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Wednesday 22 May 2024 by Jonathan Sheridan

Actively manage bond maturities to improve returns

Returns on bonds can be further increased when bonds approaching their maturity or call dates are reinvested ahead of time. We look at the benefits of actively managing maturities and early redemptions to get the most out of fixed income portfolios.


There are many benefits to fixed income investors reviewing upcoming maturities on their bond portfolio, which is another way a higher return can be achieved. By awaiting the maturity date of a bond when the principal is repaid, investors could be limiting their reinvestment opportunities to those bond investments available at maturity.

This is known as reinvestment risk and can result in returned funds yielding lower returns while held in cash, as investors await a suitable investment option.

When the demand for a bond outweighs the available supply, yields typically move lower on strong demand (and prices higher). This is exacerbated when a bond matures or is called and depending on the size of the issue can result in up to AUD200m or more of matured funds looking to reinvest at the same time often pushing prices higher.

Typically, as a bond approaches 6 months to maturity, the return of the capital price to the redemption value, called ‘pulling to par’ (as this price is usually at the par value of 100) is less than the returns available in a longer dated bond of equivalent risk held for the same period.

Therefore, selling the bond within this period not only reduces the reinvestment risk but also improves returns given the reintroduction to the portfolio of the term premium of the bond. Maintaining the term premium earned by a portfolio is one of the basic principles of bond investing. We discuss this in further detail below.

Term risk premium

The concept of time value of money plays an important role in fixed income investing, which refers to shorter maturities typically having less time premium and hence lower yields, compared to securities with longer dated maturities. As the time until the maturity date decreases, so too does the return as there is less perceived risk and hence less compensation.

When a bond is originally issued, the credit spread paid over the risk-free rate is usually higher the longer the bond has until maturity. This is due to there being more credit risk (risk of default) associated with lending for longer periods, compared to shorter periods of time, and for the optionality of redeploying funds being lost.

Likewise, a normal shaped risk-free yield curve will also offer higher risk-free rates (yields) the further out to maturity. This is evident looking at the Australian Government yield curve, which given the current uncertainty is flatter than usual, but typically has an upward sloping shape. Remember the credit spread and the risk-free rate together make up the yield of a corporate bond.

Over the life of the bond, as the length of time to maturity gradually shortens, the credit spread and risk-free rate both decrease (all other things being equal) as duration and credit risk are gradually priced out. With this, the bond’s original yield moves lower, causing the bond price to rally. The investor has been rewarded for taking both duration and credit risk, as we demonstrate using the GPTRE 3.6725% September 2024 bond as a real-life example.

Increasing returns

In the below chart we show the internal rate of return (IRR) for the GPTRE 2024 fixed coupon bond, which currently has less than a year until maturity, but was issued with a six-year tenor. In both scenarios we have assumed that the bond was purchased at primary issuance for $100. The first scenario calculates IRR of this investment assuming the bond is sold now, while the second scenario assumes the bond is held until maturity in September 2024.

The second scenario, where the GPTRE 2024 bond was held until maturity has a lower IRR than the first scenario where the bond can be exited at a price very close to the final redemption amount of $100. By holding on to the bond for an extra 6-months, investors are not getting rewarded with additional returns; rather investors will be exposed to the risk that there may not be attractive investment options at the time of maturity.

As shown in the below chart, the price of the GPTRE 2024 bond peaked at nearly $109.00 in 2021 and has been gradually moving lower since then as market yields rose in response to inflation, as well as the bond moving closer to maturity.

As illustrated with the GPTRE 2024 example above, the return is more attractive when upcoming maturities are actively managed and reinvested ahead of maturity dates, than to allow the deterioration in the capital price.


In actively managing upcoming maturities, fixed income investors are able to improve their returns, and mitigate reinvestment risk. Whilst the extra returns are not necessarily large, over time all small additions to returns add up to a larger total. This continual optimisation of returns by trading is one of the best ways to maximise returns in fixed income portfolios.

This isn’t a feature that is available to all asset classes and is more unique to fixed income portfolios. In working out the best strategy for actively managing re-investment of those positions due to redeem shortly, an investor can maximise their portfolio returns.