Wednesday 05 June 2013 by Legacy

Commonwealth government bonds on the ASX

Please note that the figure mentioned in this article is no longer available.

Government bonds commenced trading on the ASX on 21 May 2013 after many years of planning

Officially called Exchange-traded Treasury Bonds, the ASX listing makes the market more accessible to individual investors and adds to a small number of existing corporate bonds (and a larger selection of hybrid securities).

The vast majority of bonds, both government and corporate, are still only available through the over the counter (OTC) or wholesale market, where you need to find a fixed income broker to be able to trade. However, it is expected that the listed bond market will continue to grow in size as the regulators reduce the disclosure burdens on potential new issuers and the demand for direct bond ownership increases, particularly from retirees and self managed super funds.

While we consider the listing, a breakthrough in terms of accessibility in Australia, unfortunately the market remains underdeveloped and investors are still generally unaware of the benefits of owning a direct bond portfolio.

There are currently 17 fixed rate bonds and five inflation linked bonds (ILBs) issued by the Commonwealth government that are available for purchase on the ASX in parcels as small as $100 face value.

On the first day of trade there were $319,000 worth of bonds transacted across seven fixed rate and two ILB lines. This compares to circa $6.8bn in average daily volume in the OTC market (according to AFMA data). While we expect the amount traded on the ASX to increase over time as more investors become aware of their availability, it is clear that the size of the market will be significantly less than the OTC market.

Table 1 shows fixed rate government bonds available on the ASX, the price and the yield to maturity as at 4 June 2013.

As many readers will be aware, there is an inverse relationship between fixed rate bond prices and yields - bond prices rise when interest rates fall (and vice-versa). The vast majority of government bonds are fixed rate.

As can be seen from the table above, record low interest rates in Australia have seen the price of fixed rate government bonds rise significantly with all but two of the 17 available bonds trading at a premium (remember that at maturity investors will only ever receive their $100 face value back).

As a result of the low interest rate environment and high prices, the yield to maturity on the available ASX listed government bonds (as well as the OTC government bonds) is relatively low, ranging from 2.47% to 3.91% (note the 4.75% bond maturing 15 June 2016 showing a yield to maturity of 1.85% has been excluded as this is an unrealistically low yield and is a function of a “blip” in the market where the last purchase price is not representative of the true value).

Investors looking to transact government bonds on the ASX will need to contact their financial advisor or stock broker and a brokerage fee will be payable. The bonds are tradeable in $100 face value units and as such the minimum investment amount is approximately $100.

As an interesting side note, investors in ASX listed government bonds won’t actually have direct ownership of the bonds themselves. Rather, the holder has beneficial ownership in the form of CHESS Depositary Interests (CDIs). Despite not owning the actual bond, the investor will obtain all of the economic benefits, including coupon and principal payments, attached to legal ownership of the government bond over which the CDIs have been issued.