Let’s be honest. When it comes to your average investor, bond markets can seem intimidating and may be misunderstood. While corporate bonds don’t share the romantic aura that investing in the stock market may emanate, they’re still a strong defensive prospect and have a place in any portfolio.
Here are some of the most common myths around corporate bonds dispelled.
Myth 1: Corporate bonds aren’t for retail investors
The biggest myth when it comes to investing in corporate bonds is that they’re only for institutional investors and that the barriers for retail investors are too high. However, this couldn’t be further from the truth.
Not all Australians want to expose their hard-earned savings to the volatility of stock market fluctuations. There’s obvious retail demand for low-risk investments, but there hasn’t always been the same level of access to bonds. Other risk-averse investment options such as term deposits are there, but bonds haven’t always entered the retail conversation.
Thanks to exchange traded bonds units (XTBs), this is no longer the case. XTBs give investors exposure to individual Australian corporate bonds, and are issued on the ASX. Just like an investor would buy shares, they can now gain exposure to corporate bonds with no minimum investment.
Myth 2: If you own shares, you don’t need exposure to corporate bonds
Corporate bonds are completely different to shares. By investing in a company’s stock, you’ve essentially become a part owner of the business. As a result, you’ll receive potential dividends on profits and your share will appreciate alongside company growth.
By investing in corporate bonds, you’ve become a creditor to the business. As a creditor, you aren’t directly exposed to volatility around the company’s fortunes. You simply receive interest until your loan is paid back in full, on known dates.
It’s interesting to note that while a company’s stock price can both rise and fall sharply. Bond prices generally don’t experience anywhere near the volatility. This is down to the fact that investors may see the value of a business grow or fall, but the business’s ability to keep paying interest and principal has remained unchanged.
Myth 3: Hybrids are a better alternative to corporate bonds
Hybrids are securities that combine elements of bonds with elements of stocks. Just like corporate bonds, they will pay a fixed rate of return. But, due to taking on the higher risk that these equity-like features inherently attract, this return is likely to be higher than regular corporate bonds.
The frustrating thing is that when you’re looking for stability from bonds during times of stock market volatility, hybrids can behave just like stocks. Investing in corporate bonds is meant to be a defensive allocation of your portfolio. It should be a form of hedge against stock market moves. Hybrids generally don’t offer this.
While hybrids may have a place in a balanced portfolio, they can’t be viewed as a like for like alternative for the defensive attributes that corporate bonds provide.
Myth 4: Returns in the current low rate environment are too low
No matter where in the world you look, low interest rates are the new normal. While the US has begun to lead global rates back up, Australian rates haven’t followed yet. We’re still sitting much lower than we’ve historically been accustomed to.
With global economic conditions dictating that interest rates will remain lower for some time yet, every percentage point that you can squeeze out of an investment becomes that much more valuable. As a result, when compared to the volatility of stocks, the stability of corporate bonds becomes an attractive proposition.
In times of global uncertainty, the defensive attributes of corporate bonds are actually more important than straight up yield. It’s in a low-interest-rate environment such as now when the true value of fixed income comes to the fore.
Myth 5: There aren’t enough blue-chip names that issue corporate bonds
There are in fact approximately 40 XTBs that are ready to be bought and sold on the ASX. You can use the same broker you use to buy shares to buy bonds from some of the biggest names in Australian business. There are no minimums when investing in XTBs and there’s no additional paperwork.
You can use this list of all available XTBs to find details on the issuer as well as all of the relevant dates, prices and yields sorted by the column of your choice. Names such as Telstra, AGL and BHP are just a few of the blue-chip names that stand out on the list.
With the most common myths about corporate bonds now debunked, you can see the case for including them within any investment portfolio.
This article was originally published on 6 May 2019