Fixed income bonds are based on a simple premise: an investor lends money to a borrower for a specific period, in exchange for agreed, regular interest payments. While it may not deliver the thrills of growth stocks or involve household brands you can namedrop with friends, fixed income has been around since medieval1 times, and it’s still going strong.
Until recently, it was also as tricky to navigate as the feudal system. Assets were difficult to access directly, complicated, and designed for people who didn’t need money in the first place.
However, times are changing.
Today’s investor is empowered, informed and looking for new ways to balance their exposure to risk, bringing forth a wave of new fixed income offerings which are convenient, accessible, and pride themselves on low barriers to entry for retail investors.
The bond market has also undergone a transformation, embracing electronic trading platforms, which allow direct investment and increased transparency. It enabled the expansion of bond ETFs (Exchange Traded Funds) – giving investors access to fixed income markets, whilst enjoying the flexibility of trading on stock exchanges. The sum total is a win for retail investors, enabling more efficient, cost-effective investing.
The benefits of Fixed Income Bonds now
In our current market, investment strategies that focus on protecting wealth have become the main event, rather than just a back up plan. In a bid to avoid the swings of the stock market and the unpredictability of inflation, investors seek out returns they can depend on. Bonds offer precisely that – a focus on preserving capital, shielding investors from the tumultuous ups and downs of equities, bringing them closer to one thing that’s priceless: peace of mind.
Also read: Australian Bonds Record Start To 2024
Bonds work by lending money to governments or corporations in exchange for regular interest payments, and the return of the initial investment at a later date. They’re often diversified, spreading risk across a variety of assets; while one asset may experience a downturn, most others might rise, delivering more stable returns overall. This diversification not only brings a more robust, sustainable element to a portfolio – it also smooths out some of the bumps of market fluctuations.
All that being said, perhaps the most appealing feature of fixed income bonds is simply the most obvious one: access to consistent, predictable returns. The global economy over the last five years has taken some hits, along with anyone who has bumped up against it. An opportunity to make money with added reliability and restful nights is something we’d all appreciate right now.
What about risks?
A well-diversified, balanced portfolio usually includes some allocation to fixed income, but like any investment, it also carries its own set of risks.
When interest rates rise, the value of existing bonds tends to fall, and vice versa. This risk is mostly relevant for long-term bonds, but if you own a bond with a fixed interest rate and market interest rates rise, the value of your bond may decrease because investors can buy newlyissued bonds at higher rates. If inflation rises faster than the yield on your bond investment, the purchasing power of your returns may decrease over time. There’s also the chance that the issuer defaults, however bonds issued by governments and financially stable institutions typically come with low risk of this. Generally, fixed income bonds offer lower volatility and more stability compared to the alternatives.
Fixed income bonds in Australia
While Australia’s bond market may not be as large or liquid as other major economies (e.g. The US or Japan), it has grown significantly in recent years, and yields have been relatively high in comparison to the big players. This may be because the Australian bond market relies heavily on government bonds issued by the Commonwealth Government, known as Commonwealth Government Securities (CGS), as well as bonds issued by state governments and corporate bonds. We also run a tight ship when it comes to regulation, with bodies like Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) focused on market integrity, transparency, and investor protection.
Australia’s sovereign credit rating is AAA, one of just nine countries worldwide to be rated AAA by all three major credit rating agencies. Our strong credit rating means Australia has access to funds at lower rates and an ability to offer higher quality and lower risk, compared to bonds from other countries. This makes it attractive to both domestic and international investors on the hunt for more stable and profitable investments.
Are fixed income bonds having their moment? In an uncertain economy – or at least one in which uncertainty has become the norm – the reliability and stability of this type of investment holds strong appeal. We started the Blossom app with the aim of bringing fixed income to the everyday investor. With an industry known for high minimums and lockups – we wanted a solution that us, as investors wanted. Now you can get access for as little as $5 with the Blossom App.
Bonds are less likely to get your heart racing, but you’ll sleep more soundly, and a good night’s sleep is a commodity everyone is looking for.
1 The Entire Evolution of Fixed Income, From 2400 B.C. to Now | Build Asset Management (getbuilding.com)
