Tuesday 15 July 2014 by Elizabeth Moran Trade opportunities

Short dated bonds have greater certainty

There’s a misconception in the market that buying bonds means locking away your funds for a long time.

Bonds are tradeable instruments and there is an active secondary market but if you don’t want to be subject to market fluctuations by investing in longer term bonds, there are bonds with short terms to maturity that provide healthy returns and greater capital certainty.

There are over 60 bonds with less than two years to maturity from a very wide range of issuers including: the Australian Commonwealth government, state governments, major banks, domestic corporations including infrastructure companies and international banks and corporations. I’ve selected a sample to give you an insight into what is available.

As the bonds are close to maturity, investors have greater certainty that the companies who have issued them will be able to repay.

Massive global quantitative easing also means there’s plenty of cash looking for a home and it’s very likely that companies needing to refinance maturing bonds will be able to access cheaper money for longer and there is even less risk that a company will default and less risk of investors losing money.

Those companies that have a call date approaching (where the company has the option to repay the investor; if they chose not to repay, the term of the bond is extended) are very likely to call the bond and refinance to reduce the cost of debt.

All of the eleven bonds shown are rated by the credit rating agencies as investment grade. The Australian government and ANZ bonds, while low risk are not attractive to retail investors that should be able to access better term deposit rates for the same risk, but may be attractive to institutional investors with larger sums to invest and mandates to hold funds in minimum credit rating buckets.

The Dampier to Bunbury Natural Gas Pipeline bond looks too expensive, while I think the ElectraNet inflation linked bond, the Genworth floating rate bond and Suncorp subsidiary AAI Ltd fixed bond are the stand-outs.

On a cautionary note, a bond approaching maturity can become illiquid. Contrary to this, there is a huge current demand for bonds with a colleague stating recently “the market is like a giant vacuum, whatever becomes available for sale is quickly hoovered”.

There are some long dated bonds out there and they have their place in portfolios. Investors that are concerned about the chance of a big correction in the coming years could ease their concern by investing in short term bonds to help preserve capital and increase returns over deposits over the same timeframe.

Please call your local dealer for more information.

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