments

Comment Filter

Highlight new comments in the last hr(s).

@ Bernard

It may be worth noting that the 6.00% 15/11/2011 NZ Government issue is subject to the full amount of RWT for the 6 month 3% coupon if one self registers ownership at Computershare (the old RBNZ registry service) and holds to redemption.

With less than one month to run this would be an unattractive proposition. Equally the alternative of co-mingling ones ownership with a bank or broker in a nominee account creates an unsecured lender situation.

It must also be noted the RBNZ is actively purchasing this issue at it's open market operations window to ease the liquidity impact upon redemption. Not that the yield is too depressed @2.505%(close tonight).compared to tbills

Nonetheless, if a secure short term home for funds is required,  ,    selling one day before maturity might do the trick if the spreads were not too wide - but unlikely.    

@Bernard

An excellent new addition to your site BH, congratulations.  Tthe indicative prices pages is the best overall one page coverage of NZ bonds I have seen.

 Is there any reason why the Powerco PWC050 and Contact  CEN010 bonds have such high yields compared to the NZX quotes?

Apologies - slight teething troubles.  Corrected now.

"Unless the company collapses and defaults"...no risks there then.

Put it in the bank why don't you?...pisspoor rates and tax to pay on interest plus the debasement to consider...but safe as houses...err....perhaps that should read "unsafe as houses" because not one dollar of your deposit is guaranteed by the govt....expect to see deposits at a bank near you frozen at some stage in the future....

That leaves saving in a bank in aussie...where you get some guaranteee....or in aussie shares...Bernard ought to be providing the directions to take to do just this.

For the average Kiwi peasant we are talking about peanuts in savings....they would be far better off to clear their debts and boost the purchase of stuff they will need at sales prices to store away. They should invest in a garden tunnel house and in the gear needed to keep food stored. They should team up to own and use a fish net or a Predator unit. Fork out for the rifle license and get with the small game hunting.

Another thing...invest the peanuts into improving your house insulation...into a wetback woodburner if you have wood nearby. Beware the greedy council money grab.

Cobblers...a small wetback woodburner installed is less than $3000. And they don't pollute...that's humbug. Anyone with a free local wood supply...a beach or a the bush, would be silly not to have one and keep it going 24/7

Yes they steal heaps for a rifle license but again the wild game out here is so plentiful...Those able to walk or ride a bike into the country lanes away from property cannot but fill a bag with Rabbits.

Those near 'Golden Bay' type sand beaches are mad not to have a Predator or a net.

Putting some effort into building a plastic tunnel house will pay off in heaps of food.

Only 3k OMG, 30% of my energy bill is water heating about $800 year increasing at 12%pa that fireplace has a NPV of trillions, govt should make these compulsory, not crappy paper tickets to the casino.  These are smart money investments with real returns.  I expect to see them in personel finance.

Burning wood is carbon neutral.  On a 33 year timeline what is the NPV of a wetback fireplace, or do they last that long?

Just don't burn salty wood in them and clean regularly...the liners can be replaced. For many it means no water heating costs at all. What is the saving there each year. Then deduct the cost of the potential poor bank return on $3000 each year!...in reality a loss due to tax on the interest and debasement of the money. So the deduction is the 3 to 4% debased...say $120

And you get the heating of the house if you divert the hot air to all the rooms. Power saving there too.

Burn wood....cones are good.

If a government bond is a taxpayer debt, then buying the bond, is like borrowing money from myself, then paying myself interest for it?  Am I wrong?  A bit like national floating SOE's that I already own and then telling me I will be able to own them.  Sounds a little silly to me.

Hi

This is great and a welcome addition.

What would also be useful for each bond listing is their listing code - e.g. Raboplus redeemable at 8.78% = RCSHA.

This would make them easier to identify and look up.

cheers

Great idea...Bonds are something I want to look at getting into.

regards

@steven

"Great idea...Bonds are something I want to look at getting into.""" 

You may wish to exercise a little caution. You have missed the greatest bull market in Government bonds which started in 1982.

The upside is limited by the zero yield barrier - US 10 yr Treasury @ 2.16% - and the downside is unlimited. 

Current US Government bond pricing makes the BPV (DV01) take on a very high nominal value for longer duration issues. Our higher market yields makes the pain of being wrong a little more forgiving.  

This is not a game for inexperienced players.

I strongly recommend purchasing and understanding the contents of this old but nonetheless, invaluable guide.  

C'mon Bernard & David

Whip the team into shape.

NZDMO office announces  new note offerings totalling $900 million.

Not a mention on the new page.

And as Wolly rightly points out the local banks will have to monetise these new 'promises to pay', thus further debasing the currency/savings.

 

Nobody gives a hoot SH, least of all those in the game. I'm too old to care and content to watch the bomb go off...as it will. I expect 013 as the fatal year for the greatest plunge of all. I shall be utterly stunned if Democracy across Europe and in the USA has not been 'shelved for the duration and protection of the citizens'...... from the citizens...oops sorry, the revolting serfs.

By then our currency will have debased another 12% to 16% depending on what you want to pay for.