Investing in fixed income through the economic cycles
Bonds are a defensive asset class, but they can potentially offer higher yields, even in a low interest rate environment.
Bonds sit on the debt side of an issuer's balance sheet. The issuer, typically a government of corporate, raises capital with a bond issue, and pays an agreed interest rate (called a coupon rate) to the investor on a regular basis, typically quarterly, semi-annually or yearly. The face value of the bond is returned on maturity as long as there is no default event, which is rare.
This makes bonds a relatively safe investment when equity markets are volatile – and in any environment a path to provide predictable recurring income. But issuer credit strength and macroeconomic factors will still impact your net return.
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 provide opportunity to bring currency opportunities into your portfolio for further diversification, and to potentially boost your returns.
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, but then sell the bond and purchase a US corporate bond in US dollars to take advantage of an identified opportunity.
While fees on such transactions used to be prohibitive it can now be simply managed with fee-free global transaction accounts - depending on the bank you use.
Transparent pricing
Bonds are a liquid asset and most can be traded on the OTC (over the counter) secondary market, Proceeds typically will be received two days after a sale, compared to having to lodge a 30-day legal notification form to liquidate a term deposit before maturity in Australia.
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 to suit your investment plan.
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 issuer. You can then choose whether to reinvest back into newer issue bonds with attractive valuations, or sell bonds on the secondary market to take up other opportunities.
Bonds do not offer instant access to cash, but they do offer quick access. This means funds can be available if you need to release cash at predictable periods for personal reasons, such as purchasing property or education costs.
A holistic approach to your strategy
A sound starting point for investors is a 'blue chip' bond investment strategy. It means focusing on defensive corporates, with a global reputation for quality, reliability and the ability to maintain profitability through market cycles. Such companies typically pay a reasonable yield, and provide a solid platform for regular, stable income.
When setting your strategy, it's 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 relationship managers can help you tailor a strategy that delivers recurring income, and target the returns you need to achieve.
This information is not advice and has been prepared without taking account of the objectives, situations or needs of any particular individuals. Any individual should consider if the information is appropriate for your own situation. Individuals are advised to obtain independent legal, financial, foreign exchange and taxation advice prior to making financial decision. Past performance is not indicative of future performance. Citigroup Pty Limited ABN 88 004 325 080, AFSL and Australian credit licence 238098.
Bonds are a defensive asset class, but they can potentially offer higher yields, even in a low interest rate environment.
Bonds sit on the debt side of an issuer's balance sheet. The issuer, typically a government of corporate, raises capital with a bond issue, and pays an agreed interest rate (called a coupon rate) to the investor on a regular basis, typically quarterly, semi-annually or yearly. The face value of the bond is returned on maturity as long as there is no default event, which is rare.
This makes bonds a relatively safe investment when equity markets are volatile – and in any environment a path to provide predictable recurring income. But issuer credit strength and macroeconomic factors will still impact your net return.
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 provide opportunity to bring currency opportunities into your portfolio for further diversification, and to potentially boost your returns.
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, but then sell the bond and purchase a US corporate bond in US dollars to take advantage of an identified opportunity.
While fees on such transactions used to be prohibitive it can now be simply managed with fee-free global transaction accounts - depending on the bank you use.
Transparent pricing
Bonds are a liquid asset and most can be traded on the OTC (over the counter) secondary market, Proceeds typically will be received two days after a sale, compared to having to lodge a 30-day legal notification form to liquidate a term deposit before maturity in Australia.
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 to suit your investment plan.
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 issuer. You can then choose whether to reinvest back into newer issue bonds with attractive valuations, or sell bonds on the secondary market to take up other opportunities.
Bonds do not offer instant access to cash, but they do offer quick access. This means funds can be available if you need to release cash at predictable periods for personal reasons, such as purchasing property or education costs.
A holistic approach to your strategy
A sound starting point for investors is a 'blue chip' bond investment strategy. It means focusing on defensive corporates, with a global reputation for quality, reliability and the ability to maintain profitability through market cycles. Such companies typically pay a reasonable yield, and provide a solid platform for regular, stable income.
When setting your strategy, it's 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 relationship managers can help you tailor a strategy that delivers recurring income, and target the returns you need to achieve.
This information is not advice and has been prepared without taking account of the objectives, situations or needs of any particular individuals. Any individual should consider if the information is appropriate for your own situation. Individuals are advised to obtain independent legal, financial, foreign exchange and taxation advice prior to making financial decision. Past performance is not indicative of future performance. Citigroup Pty Limited ABN 88 004 325 080, AFSL and Australian credit licence 238098.
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