New research released last week revealed that the top concern for Australians aged over 50 was running out of savings in retirement. The results are somewhat unsurprising given both inflation and interest rates have surged since COVID-19 lockdowns.
While inflation has begun to erode the purchasing power of savings, aggressive monetary tightening has slammed the brakes on growth assets.
The ‘bonds are back’ narrative is now in full swing, and with yields on some corporate fixed-income securities currently paying upwards of 8%, financial advisers are now re-considering their role within client portfolios. This is especially pertinent for clients in or approaching retirement, where a greater focus on income generation and capital preservation is generally required.
Fixed-Income Securities – Why Now?
Unlike growth assets including equities, property and some alternatives, fixed-income securities are predominantly used as defensive investments. Not only can they help to stabilise client portfolios during heightened share market volatility, but they can also provide a consistent and stable income stream, especially when the reliability of dividend payments diminishes.
Another benefit for income-conscious clients who might be approaching retirement is that with fixed-income securities, the most likely outcomes are known upfront; coupon payments are paid in regular intervals, and the maturity date, when clients can expect to receive their funds back at the face value of the security, is known at the time of the investment.
These characteristics undeniably position fixed-income securities well in times of economic uncertainty, but despite being generally less risky and relatively ‘known quantities’ compared to shares, there are still various risks to be aware of.
Considerations for Advisers
Corporate fixed-income securities are issued by companies with varying degrees of credit worthiness. Those with higher credit ratings typically offer lower yields and less credit risk, while entities with lower credit rating generally offer bonds with higher yields, but this comes with increased credit risk.
In the event where an issuer defaults on a payment or becomes insolvent, also known as a ‘credit event’, then just like publicly traded shares the value of fixed-income securities can materially devalue. In some cases, client capital can be lost completely.
There are also market and liquidity considerations to be aware of, especially if a client wants or needs to sell their securities. While investors who hold until maturity can expect to receive their principal investment back at face value (assuming no credit event has taken place), if sold prior to this, then a capital loss (or gain) can occur. This is because the price of the security fluctuates throughout the term to reflect changing market conditions.
Additionally, the market for the fixed-income security may become less liquid which can also impact the ability to sell it at the desired price. Lastly, interest rate and inflation risk can also impact returns, although there are corporate fixed-income securities available which offer floating rates and inflation protection.
Speak With an Expert
Investing in corporate fixed-income securities can provide several benefits for clients approaching or already in retirement. From a regular stream of income to greater portfolio diversification, fixed-income securities can play a pivotal role within investment portfolios and are currently offering very attractive yields.
For more information about how corporate fixed-income can be incorporated into your clients’ portfolios, contact an adviser at the Australian Bond Exchange today.
Data as accurate as 11.09.2023
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.