Monday 26 November 2018 by Elizabeth Moran Education (basics)

Myth #6. There is too long to wait until maturity

Reality #6 Once bonds are issued they are traded in the secondary market. You can buy bonds that are close to maturity, say with one or two years to go. You don’t have to buy new issue bonds

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Bonds can be issued with very long terms to maturity, some have 20, 30 or even 50 years until they mature and capital is repaid to you. Don’t be put off by the long terms. Here is the list of reasons why:

1.   The over the counter bond market is huge and in 2017 the Securities Industry and Financial Markets Association (SIFMA) estimated that the global market was worth $100.13 trillion, bigger than the global share market worth $85.31 trillion. SIFMA estimate the Australian dollar bond market is worth $2.15 trillion. 

This massive, global market trades very large volumes of bonds every business day. You can typically sell your bonds at short notice and access your funds.

2.   While you might think you may not be around to see some of the maturity dates available, we’re all living longer. Longevity risk is one of life’s great unknowns. One way to hedge against this risk is to invest in longer dated bonds, which will help protect you against running out of money. Just about everyone I know knows a healthy nonagenarian (someone aged 90 to 99 years)!

3.   Because bonds are tradeable you can buy them when they are close to maturity. If you don’t want to invest in anything greater than say two or three years, there are still many options available.

4.   Longer dated fixed rate bonds will show the greatest price movements when interest rates rise and fall. They are very protective in a declining rate environment, and so should be considered in certain economic circumstances.

 

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