Do Corporate Bonds provide a good investment avenue?
Team Veye | 25-Mar-2019
Bonds are a much older form of financial security. The use of bonds in the English-speaking nations can be traced back to 1694, when the Bank of England was formed so that bonds could be issued to finance a war that England was then fighting against France. Bonds require more research particularly when they are issued by the private sector, because there can be wide variations in credit ratings. Also, changes in bond yields can have a significant effect on bond prices because of their longer maturities.
We have various types of bonds that are issued these days - Government, Semi-government & Non-Government Bonds. Non-Government Bonds are issued by majorly Banks, Corporates, Asset-backed and non-residents. Corporate bonds – It is a form of capital raising for companies to fund expansion or new opportunities – instead of selling equity (shares) they borrow from investors by selling bonds. Unlike government or semi-government bonds, there is greater variance in credit quality and yield. This sector of the bond market was slow to develop in the period leading to the global financial crisis, and in most of the period since Australian companies making corporate bond issues have relied on the US domestic bond market.
Some corporates, such as Origin Energy and Tabcorp Holdings, have followed the example of the banks and made floating rate note issues to retail clients with listing on the ASX. Some large Australian corporates such as Wesfarmers, BHP Billiton and privatised government entities such as Telstra have made wholesale market fixed-interest issues, with the number of issuers being sufficient for AMP to have a corporate bond fund with a 65% Australian corporate component. Just the same, further development of the wholesale corporate bond market may have to wait for a time when the US domestic market is no longer attractive to large corporate issuers
There are signs, however, that a significant domestic retail market for corporate bonds is emerging. There certainly should be a demand, with retail investors having had few opportunities for fixed-interest investments in recent years other than bank term deposits. There is now also likely to be a ready supply of corporate issuers because the banks are becoming less able to lend to corporates because of regulatory reform being introduced by APRA to bring Australian banks into line with the Basel regulatory framework.
The Australian government is encouraging the development of a large and deep Australian corporate bond market, with an emphasis on retail investors. The listing of its own bonds on the ASX, which began in May 2013, is part of this reform plan.
Having said that, we reckon that this is an area that is still developing with not many options available for investment but once it is rolled out with some reforms from the government it surely has the ability to become a lucrative choice for investors. So, keep an eye.
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