Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 123

Listed bonds finally reach retail investors

It has always been an anomaly of the Australian financial system that retail investors have not had ready access to high quality corporate bonds. In most developed markets, and particularly in Europe, bonds have long been the mainstay of retail portfolios. At last in Australia, 17 corporate names are available through Exchange-Traded Bonds or XTBs listed on the ASX, to be purchased in the same way as any listed security.

In a prior life, I spent many years doing roadshows around Europe marketing bonds destined for retail investors. It was great fun. For the first ever transaction exceeding $A100 million in the Euromarket denominated in Australian dollars, we flew around Switzerland (with the light plane banking around the snow-capped Matterhorn!) visiting private banks who gobbled up the generous coupons for their Belgian dentist customers. It was wood-panelled meeting rooms inside splendid granite buildings, with polite Swiss bankers taking generous fees for keeping their clients happy.

But none of the bonds we issued in Australia were intended for retail distribution. The banks had the term deposit market sewn up.

Investors taking equity risk to achieve returns

Australian retail investors looking for secure yield have never been significant buyers of government bonds, except indirectly through bond funds, and now, ETFs based on bonds. Until recently, when fixed interest specialists like FIIG Securities started bringing corporate names to the market, retail investors were limited to bank term deposits and a few bonds listed on the ASX.

This might have been acceptable when interest rates were higher (Westpac issued a five-year term deposit paying 8% as recently at 2010), but the current bank rate for a five-year term deposit is only about 3%, barely covering inflation. Investors have turned to the much higher risk of shares, where the volatility of the All Ords index at about 15% is over three times the bond index. This is not a satisfactory solution to the problem of capital stability, as many investors have realised with the shock of bank shares like CBA falling from $96 to below $80 in a few months. That’s three years of dividends gone.

Need to open corporate bond market

Little wonder that the Financial System Inquiry Final Report argued that: “Less onerous disclosure requirements for listed securities would make retail issuance simpler and more cost effective” (page 263) and called for regulations to change to improve access to the bond market for retail investors.

As a sign of the need for secure alternatives, the latest ATO data for March 2015 shows 26.5% ($157.4 billion) of SMSF investments sitting in cash or term deposits, at a time when the cash rate is only 2%. Not many retirement goals are being met at that rate. Only $5 billion is listed under ‘debt securities’, although this ignores bond funds. Institutional super funds hold between 10% and 30% of their balanced options in fixed interest.

Australian Corporate Bond Fund (ACBC) has found a solution to the structural problem by placing individual senior, unsecured wholesale bonds into a trust, which issues ASX-listed securities called XTBs, similar to managed funds or Exchange Traded Funds. Each XTB reflects the maturity and coupon of the underlying corporate bond, best illustrated with an example:

  • ASX code YTMLLC gives exposure to a Lend Lease Corporation (LLC) senior bond
  • Final maturity is 13 November 2018
  • Coupon is 5.5% pa paid semi-annually
  • As at 19 August 2015, offered on the ASX at a price of $107.83.

Australian investors think in terms of yield, not price, and the XTB website has a useful calculator. Plugging in these numbers gives a yield to maturity of 3.39% at the time of writing (19 August 2015).

On the current range of XTBs, a fee of 0.4% per year to maturity is charged in the price by the manager, meaning the XTB investor receives 0.4% lower yield than wholesale. ASIC is in process of approving 16 more XTBs including five using floating rate senior bonds. It is expected that the fee structure for the floaters will be materially lower, to offer investors a more competitive option to cash or rolling short term deposits.

Table 1 shows the range of 17 bonds available at the moment.

Table 1: Corporate bonds available through XTB as at 19 August 2015

What are the issues to consider for retail investors?

The most obvious point is that these names are all high quality, investment grade issuers, so none of the indicative yields are above 4%. Many of the bond transactions brought to the market by FIIG are unrated and sub-investment grade, but this is what is required to achieve the higher yields of over 6.5%. Retail investors chasing these returns need to carefully consider whether unrated issuers are worth the extra risk, and ensure a wide diversity without a large exposure to any one name. Companies with ratings below the investment grade of BBB+ have an exponential risk/return trade off, as shown in Figure 1.

Figure 1: Five-year probability of default by credit rating.

While XTB is in the ideal space for investors looking for better security and uncomfortable with equity risk, demand would have been much higher five years ago when rates were higher. Investor appetite for Telstra at 2.79%, Wesfarmers at 2.9% and Woolworths at 3% will be subdued while the major bank deposits are at or around 3%. This is despite the banks calling off their ‘term deposit war’ which created attractive rates when they were intent on building their retail funding bases. While there’s an argument for diversifying away from bank risk for hybrids and shares, bank deposits carry a government guarantee up to $250,000 and the familiarity of the term deposit structure.

However, for the conservative investor looking for senior debt of quality corporate names, who is not keen on bond funds and the riskier hybrids, it’s worth considering a bond such as Lend Lease at 3.8% for five years. All bonds must be ‘seasoned’ for at least a year in the wholesale market for ASIC to allow the product to be offered as an XTB, which ensures there has been good price discovery.

Another advantage of XTBs is their access point via the ASX. Along with developments such as mFunds, over 100 ETFs, actively-managed listed funds and even private equity funds, investors such as SMSFs can implement a diversified portfolio directly on the exchange through their broker, without the need for a separate platform.

What are the downsides? Clearly, as with any bond, XTBs are tied to the performance of the underlying bond. Investors should consider Figure 1 and recognise that although these bonds are senior debt, they are not immune from the vicissitudes of corporate fortune.

The market-making role at the moment is carried out by Deutsche Bank, and liquidity has not been tested in the new structure. Although ACBC was established in 2013 and is the only company currently using this structure for bonds, its executives have significant fixed interest experience.

In summary, XTBs are a welcome addition to the supply of corporate bonds for the retail investor, and worth considering for those who want far less volatility in the value of their capital, while giving a reasonable income flow in the current low rate environment. Unlike a bond fund, the investor knows exactly what they own and when it matures.


Graham Hand is Editor of Cuffelinks. This article is for general education purposes and does not consider the circumstances of any investor.



Now you can earn 5% on bonds but stay with quality

Four reasons ESG investing continues to grow

Don't invest just for yield: the smarter way to generate income


Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.


Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.


The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.


Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 


Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.