Bonds are having a bit of a moment. Between the Reserve Bank’s rate moves pushing yields higher and headline-grabbing deals like Alphabet’s record A$5.5 billion Kangaroo bond, more everyday Australian investors are asking a very practical question: how do I actually buy one?
It’s a fair question. Bonds don’t work quite like shares or ETFs. You can’t just search “Alphabet bond” in your broker and hit buy. So, what can retail investors actually buy in Australia? And where do the different options fit?
The difference between bonds and shares
Before getting into buying bonds, it helps to understand why they behave differently from shares.
When interest rates rise, existing bonds paying lower rates tend to become less attractive, which can push their market prices down. When rates fall, the opposite can happen. Longer-term bonds can be particularly sensitive to these movements.
That’s also why the yield you see quoted for a bond isn’t necessarily the same thing as its coupon. The coupon is the interest rate attached to the bond when it’s issued, while the yield reflects what you’re earning based on the price you pay for it.
Why you can’t just buy a Google bond
Big corporate bond deals, such as Alphabet’s, are generally placed with institutional investors including super funds, fund managers and insurance companies. These deals typically involve minimum investments of hundreds of thousands of dollars and are traded through wholesale markets, which aren’t generally accessible to everyday investors.
And it’s not just the tech giants. Much of Australia’s corporate bond market has traditionally operated this way. An individual investor approaching a bond desk may face minimum investments of A$50,000 to A$500,000, depending on the bond and platform. That’s a lot to put into a single fixed-income investment.
The good news is that you don’t need to buy an individual corporate bond to get exposure to bonds.
Option 1: ASX-listed Australian Government Bonds
One of the most straightforward options is buying government bonds directly on the ASX.
Since 2013, the ASX has offered Australian Government Bonds (AGBs) in a format that’s accessible to retail investors. They’re issued as CHESS Depositary Interests (CDIs), with units of roughly $100, and you can buy and sell them through a regular broker, just as you would shares.
There are two main types:
- Exchange-traded Treasury Bonds (eTBs) pay a fixed rate of interest.
- Exchange-traded Treasury Indexed Bonds (eTIBs) have payments linked to inflation.
If you’ve never bought a bond before, this is about as close as you’ll get to the experience of buying a share. The trade-off is that you’re investing in government debt rather than corporate debt. That generally means less credit risk, but it can also mean lower yields.
It’s worth remembering that lower credit risk doesn’t mean the market price can’t fall. If interest rates move, the price of an existing government bond can still change.
How do you actually buy one?
If you’re buying an ASX-listed government bond, the process is much like buying a share.
You can search for the bond’s ASX code through your broker, check its price and relevant details, decide how much you want to invest and place an order. You’ll generally pay brokerage when you buy or sell.
If you’re buying an individual bond, it’s worth looking at its coupon, maturity date and yield, as well as the issuer and how easily you may be able to sell it later.
Option 2: Bond ETFs
If you’re building a diversified, long-term portfolio, bond ETFs are another relatively simple way to get exposure to fixed income. Rather than buying an individual bond, you’re buying units in a fund that holds a basket of bonds. Depending on the ETF, these could include government bonds, corporate bonds, international bonds or a combination of different types.
The main appeal is diversification. Instead of researching individual issuers and keeping track of when each bond matures, you can get exposure to a whole portfolio of bonds through a single investment.
There are a few other advantages:
- Fees can be low. Some of the major Australian bond ETFs charge management fees of around 0.10% a year.
- There are no large minimum investments. You can generally invest an amount that fits your own strategy.
- They’re traded on the ASX. You can buy and sell them during market hours through your broker.
There is one important difference between a bond ETF and an individual bond, though. An individual bond can be held until maturity, at which point the investor generally receives its face value, assuming the issuer meets its obligations. A bond ETF doesn’t have a single maturity date. Its price will move as the value of the underlying bonds changes, so if you sell, you may receive more or less than you originally invested.
If you’re new to bond ETFs, this guide to bond ETFs covers some of the different options available on the ASX, including government, composite and international bond ETFs.
Option 3: ASX-listed corporate bonds and income products
There’s also a smaller and more specialised market for corporate bonds and structured income products listed on the ASX.
These can offer higher yields than government bonds, but there’s a reason for that: you’re taking on more credit risk. With a corporate bond, you’re lending money to a company rather than the government. If the company gets into financial trouble, there’s a risk it won’t be able to make its interest payments or repay your investment.
These investments can also be less liquid and require more research. You’ll want to understand the issuer, read the product disclosure statement and look at where the investment sits in the company’s capital structure.
It’s also worth remembering that “corporate bond” covers a pretty broad range of investments. The market has seen volatility and provider failures over the years, so a corporate bond shouldn’t automatically be treated as the fixed-income equivalent of a term deposit.
If you’re considering an individual corporate bond, it’s worth doing the same kind of homework you would before buying an individual share.
Watch out for bond scams
Be wary of unsolicited offers for bonds promising unusually high returns. Scammers can impersonate banks and other financial institutions and offer fake bond investments. Check that the investment and provider are legitimate and read the relevant disclosure documents before handing over any money.
Option 4: A financial adviser or specialist broker
If you have a larger portfolio and want to invest in individual corporate bonds, you may also be able to access them through a financial adviser or specialist fixed-income broker. Some platforms provide access to wholesale bonds with minimum investments of around $50,000, although the minimums and eligibility requirements vary.
For most investors, this is a more involved way of getting fixed-income exposure. But it may become more relevant as your portfolio grows and you want greater control over the particular bonds you hold and when they mature.
So, which option fits a long-term portfolio?
It depends on what you’re trying to achieve.
For investors building a diversified portfolio around ETFs, bond ETFs can be a straightforward way to add fixed-income exposure. You get diversification across issuers and maturities, relatively low fees and the ability to invest alongside your existing ETFs through the same brokerage account.
ASX-listed government bonds are another option if you specifically want direct exposure to Australian government debt.
Individual corporate bonds and wholesale access are more specialised. They can make sense for some investors, but they also come with higher minimums, less liquidity and more research.
Bringing bonds into your plan
None of this means you need to rush out and buy bonds. The recent wave of Kangaroo bond issuance, including Alphabet’s deal, is largely a story about how big companies are raising money to fund huge amounts of spending on things like AI infrastructure.
But it can still be a useful prompt to look at your own portfolio. How much of your portfolio is in growth assets such as shares? And would adding some fixed income make sense for your goals and tolerance for market ups and downs?
If you’re thinking about adding another asset class to your portfolio, diversifying with other assets is a useful place to start. You can also check out our guide to choosing the right ETF once you’ve worked out what you’re looking for.
This article is general information only and doesn’t constitute personal financial advice. It does not take into account your objectives, financial situation or needs. Consider your own circumstances, and speak to a licensed financial adviser, before making investment decisions.
