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Wednesday 26 April 2023 by Darryl Bruce Opinion

Bond Scams - What to look out for

With returns on bonds sharply higher compared to a year or so ago, there has been more interest in the asset class, and with that a spike in scammers trying to lure investors. Here we discuss what to be aware of and how best to protect yourself.

Normally we are very happy when individuals or groups see opportunities in the fixed income market however there is one exception. That is when the interest comes from scammers. Depressingly it seems that scams are becoming part of everyday life and we have seen a notable pick-up in activity in this space over the last year.

When returns on investment grade bonds were 2% - 3% it seems that the scammers were turning their attention elsewhere. Now, following a succession of interest rate rises, bond yields are sharply higher and have caught the eye of scammers. From their point of view the significant increase in demand for the fixed income asset class has created an opportunity to egregiously seize capital.

I have seen a number of these scams firsthand. We have spoken to people that have suffered terrible losses and also to some that have had extremely lucky escapes. In one case we are talking about an amount in excess of $10m.

Any loss to a scam is bad however for me it somehow seems even worse when it is targeting bond investors. This is not solely due to fact that I have spent most of my career working in the bond market!

It is more to do with the motivations of bond investors. Unlike investors in, say, crypto, who (hopefully) go in with their eyes open and understand that large losses are possible along with large gains and allocate capital accordingly, investors in bonds are usually not being highly ambitious when seeking out returns.

They are looking for capital stability and a steady income. They are not expecting a wild ride and they are certainty not expecting to lose all of their capital to a scam instantaneously.

The scams that I have seen recently are typically set up as relatively authentic looking websites. They also often use authentic looking bonds but the veneer crumbles under a closer examination.

Bonds that are very commonly promoted are the CBA 9% 2028 and the Queensland Treasury Corp (QTC) 6.5% 2033 and other bonds from household name companies. They are marketed on the strength of their high coupons (income) however that is not the full story.

In the case of the CBA bond it is actually denominated in South African Rand (ZAR). So even if your funds were used to buy that particular bond, which they almost certainly will not be, your capital would be exposed to substantial emerging market currency risk which could easily wipe out the income return.

In the case of the QTC 6.5% 2033 bond the scammers emphasise the 6.5% coupon without advertising that the bond is priced at around AUD122 meaning that the actual yield to maturity is only 3.8%, not that your capital would actually be invested in these bonds. These and other bonds are simply used as a front to attract money that is immediately siphoned off, never to be seen again.

Elsewhere we have seen erroneous claims of AAA ratings on bonds and sub-investment grade bonds being touted as “investment class: high grade”.

Needless to say, this is all designed to lull investors into a false sense of security thereby making them more likely to part with their capital. These scams are not always be easy for the average investor to spot.

These groups usually operate purely from a website and have no physical premises to speak of. As the market leader in Fixed Income with 25 years of history behind us we would encourage you to rely on well established brands. We would also suggest that you look to visit premises and make sure you can meet people face to face.

Scammers understandably are often only interested in dealing remotely. Ultimately if you or any of your friends have concerns, please do not hesitate to talk to your friendly FIIG Relationship Manager who will be happy to give you their view.