Tuesday 11 August 2015 by Elizabeth Moran Opinion

Two must-have inflation linked bonds

Published in The Australian 11 August 2015

Anyone with health insurance or paying private school fees will appreciate that prices increase every year and often by far more than inflation. The prices of certain other goods and services may decline in any given quarter, but overall there has only been one negative quarterly inflation rate in the last 25 years, making inflation a critical consideration when investing

MCEC Main Foyer

For the June 2015 quarter, inflation increased 0.7 per cent taking the annual rate to 2.3 per cent – very close to the rate for one year term deposits.                                   

This raises the question of how best to combat inflation when interest rates on deposits are so low? To some extent, shares and property will help fight it but not necessarily keep pace with it. 

The only direct hedge is inflation linked bonds. The returns you earn move in line with the Consumer Price Index. So if inflation were to spike as it did in the 1970s to over 10 per cent, your returns would include that 10 per cent base rate plus a margin.

There are two types of inflation linked bonds. Here are my picks:

1. Sydney Airport capital indexed bond, maturing in 2030

This bond was first issued in 2006 with a face value of $100. Every quarter, the capital value of the bond has risen by the headline CPI rate, so that its capital value today is $125.33. That is the amount Sydney Airport would have to repay if the bond matured today.

Interest payments on the bond are fixed at 3.26 per cent but they are calculated on the growing face value of the bond, so they also rise with inflation.

These types of bonds are ideal for SMSFs in accumulation phase as they protect against inflation over the longer term. There are a number of other attractive features about the Sydney Airport 2030 bond:

  • It is currently trading at a discount to face value meaning you would only have to pay $120.12 to purchase $125.33 of value
  • The yield to maturity (calculated on a 2.5 per cent inflation assumption) is a high 5.97 per cent per annum
  • It is rated as investment grade by the credit rating agencies  

2. Melbourne Convention Centre indexed annuity bond maturing in 2033

This bond was issued by MPC Funding Ltd (MPC), which is the funding arm for the Public Private Partnership that developed the Melbourne Convention Centre. While the building is now complete, the Public Private Partnership continues to provide cleaning and maintenance to the centre. A whopping 98 per cent of its revenues come from a quarterly payment from the State of Victoria.

The bond works like a mortgage in reverse where investors pay an up-front lump sum and it is returned to them in principal and interest payments – linked to inflation, over a specified period. For example, if you invested $100,000, your first quarterly payment would be $1,767 and, assuming 2.5 per cent inflation per annum, this would rise to $2,784 for your final payment in 2033. The expected yield to maturity is 5.07 per cent per annum.

This type of inflation linked bond is better suited to investors in retirement seeking an inflation adjusted income.

One last thought. Investing about $100,000 in each of these bonds would deliver an annual cashflow of about $10,300 for the next 15 years until the Sydney Airport bond matures, delivering an anticipated lump sum of $147,000. The Melbourne Convention Centre would still make quarterly payments for a further three years. The estimated total cashflow given $200,000 initially invested is $371,000.

Both of these bonds are only available in the over-the-counter market. All investors can buy the Sydney Airport bonds but the Melbourne Convention Centre is only available to wholesale investors. There are similar indexed annuity bonds available for retail investors.

*Please note pricing was accurate as at 6 August 2015 and subject to change.


The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.