ABX Weekly 10th October 2018 Market update
A slew of positive data points out of the US has bumped yields higher. But that means analysts are starting to have concerns that the share market is due for a correction. We’ve seen this in flows as a flight to quality, as investors derisk and invest into something safer.
The Italian budget proposal was rejected putting more strain on the European market. Sending even more interest into the Australian investment space.
Brewin’ with Nguyen
Pop quiz, which of these bonds from the same company would you rather invest in?
Bond A: 3-year bond with a 3.00% coupon at price $94.50
Bond B: 3-year bond with a 10.00% coupon at price $113.77
I had an interesting conversation with a client who only wanted to purchase bonds under par ($100) and I wanted to demonstrate that the price of the bond isn’t as important as the Yield to Maturity (YTM) is. As you might guess both those bonds have the same YTM of 5%. Meaning if you hold the each of those bonds you would get a return of 5% each year on your investment.
But now say Bond B had a price of $113.00 and YTM of 5.27%. My client wouldn’t entertain the idea of Bond B even though it has now a higher YTM than Bond A.
Whether you pay a premium (above par) or have a discount (below par) on the bond just repositions when you get your value of the bond. Bond A gets its value at the end of the life of the bond date when it pays $100. Whereas Bond B value is paid off every 6 months with the coupon payment as you receive the higher coupon rate.
The YTM is what lets bondholders sleep easy at night as you know what return you’re going to get for your hardearned money
I just came off the plane from my two-week trip to visit my Swiss and German clients and thought I would share some impression with you. It is hard to believe that investors in Europe have now endured more than six years of negative interest rates and the financial system is slowly showing some signs of stress in the form of lower pensions and negative return on cash. Imagine this, you have a bank account and you firstly don’t earn any interest and secondly the bank is charging you to hold your money! I also hear from some pension funds that they are happy to lend money to a council to build a road and the pension fund actually pays the council to take the money. I also went on to the floor of the Frankfurt Stock exchange and saw firsthand, how our Australian Bonds are traded in Europe. European investors are getting very interested in our bonds as the interest rate differential is attractive and the current weakness in the A$ makes it even more exciting.
If you thought the bond examples were good, you should check out the real bonds we have to offer.
Follow Us @AusBondExchange
Where does your risk appetite lie? ABX weekly 10/10/2018
Australian Bond Exchange Pty. Ltd. (“ABX”) provides both general and specific financial product advice. This document and any information, advice or recommendation has been provided by ABX without taking account of your objectives, financial situation or needs. Because of this, you should before acting on any information, advice or recommendation from ABX consider the appropriateness of the information, advice or recommendation, having regard to your objectives, financial situation and needs. If this document, or any information, advice or recommendation, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure document relating to the product and consider the document before making any decision about whether to acquire the product. ABX, its directors, representatives, employees or related parties may have an interest in any companies or entities, or any financial product issued by companies and entities, and may earn revenue from the sale or purchase of any financial product, referred to in this document or in any information, advice or recommendation. Neither ABX, nor any of its directors, representatives, employees, or agents, make any representation or warranty as to the reliability, accuracy, or completeness, of this document or any information, advice or recommendation. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or any information, advice or recommendation. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a “wholesale client” as that term is defined in the Corporations Act 2001 (Cth). ABX strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. ABX does not make a market in the securities or products that may be referred to in this document.