How To Buy Bonds In Australia (ASX): A Step-by-Step Guide

Bonds are low-risk secure debt securities issued by governments and large corporations.

They provide a stable source of income, help diversify your investment portfolio and protect your hard-earned money from the volatile market.

It is what makes them quite an attractive investment option among investors. If you want to buy and invest in bonds in Australia, you have come to the right place.

This blog discusses the different types of bonds and ways to invest in them. It also answers some of the most commonly asked questions about buying bonds in Australia.

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1. What Are Bonds?

Bonds are safe investments used by governments and companies to finance projects and operations. 

Investing in bonds is lending money to a government or a company to receive regular interest payments after an agreed time. These are called coupon payments.

When you buy a bond, it includes details such as the total loan amount you must repay to the bond owner and how much interest will be payable to the bond owner on an incremental basis.

Such regular interest payments provide a continuous stream of income that you can use to create a diversified portfolio.

The return on your investment may be lower than you expect from investing in stocks, but they offer more stability. That's why bonds are an attractive investment option and a strategic asset for your portfolio, particularly in times of falling interest rates or market volatility.

2. How Do Bonds Work?

Investors lend money to a company or a government for a fixed period at a pre-determined interest rate. All bonds come with a fixed value, called "face value" when issued to the lender. 

Government bonds in Australia generally make regular interest payments to the bond owners during the bond term and repay their principal amount on the 'maturity date' of the bonds. 

Investors can sell their bonds before the maturity date, but in that case, they will get the market value, which could be lower than the face value or principal of the bond. 

For example, if you purchase a 10-year $10,000 bond that pays 3% interest from a mining company, the company will make periodic interest payments on the $10,000 and return the entire principal in 10 years.

The price of a bond may fluctuate due to four main factors:

• The interest rate

• And the credit rating of the issuing company (if the credit rating improves, then the bond price will rise, and vice versa)

• The level of liquidity

• When the bond is due to be repaid 

Skilled bond traders try to gain from price movements by actively trading bonds on the bond markets.

3. What Are The 5 Types Of Bonds?

The Australian government and corporations are the main issuing entities in Australia for bonds.

The Commonwealth of Australia issues Commonwealth Government Bonds, or Commonwealth Government Securities, which pay a lower interest rate than corporate bonds in Australia as they involve fewer risks.

Here is a collection of the different bonds you can buy in Australia:  

Government-Issued Commonwealth Government Securities

You can buy these in various ways:

• Through the ASX 

• Directly over the counter

• Through a broker

• With an online trading account

The face value and the interest rate of this type of bond remain fixed, and payments are made every 3 to 6 months over the bond term.

There are different types of Australian Government Bonds: 

• Treasury Bonds in Australia: These are medium to long-term debt securities that pay interest every six months at a fixed rate. On maturity, the investors receive the face value of the bond. You can trade them on the Australian Securities Exchange at market value.

• Treasury Indexed Bonds: Like Treasury Bonds, these are medium to long-term bonds, where the capital value is adjusted for movements in the Consumer Price Index that measure inflation. Investors get the interest each quarter at a fixed rate and the capital value of the bond on maturity.

• Semi-Government Bonds: These semi-sovereign debts are issued by Australian territories and states. You can buy or sell them only through state and territory treasury corporations.

Corporate Bonds

Companies issue these bonds to raise money from investors to finance their business activities. You can trade them on the over-the-counter (OTC) market.

Although they offer higher interest rates, growing companies are riskier than government entities. It is necessary to check the credit risk of corporate bonds before buying them. The minimum amount of funds you need to buy corporate bonds is higher and can be around $500,000.

Sustainable Bonds

You can also find many bonds through superannuation, wholesale markets, and exchange-traded funds. They work the same way as common bonds but are primarily used to fund sustainable projects.

Bond ETFs

They are available on the ASX and are accessible with an online share trading account. Investing in a bond ETF implies investing in a fund that tracks the bond market (corporate or government bonds) and imitates its returns. 

Bond ETFs pay interest monthly, and you receive the capital gains as a yearly dividend.

4. How Do I Buy ASX Bonds?

There are several easy and affordable ways to access the bond market in Australia. You can buy bonds listed on ASX in the following ways:

• Exchange-Traded Funds or Exchange-Traded Bonds: You can buy or sell them on a stock exchange via a full-service broker or an online trading platform.

• Bond ETFs: This is an exchange-traded fund comprising a set of securities listed on a stock exchange. Bond ETFs generally track an index or a bundle of bonds to replicate its returns. Hybrid bond ETFs are riskier than other derivatives, so research before investing in them.

