Thread by @ImcocoMash

Let me summarise an article by @FNBSA on Bonds in a thread;

Equity market instability and low cash interest rates have left savers and investors, both locally and abroad, taking another look at government bonds as a potential area of investment. #Bonds

Government bonds are a popular fixed income instrument; they are generally less volatile than equities and offer higher yields (interest rates) than cash. We look at how government bonds work and how to gain access to this asset class. #bonds

What is a government bond?

A government bond is a debt instrument issued by a government to support state spending and obligations. Essentially an investor is lending money to the government and in return receiving interest on that loan. #bonds

Government bonds are often considered low-risk investments since they are backed by national government. #bonds

When an investor purchases a government bond, they are lending government an amount of money for an agreed upon period. In return, the investor receives a set level of interest at regular periods, known as coupon payments....

On bond expiration, the investor receives the original capital amount invested/lent to the government. Government bonds offer different yields based on the term of the investment. Typically, the longer the funds are lent to government the greater the yield offered to investors.

The type of bond described above is known as a "vanilla bond". Governments also issue inflation-linked bonds, whereby the state pays interest linked to the inflation rate during the investment period instead of interest at a fixed predetermined rate. #bonds by @FNBSA

Why invest in government bonds?

Government bonds are bought by investors as they provide a predictable income stream in the form of regular predetermined payments....

For investors with lower risk appetite, bonds can act as an effective instrument to beat the cost of inflation and provide stable, measurable returns. When held to maturity, investors receive their capital back and thus preserve capital over a fixed period....

In times of market uncertainty bonds can also shelter investors from losses and market pullbacks as they behave differently to the equity market (providing the benefit of diversification). #bonds by @FNBSA

How can investors buy government bonds?

SA government bonds are issued by National Treasury. Usually, a large investment is required to buy bonds directly from Treasury (in what is referred to as a primary issuance)

There are various ways to buy bonds in the secondary market. Investors also have the option of buying retail savings bonds. #bonds by @FNBSA

stockbroker: SA government bonds trade on the JSE bond exchange and can be bought and sold between maturity dates through a stockbroker.Sometimes investors will be able to buy bonds at prices lower than face value and will then receive a higher yield than through treasury #bonds

Bond exchange-traded funds (ETFs): Bond ETFs track a basket of South African government bonds with varying maturities and yields. Investors can buy either a vanilla bond ETF like the SATRIX SA Bond ETF or an inflation-linked bond ETF like the Ashburton ILBI ETF....

Investors can even buy bonds issued by other governments through the Ashburton World Government Bond Index. Bond ETFs are listed on the JSE and can be bought and sold easily through a stockbroker.

Bond unit trusts: This is a collective investment structure that can hold a wide range of South African government and even corporate bonds selected by professional investors. Unit trusts are another liquid investment vehicle

Bond unit trusts can be purchased through a linked investment service provider (LISP). #bonds by @FNBSA

RSA retail savings bonds: This is another direct way for an individual to invest in SA government bonds. The minimum investment amount is R1 000. RSA retail bonds offer yields linked to SA government bonds, and are available with two-, three- or five-year fixed terms.

Investors can either purchase vanilla bonds or inflation-linked retail bonds.Interest is payable semi-annually on set payment dates until maturity of the bond.These bonds can be acquired at the South African post office or online through ht‌tps‌://‌secure.‌rsaretailbonds.
gov‌.za

A major drawback of these bonds is that they cannot be sold in the secondary market, so investors will be tied into the investment until maturity.

from @FNBSA on bonds “Regardless of point valuations, bonds hold diversification benefit and should form an important part of any investment portfolio” by Chantal Marx, Head of Research at FNB Wealth and Investments and Nicholas Riemer, Head of Investment Education at FNB Wealth