Exchange-traded AGBs offer a convenient and readily accessible way to invest in bonds issued by the Australian Government. Bonds are fixed income, interest rate investments that provide a regular income stream and the opportunity for the investor to receive the investment’s face value at maturity. They add to the diversity of investment products available to retail investors.

Exchange-traded AGBs will be quoted and transacted on ASX in a similar way to shares, with each bond quoted as a gross price (capital plus accrued interest) with a face value of $100.00.

The launch of Exchange-traded AGBs will increase the amount of ASX-quoted assets for retail investors in the interest rate category from $35 billion to approximately $280 billion, an eight-fold increase.

Elmer Funke Kupper, ASX Managing Director and CEO, said: “The benefits of a retail government bond market are significant, allowing retail investors to diversify their savings and providing an important foundation for the development of a corporate bond market. These benefits will help improve Australia’s economic competitiveness.”

For retail investors, Exchange-traded AGBs offer a secure, liquid investment that provides stable payments and the ability to reduce risk by diversifying portfolios beyond equities.

This is especially relevant given Australia’s aging population, expansion of self-managed superannuation and the need for greater certainty in income streams, particularly those provided by low risk assets such as government bonds.

Investors in Exchange-traded AGBs will hold beneficial ownership of the Australian Government Bonds in the form of CHESS Depositary Interests (CDIs). This means investors will obtain all of the economic benefits (including coupon and principal payments) attached to the legal ownership of the Australian Government Bond over which the CDI has been issued. Trades in Exchange-traded AGBs will be cleared by ASX Clear and settled through CHESS.

ASX has appointed three market makers to provide continuous two-way pricing in all bond series. The market makers are Commonwealth Bank of Australia, J.P. Morgan Australia Limited and UBS AG, Australia Branch. They have been given short-selling relief by ASIC. ASX will quote all benchmark bond series of Exchange-traded Treasury Bonds and Exchange-traded Treasury Indexed Bonds.

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What does it all mean?

• The last time that Australian long-term government bond yields were at current levels was back in 1948. A 12-year government bond traded in Australia and yields held just over 3 per cent. But a Commonwealth long-term bond also traded in London and yields were near 2.6 per cent in mid 1948. Over 1946-1948 Commonwealth long-term yields were trading between 2.25-3.0 per cent in London.
• The bottom line is that Australian government debt is demand, together with securities in the US and Germany, as investors seek “safe-haven” assets. So lower yields represent a tick mark for the Australian economy.
• Lower government bond yields will reduce borrowing costs for the Australian government and therefore assist in reducing the budget deficit and public debt. Lower government bond yields also serve to keep borrowing costs down for companies and home buyers. If market yields remain low then Aussie borrowers will benefit. The only worry for borrowers is to decide how much debt to keep at variable rates and how much of loan obligations should be locked in at fixed rates.
• The jitters about Europe may be weighing on equities markets, but Australian borrowers are emerging as winners – helping people to keep focussing on opportunities rather than risks.

4 June 2012

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