What to look for in fixed income investments
Bonds are a defensive asset class, but they can potentially offer higher yields despite the low interest rate environment.
Bonds sit on the debt side of an issuer's balance sheet. The issuer raises capital with a bond issue, and pays an agreed interest rate (called a coupon rate) to the investor on a regular basis, typically semi-annually. The face value of the bond is returned on maturity.
This makes bonds a relatively safe investment when equity markets are volatile – and provides predictable recurring income. But issuer credit strength and macroeconomic factors will still impact your net return.
1. Diverse global and local opportunities
Although there are many local bond opportunities, there are even more global options. This allows investors to diversify not just by asset class but also geographically. The latter also provides opportunity for multiple currency diversification, although currently we favour USD, due to its safe haven status in volatile conditions.
But the opportunities are diverse. For example, let’s say you sell a UK property and receive the proceeds in pounds sterling.
You may look for a UK bond opportunity to continue generating income in sterling, and if the currency movement becomes more favourable, choose to sell the bond holding and transfer from sterling to another currency.
2. Transparent pricing
Unlike term deposits, bonds are liquid and can be traded on the secondary market – as an investor may choose to do in the above scenario. However, you can invest in bonds that are not exchange traded, and if you do this, ensure the party you transact with can access a broad market of buyers and sellers.
2. A range of maturity profiles
Bonds come with different maturity dates, typically from one year to 10 years, allowing you to choose different maturity profiles depending on your need for cash.
Staggering maturity profiles is part of a broader strategy to consider..
For example, you could build a bond portfolio with three, five, seven and 10 year bonds. As each bond matures, the issuer will return its face value to you.
A good strategy is to avoid locking your funds into a single maturity profile or a single issuers. You can then choose whether to reinvest back into newer issue bonds, or bonds on the secondary market with attractive valuations.
Or, you may need to release cash at predictable periods for personal reasons, such as purchasing property or education costs.
2. A holistic approach to your strategy
A sound starting point for investors is a 'blue chip' bond investment strategy. These focus on defensive corporates, with a global reputation for quality, reliability and the ability to maintain profitability through market cycles. They typically pay a reasonable yield, and provide a solid platform for regular, stable income.
When setting your strategy, its good not to focus solely on coupon rates – because, as with any investment, higher returns typically imply higher risk. You may not realise it, but you could potentially be investing in lower graded entities, or you may fall lower in the ranking of claims – which means in the rare event of a default, your bond value may not be fully repaid.
Citibank currently supports clients with a range of other strategic opportunities, including:
- Tactical strategy – be opportunistic about trading, such as looking for recent credit rating upgrades, or switching existing bond holdings for better risk-reward bonds.
- Thematic strategy – focus on specific macro-economic or industry themes, an approach supported by Citi research.
- Secondary market issues – sometimes new issue bonds are released to the secondary market, providing better liquidity and the potential for price appreciation on the new issue premium.
Our product specialists can help you tailor a strategy that delivers recurring income, and target the returns you need to achieve.
Simson is chief investment strategist for Citi Australia.
Bonds are a defensive asset class, but they can potentially offer higher yields despite the low interest rate environment.
Bonds sit on the debt side of an issuer's balance sheet. The issuer raises capital with a bond issue, and pays an agreed interest rate (called a coupon rate) to the investor on a regular basis, typically semi-annually. The face value of the bond is returned on maturity.
This makes bonds a relatively safe investment when equity markets are volatile – and provides predictable recurring income. But issuer credit strength and macroeconomic factors will still impact your net return.
1. Diverse global and local opportunities
Although there are many local bond opportunities, there are even more global options. This allows investors to diversify not just by asset class but also geographically. The latter also provides opportunity for multiple currency diversification, although currently we favour USD, due to its safe haven status in volatile conditions.
But the opportunities are diverse. For example, let’s say you sell a UK property and receive the proceeds in pounds sterling.
You may look for a UK bond opportunity to continue generating income in sterling, and if the currency movement becomes more favourable, choose to sell the bond holding and transfer from sterling to another currency.
2. Transparent pricing
Unlike term deposits, bonds are liquid and can be traded on the secondary market – as an investor may choose to do in the above scenario. However, you can invest in bonds that are not exchange traded, and if you do this, ensure the party you transact with can access a broad market of buyers and sellers.
2. A range of maturity profiles
Bonds come with different maturity dates, typically from one year to 10 years, allowing you to choose different maturity profiles depending on your need for cash.
Staggering maturity profiles is part of a broader strategy to consider..
For example, you could build a bond portfolio with three, five, seven and 10 year bonds. As each bond matures, the issuer will return its face value to you.
A good strategy is to avoid locking your funds into a single maturity profile or a single issuers. You can then choose whether to reinvest back into newer issue bonds, or bonds on the secondary market with attractive valuations.
Or, you may need to release cash at predictable periods for personal reasons, such as purchasing property or education costs.
2. A holistic approach to your strategy
A sound starting point for investors is a 'blue chip' bond investment strategy. These focus on defensive corporates, with a global reputation for quality, reliability and the ability to maintain profitability through market cycles. They typically pay a reasonable yield, and provide a solid platform for regular, stable income.
When setting your strategy, its good not to focus solely on coupon rates – because, as with any investment, higher returns typically imply higher risk. You may not realise it, but you could potentially be investing in lower graded entities, or you may fall lower in the ranking of claims – which means in the rare event of a default, your bond value may not be fully repaid.
Citibank currently supports clients with a range of other strategic opportunities, including:
- Tactical strategy – be opportunistic about trading, such as looking for recent credit rating upgrades, or switching existing bond holdings for better risk-reward bonds.
- Thematic strategy – focus on specific macro-economic or industry themes, an approach supported by Citi research.
- Secondary market issues – sometimes new issue bonds are released to the secondary market, providing better liquidity and the potential for price appreciation on the new issue premium.
Our product specialists can help you tailor a strategy that delivers recurring income, and target the returns you need to achieve.
Simson is chief investment strategist for Citi Australia.