Most fund managers include government bonds in their portfolio to counter the share market’s volatility and ensure predictable returns, but since governments usually issue debt securities in large quantities, it limits accessibility for retail investors.
Australian Government Bonds (AGBs), however, are listed in the Australian Securities Exchange (ASX) in the form of Clearing House Electronic Subregister System (CHESS) depositary interests (CDIs), and these can be purchased in small parcels.
These CDIs split the ownership of its underlying investment and assign beneficial ownership to individual investors, but before discussing what that means, here are the the types of AGBs sold as CDIs:
- Exchange-traded Treasury Bonds (eTBs)
eTBs have fixed coupon rate and face value.
- Exchange-traded Treasury Indexed Bonds (eTIBs)
eTIBs are fixed coupon rate bonds applied to the adjusted capital based on movements in the Consumer Price Index (CPI).
How do CDIs work?
A CDI is like a bare trust which splits the legal and beneficial ownership of AGBs.
The legal owner of CDIs and their underlying AGB investments is Austraclear, a wholly owned subsidiary of the ASX. The beneficial owner is the retail investor who purchases bond parcels packaged as CDIs.
The investor pays for the CDI and receives all the benefits of bond ownership, such as coupon payments and face value settlement.
AGBs in the form of CDIs also extend liquidity to eTBs and eTIBs because they can be traded in the ASX like shares.
How to invest in AGBs
A potential investor may purchase AGBs through the primary and secondary markets, but the requirements and process will depend on which market the investments are purchased.
AGBs in the primary market
As with all investment purchases in the primary market, investors purchase in large quantities. This means most of the buyers are investment banks and large institutions that lend a significant amount of money to the government.
Just to show how significant the lending is, each bid must be for a minimum of $1,000,000 worth of face value, and additional bids must be in multiples of $1,000,000.
The Australian Office of Financial Management (AOFM)—the office in charge of issuing debt securities, among other things—only allows registered bidders to bid at tenders. For this, AOFM requires interested parties to:
- sign the ‘Registered Bidder Agreement’ form;
- provide their Tax File Number (TFN) or Australian Business Number (ABN);
- register for the Yieldbroker DEBTS System;
- Register with Austraclear; and,
- Have an Australian bank account.
Once recognised as a registered bidder, the investor may bid on AGBs offered in tender announcements., These announcements provide all details in relation to the offered securities.
Those who don’t have at least $1,000,000 to spare the government, should invest in AGBs through CDIs in the ASX.
AGB trading in the secondary market
AGBs are traded in the ASX in the form of CDIs, and unlike primary market tenders, investors don’t need millions of dollars. However, stock brokers charge transaction fees for executing orders.
Bonds are traded through stockbrokers since they are the only market participants allowed to execute orders in the ASX. Once the order is executed, simply wait two business days (including the trade date) for settlement and beneficial ownership transfers are finalised.
Since AGBs are traded in the form of CDIs, what investors actually receive is not a ‘certificate of bond ownership’ but a CHESS account holder ID number (HID). Investors will still receive all the coupon interest payments and the face value, but they only own rights to that income and not the bond itself.
Finding AGBs in the ASX
The best place to search for an AGB investment is on the ASX website since it has a page dedicated to the list of available AGBs. The ASX also provides complete information on the terms for each offer, including the date of maturity.
ASX lists AGBs using a six-character alphanumeric code that indicates the type, coupon payout schedule and maturity of the bond. There are three important elements in the code:
1. The first three characters refer to the type of AGB offered. These are:
- GSB for eTBs; and,
- GSI for eTIBs
2. The fourth character stands for the month of maturity. Two letters are assigned to each month.
For example, ‘A’ and ‘B’ stands for January, ‘C’ and ‘D’ mean February, ‘E’ and ‘F’ are equivalent to March, and so on.
3. The last two characters are numbers which indicate the year of maturity.
For example, one of the AGBs in the list of government bonds has the code “GSBE47.”
Following the code above, this translates to an eTB that will mature in March 2047.
Those who no longer wish to hold on to their AGB may sell their CDI anytime the ASX is open; however, the AGBs will be subject to the current market price..
It’s best to just do proper research or discuss options with financial advisers or stockbrokers first, especially for long-term investments.
It’s also important to know that taxes may apply with coupon interest earnings, so take this into consideration when choosing an AGB. The Australian Securities and Investments Commission (ASIC) and ASX website offer free applications and calculators for investors.
This information has been sourced from Australian government bonds and ASX.