Legislation passed through parliament yesterday that followed through on a promise by “the world’s greatest treasurer” Wayne Swan that Government bonds will be listed for the retail market (I nearly said the ASX but now we have to be generic as we have Chi-X as well). the Treasurer took his time getting the legislation together but now we have it in place.
We have not had a developed retail bond market in this country and the need had been suggested frequently but with low interest rates worldwide in the 2000s nobody was in a rush to promote it beyond the discussion stage. For a decaede the banks found it easier to borrow cheaply overseas and the surplus experienced by previous governments saw them reducing debt rather than developing the market. The typical Australian investor was not interested either as the year on year growth in share values compounded by the addition of franked dividends made a poor case for bonds
Then, you guessed it, the GFC came along and the tables turned, market volatility became the norm, growth disappeared, risk became a dirty word and sources of overseas finance disappeared for some time before reappearing but with a much higher spread from new issues. Investors, especially the new growing SMSF sector, scurried towards “The Guarantee”. The amount of cash raised as result of the chase for certainty of return cannot be under-estimated, even as rates dropped.
The opportunity to invest in government debt, both federal, state and the securitised debt of our major blue-chip companies would, you would think, be an attractive asset allocation for risk shy investors including SMSF trustees.
But take a look at the current yields on Australian Government Bonds, which you can see in the table below, and it is clear that they are struggling to get over 3.12% for the 10 year and lower still for shorter durations.
|Australian Government Bonds
One of the reasons for this is that our Government Bonds are in high demand from overseas governments and pension funds which, under their operating rules, must hold a high percentage of AAA securities. Guess what? There aren’t so many of those around any more, so at the moment over 80% of our Government Bonds are owned by overseas institutions. This high demand has driven down the yields significantly.
Currently it is the corporate issues that are being sought after by retail investors with credit spreads far above those available prior to the GFC and with a risk premium high enough in comparison to Term Deposit Rates and Government Bonds to be attractive. Every issue I have seen this year has been substantially over subscribed, even the ones I would not touch.
Then there are term deposits themselves which still yield 4.75%+ with a government guarantee for 5 years and are thus more or less the same as the sovereign anyway.
So, although it is good news in the long-term for the retail investment community that we will be able to access what will effectively be an investment that can be considered a “risk free” solution, I do not expect a rush to acquire the first issues as the net return after inflation of the government bond sector is simply unattractive.