• Exchange-Traded Corporate Bonds: An exchange-traded bond unit relates to a single corporate bond listed on ASX. It mirrors a specific underlying bond and provides expectable dates (coupons), income amounts, and fixed maturity dates before investing. Presently, there are 50 XTBs that you can trade on the ASX with a minimum of $500.

• Exchange-Traded Government Bonds on ASX: These bonds track government bonds and provide fixed interest returns for the security term. However, as the interest rate gets adjusted with the Consumer Price index, the interest you receive may change periodically.

5. Steps For BeginnersTo Invest In Bonds In Australia

Step 1: Study The Bonds Before Investing

You must have an investment strategy and know the terms used during its execution. Some of these terms include: 

• Accrued interest

• Basis points

• Bid/ask

• Clean price

• Coupon rate

• Duration

• Market price

• Nominal value

• Par

• Premium and discount bonds

• Yield to maturity

Beginners can take an Australian Government bonds course that introduces them to exchange-traded Australian Government bonds and teach about how bonds work and their importance in their portfolio.

Step 2: Identify The Right Bond For Investment

Next, you must decide what type of bond you want to invest in.

Investors can invest in Bond Funds or Bond ETFs. It is the relatively easiest and cheapest way to access the bond market. You can buy and sell bonds on a stock exchange via a full-service broker or an online trading platform.

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Invest In Bonds via CFDs

CFD investors seek to gain from upward or downward bond price movements in the futures market. However, these complex derivative products can be risky and are most suited to advanced traders.

6. Compare Online Brokers To Invest In Bonds

With so many brokers available online, it often becomes confusing to find the best one from them.

We have compared top Online Brokers in Australia based on vital parameters to ease your selection.

7. Frequently Asked Questions (FAQs)

Which Type of Bond Is The Best?

In Australia, there are three main types of Fixed Income Securities you can trade on the ASX:

• Australian Government Bonds

• Corporate Bonds

• Hybrid Securities

As each type of bond has its sellers, buyers, objectives, and levels of risk and returns potential, it is necessary to compare options carefully before making a decision.

How Do I Trade In Bonds?

It is easy to invest in exchange-traded Australian government bonds on the ASX. You can do it through a financial adviser, a stockbroker, or an online share trading account.

The ASX provides a complete list of all government bonds - Treasury bonds and Treasury-indexed bonds that are available for trading on the ASX. 

Some bonds are not publicly traded, and you can only buy them over the counter. You can purchase them wholesale. You will have to engage a broker to execute your trades on your behalf (in exchange for a brokerage fee).

It often requires a more considerable minimum investment (over $500,000).

Can Bonds Lose Value?

Since the interest rate payable on the bond can not go below zero, so the redemption value of your bond can not reduce.

Is There A Downside To Bonds?

Bonds are a defensive asset but also carries risk such as:

• The main risk is the “Credit Risk/Default Risk” when the issuer goes solvent and fails to pay the interest owed to its investors. The chance of default is minimal in the case of government bonds and high in the case of corporate bonds.

• Another type of risk is “Interest rate risk”, as a rising interest rate causes the bond value to decline. As bonds have long maturities, there is a risk that the interest rates may rise before the maturity of the bond. Not only does it reduce the value of your bond, but holding it for a long may deprive you of earning a higher interest rate in any other investment instrument.

• Lack of transparency: Dealing in a bond market requires you to engage a third party, like a broker, to execute your trades. Due to this, you are less confident of the price you receive or pay for your bonds. 

What Is The Interest Paid on Bonds?

What Is The Australian Government Bonds Calculator?

The ASX bond calculator computes bond prices and yields for standard fixed-interest and exchange-traded Australian Government Bonds. It helps users calculate the yield to maturity of different AGBs from the traded price, thereby assisting people in determining which AGB is the most attractive investment for their needs.

Once you enter the yield or market price for your selected AGB into the calculator, the calculator will produce the following:

• The market price depends on the yield to maturity

• Yield to maturity depending on the market price

• Clean price. (market price - accrued interest)

• Accumulated interest

What Are The Best Bonds To Invest In Australia?

SPDR S&P/ASX Australian Bond Fund

The State Street Global Advisors Australia Limited manages this bond and provides returns corresponding to the S&P/ASX Australian Fixed Interest Index.

The fund comprises the following sectors in its exposure profile:

• Semi-government bonds (27.37%)

• Commonwealth government bonds (54.14%)

• Supranational bonds (5.37%)

• Corporate-finance bonds (4.96%)

• Government-related bonds (4.78%)

• Corporate industry bonds (2.23%)

• Other (0.78%)

• Corporate utility bonds (0.38%)

The iShares Core Composite Bond ETF

The bond ETF tracks the performance of the Bloomberg AusBond Composite Index, which is the underlying fund index.

