Monday 27 November 2017 by FIIG Securities threesistersaustralia Opinion

Top three retail bond picks

Here are three attractive retail bonds for investors wanting better returns than deposit rates without the volatility of shares 

As published in The Australian on 25 November 2017


You’ve probably heard this week’s comment from RBA governor Philip Lowe that there is no case for an official interest rate rise.

In fact, rates are moving very slowly, if at all. Yes, the share market is running hot, yet diversified investors constantly review the corporate bond market for opportunities and balance. In fact, it is all the more necessary as equity valuations go ever higher.

Here are three bonds that are really attractive in this market and available to mums and dads. All three are rated by credit rating agencies as investment grade and thus are low risk. I’ve chosen three different types of bonds one each of inflation linked, floating and fixed, so you can get a feel for what is available.

Sydney Airport 2030 Inflation linked bond

While you may already own Sydney Airport shares for their growth prospects based on the remarkable number of 117,000 people a day going through its corridors, investing in the Sydney Airport 2030 maturity inflation linked bond will have a completely different purpose.

While inflation is low, we don’t know what the future holds and there could be a significant ‘sting’ given massive global stimulus.

Inflation linked bonds are the only 100 per cent hedge against inflation and so an important part of protecting the purchasing power of your portfolio.

The Sydney Airport 2030 bond was issued at $100 face value in 2006, but the capital value has been compounding with inflation since and is now worth $130.

That’s the capital amount the company would have to repay investors if the bond matured now. Rising inflation will see the bond outperform, delivering higher returns with higher inflation and greater demand from investors seeking protection.

The bond pays a fixed quarterly coupon of 2.86 per cent on whatever the current indexed face value is. In pure inflation terms this total return equates to CPI +2.86%. That’s better than most deposit rates and with inflation running at about 1.7 per cent, total return is approximately 4.5 per cent annum – better than the average ASX dividend yield. 

Bendigo and Adelaide 2019 Floating rate note

For those who think interest rates are going to rise, floating rate bonds make sense. Interest on these bonds varies according to market expectations and is adjusted quarterly, when the interest payments are made.

This Bendigo and Adelaide bank bond is a subordinated one, so a bit higher risk with an expected maturity in 2019, the call date, but this can be extended to 2024 at the bank and APRA’s discretion.

Further, it has a clause which is also contained in most listed bank hybrids, where it converts to equity on APRA’s determination. In the bond’s favour is the short term until first call; it’s very unlikely the bond won’t be repaid in January 2019. This reduces its risk. The closer a bond is to maturity the less uncertainty there is about the organisation issuing it, assuming it’s financially sound. The bond has an expected yield to call of 3.06 per cent per annum. Great for capturing short term anticipated interest rate rises, better than deposit rates on offer, but not a great diversifier for many portfolios that are already overweight financials.

Investing in this bond with its short time until maturity protects against rate rises. If capital is returned in just over a year, it can be reinvested in higher paying bonds.

Adani Abbot Point 2020 Fixed rate bond 

Unloved companies that are still sound businesses make good bond investments. While this bond isn’t one for ESG advocates, it is paying a very high 6.46 per cent per annum, which makes a compelling case.

This bond was issued in 2015 so that Adani could buy the existing Abbot Point coal terminal from the Queensland state government. Established in 1984, the port is 33 years old. While many of us don’t like what coal does to the environment, we haven’t perfected a reliable, sustaining replacement.

This is a fixed rate bond, with interest paid half yearly.

If a retail investor wanted to put a mini portfolio of bonds together then investing in all three bonds would provide an expected weighted average yield to maturity of 5.1 per cent per annum, assuming inflation at 2.5 per cent - the RBA target mid point. There are few investments that can project the expected return upfront and repay capital at maturity. Corporate bonds are great diversifiers and will smooth overall returns in a portfolio.