The size of the global bond market compared to the global equities market suggests it has the ability to offer SMSF trustees a wider variety of opportunities to invest in companies and governments, a fixed income manager has said.
“The bond market isn’t very well known in Australia, for various reasons, but it is four to five times larger than the equities market globally. The global bond market is around US$100 trillion and the Australian bond market is around A$1.5 trillion in size,” BGC Fixed Income Solutions head of research Justin McCarthy told delegates at the recent smstrusteenews SMSF Trustee Empowerment Day 2018.
“Half a trillion of that is made up by federal government bonds, another half a trillion is made up by state government bonds and the last $500 billion is made up of corporate and bank bonds and the like issued by companies you know, such as Wesfarmers, Telstra, BHP and all the major banks,” he said.
When examining bonds, McCarthy suggested SMSF trustees view them in a similar manner to term deposits.
“Bonds are very similar in structure to term deposits. With a term deposit you give the bank $1000, you know what your interest payments are for the next three years and you get your money back at the end of the term,” he noted.
“With a bond it’s very similar, but it trades once the initial offering has first occurred. So you can trade bonds and the price can vary, but unlike shares, bonds can list at $100, they can redeem at $100, but they might go up to $102 or down to $98.”
McCarthy pointed out the ranking of bonds in the capital structure of an organisation is a very important factor SMSF trustees should consider when assessing an investment in bonds or equities.
This is what dictates which parties are paid first in the unlikely event of a company liquidation, he added.
To this end, he noted in a banking structure, senior secured bonds have the highest payment priority followed by term deposits, senior unsecured bonds, subordinated debt, hybrids and then equities.