The ETF mainly holds investment-grade fixed-income securities issued by the government and domiciled corporations in Australia. The average maturity of its underlying investments is between 7 and 10 years, and its total annual return was 2.57%.

You can also refer to the below top Australian government bonds list to find the best bond for your requirements:

• AMP Capital Corporate Bond

• AMP Flex Lifetime S2-AMP Australian Bond

• Altius Sustainable Bond Fund

• Artesian Corporate Bond Fund

• Pendal Government Bond

• CFS Wholesale Australian Bond

• Jamieson Coote Bonds Active

• Legg Mason Western Asset Australian Bond Trust

• Mercer Australian Sovereign Bond Fund

• Nikko AM Australian Bond

• PIMCO Australian Bond (Wholesale)

• UBS Australian Bond Fund

• Vanguard Australian Govt Bond Index

Click here to find the complete list of Exchange-traded Treasury Bonds on ASX.

What Is The Best Time To Buy Bonds?

Usually, investors like to invest in bonds when an economy performs well, and inflationary pressures and interest rates tend to build up. It puts pressure on yields, causes them to increase, and the bond value tends to fall.

Likewise, they tend to sell their bond units when the economy cools, and interest rates fall, leading to a bond price increase.

However, some investors invest in bonds when an economy doesn’t perform well. Such investors start shifting their investment from the stock market to bonds to protect their capital. They prefer lower but guaranteed returns to take risky bets in the stock market.

Experts recommend understanding the economic cycle beside the factors that drive the yields up or down to decide the correct entry and exit time in bonds, debt funds, or hybrid funds.

Can You Invest In Bonds In Australia? 

Yes, there are multiple mediums you can use to buy a bond in Australia. These include:

• Buying directly over the counter

• Through the ASX 

• Through a broker 

• Using an online trading account

Do Bonds Pay Monthly?

Most bond funds, like bond ETFs, pay regular monthly payments, but the amount may differ based on the market conditions.

How Much Money Do I Need To Invest In Bonds?

Unlike stocks, you need an initial amount of money to start investing in bonds. 

So, how much do you need to start investing? Many bonds come with a face value of $1000, so buying one bond unit on the Australian Stock Exchange is equivalent to $100. 

On the other hand, the minimum amount needed to purchase corporate bonds is usually large, up to $500,000.

How Much Do Australian Government Bonds Pay?

Government Bonds In Australia Rate (as of 23-09-2022)

10-Year Australian Government Bond Rate RBA

Is Buying Bonds A Good Idea?

Bonds come in a variety of types. Out of all, Government bonds are one of the safest investment options, as no Australian government has defaulted on its debt.

Investing in these defensive assets gives you a wide range of benefits, such as:

• Less volatility makes it potentially a safer investment

• Provides a stable and predictable revenue stream

• Choosing bonds to diversify a part of your portfolio can help reduce your financial risk.

Buying bonds is an excellent option for risk-averse people who aren’t after huge returns and want a comparatively safer and stable investment option. Bonds can help you gain decent returns without much exposure to unwanted market volatility.

It is ideal for retired people or those entering retirement or already retired who prefer a more stable income stream to support their lifestyle. Additionally, those heavily invested in stocks can consider buying bonds to rebalance their portfolio to average their financial risks/returns.

How Do You Trade Bonds To Make Money?

Here are the two simple ways you can use to make money from bonds:

• Hold onto the bonds till their maturity and collect the coupon payments. This way, you will receive your initial investment and the profit as “interest” you gained monthly/quarterly/annually during the bond tenure. 

• Buy them at a low price, and sell them at a price higher than what you initially paid. 

How to Buy Government Bonds In Australia on Commsec?

CommSec allows trade in Interest Rate Securities the same way as stocks listed on the ASX. A CommSec client can trade all the Interest Rate Securities available on the ASX.

The platform allows to:

• Access the current bond price on the website using the ASX code.

• View charts and other relevant data. 

• Place an order to buy/sell a government bond.

CommSec, in partnership with CommBank Investor Sales, enables Sophisticated and Wholesale clients to trade in unlisted or over-the-counter bond investments with an investment of at least $500,000.

To start investing in Interest Rate Securities, open a CommSec Share Trading Account. Login to your CommSec Share Trading Account and search for Interest Rate Securities.

8. Conclusion

We hope the above information has enhanced your knowledge of bonds and how to invest in them.

Like any other investment instrument, conduct thorough research and compare all available options to make an informed buying decision.

If you don't have an online account to buy bonds yet, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE.

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