Help with government bonds!

[hng049]

Hi everyone. I'm thinking about investing in Australian government bonds and can't decide between indexed and non-indexed bonds . What are the main pros and cons for either of them in your opinions and when is a good time to buy them? Also, I know that they can be purchased just like shares on the ASX but I was wondering if you can buy them directly from the Australian government since I would like to buy them at face value If you can't, why not? Thanks in advance!

 

[OmegaTrader]

Hi everyone. I'm thinking about investing in Australian government bonds and can't decide between indexed and non-indexed bonds . What are the main pros and cons for either of them in your opinions and when is a good time to buy them? Also, I know that they can be purchased just like shares on the ASX but I was wondering if you can buy them directly from the Australian government since I would like to buy them at face value If you can't, why not? Thanks in advance!

Hi this is not advice, DO YOUR OWN RESEARCH

From my limited knowledge,

The Bonds are put to tender and mainly the big four banks put in the bids with the RBA and used to be another organisation I forget the name....


But I think it was or changed to RBA, I don't know exactly which department it is I think AOFM,

IDK exaclty

I remember hearing someone who used to work at RBA and was so excited that the bond auction was going on. Basically it was just the big four putting their bids to secret ballot piece of paper.

hahaha


So in short no you cannot buy directly from government as a retail participant.
Even if you could bid you would be out bid because other participants would discount at a yield and get the contract etc etc

So Bonds are basically vanilla instrument, the yield/discount will reflect current interest rates inflationary expectations and demand for safety etc etc

An inflation linked bond the capital is adjusted for inflation through a nominal value and then coupon is paid at a fixed interest rate, tied to the nominal value.

For deflation I thought the rules were different because I looked at it a couple of years ago.

But if the face value is less than 100 then the coupon remains fixed at that amount, so you gain in a sense

A bit of an unusual circumstance anyway.

Buying through asx, you are buying an instrument on the exchange with I think ANZ as the market maker, but that may have changed.

It is just a way to get get access to this market being a retail trader, the other ways using an OTC broker or through a fund etc etc.

I don't know if you actually own the actual bond in this case, a lawyer would have to answer that.

You own a chess depository interest type instrument thing, who knows,

http://www.asx.com.au/documents/settlement/CHESS_Depositary_Interests.pdf


which is not exactly the same a owning the bond. So I don't know how would hold up in reality if the proverbial sh*t hits the fan. It gets very mucky, guarantee schemes and nominees etc etc

Once again not my speciality.

Going through an OTC broker you may own a CDF, once again which is not a bond, so if the OTC broker dies, you die too...

Benefits VS Costs of Bonds

Benefits

Bonds allow for speculation in movement of interest rates.

Think of them like fixing bank interest and the rates going lower

Bonds are the government

A bank can go bankrupt easier than a government

At least in theory...

Downsides

Bonds are like fixed interest:

If rates go up you lose, as you have fixed your money at a lower rate

The Banks are backed by the government anyway:

If bank interest is higher and you are not specualting....

Why not invest in bank interest as the banks are de facto banked by the government.

Unles there is a tax difference, IDK

http://www.asx.com.au/documents/products/Taxation_of_Exchange-traded_AGBs_-_Deloitte_paper.pdf





Inflation vs Vanilla bond

Coupon

A normal bond you will get paid the same coupon every period

A inflation bond you will get paid an inflation adjusted coupon every period


Face value

A normal bond you will get paid the face value of the bond

A inflation bond you will get an inflation adjusted nominal face value or the intial face value, which ever is greater.






Analysis

so in essence the market will discount the non inflationary bond more.

So no matter what you choose in general theory the market will arbitriage any profits away.


So why would you use inflationary bonds??


1) If you think inflation is mispriced by the market and extremes will occur.

For example the market may take negative yields and not adjust in a rational way to inflation.

The market should discount bonds for inflation but they don't because they want safety.

In this case an inflationary bond would be superior, but only if you had invested before the phenomenon had occured.



2) You like the concept of a certain thing.

3) You can get a better return in inflation bonds than normal bonds and bank interest

Good luck