Most of you have never used a bond price calculator. It may sound boring but inputting a few yields into this simple calculator provided by the ASX is highly instructive. It shows why bond funds have delivered strong returns in the last year and the possible impact of a reversal if rates rise.
Let's check some prices based on the longest Australian Government bond listed. These examples use 1% movements in rates, which are more likely to take months rather than happening quickly:
1. 3% coupon bond matures 21 March 2047. Current price $133.77, current yield 1.55%.
2. Increase the yield by 1% to 2.55%, same bond, price falls to $108.93.
3. Reduce the yield by 1% to 0.55%, same bond, price rises to $162.72.
Rises or falls of 1% are possible. The US President has made 43,600 tweets (as at last night) since he came into office and the next one could move the market. If we had a share price falling from $163 to $133 or $109 the headlines would scream about volatility. This is a bond (admittedly, the long bond exaggerates the outcome) but a $54 fall from $163 is 33%. A bond will pay $100 on maturity but it can be quite a ride in the meantime, as Warren Bird explained.
If you think 28 years to 2047 is a long time, the US Treasury is canvassing investor appetite for a 100-year bond. Austria issued a 'century' bond in 2017 with a coupon of 2.1% and the yield is now 0.66%, with the price over $200. Who said bonds were boring or riskless?!
It's fun to try inputting a negative yield (and thanks to Peter Morgan for this example).
That's a relief! The ASX says yields cannot go negative. They should tell the Reserve Bank to stop lowering rates or the ASX will need to fix their model. Around the world, almost US$17 trillion of bonds offer negative yields (Source: Bloomberg) from only US$6 trillion less than a year ago.
In this week's edition ...
Exchange Traded Funds (ETFs) are a major factor in the changing landscape of investing, driven by the low cost of indexing and easy access via the listed market. In our continuing Interview Series, Alex Vynokur maps these developments, including in the active and thematic forms, and gives pointers to the ways investing will continue to change.
On the theme of change, Jeremy Podger describes six major themes which will have major impacts on markets in coming years, and Vivek Bommi explains three types of fixed interest alternatives as investors struggle with 1% cash and term deposit rates.
We then have two articles on investor behaviour. Julian Morrison warns investors not to think activity is the best way to invest, while Erica Hall cites research showing many retirees are too frugal and cautious in their desire not to run out of money.
There has been considerable media coverage of the Mercer versus Grattan debate about super and living standards in retirement, and we show both sides of the debate. It's hard to argue that someone earning less than the tax-free threshold of $18,200 who pays 15% tax in super is benefitting from the system as much as someone with a marginal tax rate of 45%.
This week's White Paper from NAB/nabtrade reports on the key findings from their recent seminar on fixed income trends.
Graham Hand, Managing Editor
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