Government bonds Australia? What and how? From another newbie ; )

[rue]

I am a very conservative saver and becoming a convert to YMOYL a few years back has cemented this further.  At the same time I know very little about investing per se just that I want a safe interest rate with no risk.  I’m not into buying property either.  I am going to do the  whole Extreme EarlyRetirement with only 100,000 dollars for capital but we do have a house that will be paid by then and very low out goings as we have photo voltaic electricity etc and live frugally.  Also this amount is for my half of the out goings and partner is still working P/T but saving to be able to leave work too. Any how I will get to the point!  I am determined to retire from my safe well paidish job when I REACH THE 100,000 dollars in 18 months (I will try to find work I enjoy P/T from home maybe selling my craftwork). My longing to be home making and creating will not wait any longer than that.  I currently move my money around into the highest interest term deposit  or internet savings accounts.  I have to stay on top of current interest rates and take advantage of bonus rates to new customers  which means I have to move money every 4 to 5 months in some instances (its split into different accounts).  I have read about government bonds in YMOYL.  Could someone please tell me what these are in Australia and how to buy and what the interest rate is and how they work?  Also any other safe savings tips for Australia very much appreciated.

[bigchrisb]

Hi, and welcome from another Aussie.

The bond market in Australia is far less developed than the bond market in the US.   It is difficult to access many bonds directly, and there isn't much of a secondary market (i.e. its difficult to sell your bonds).

If you want to buy government bonds directly, one way is direct from the reserve bank.  See http://www.rba.gov.au/fin-services/bond-facility/ for their information page.

An alternative that might offer a bit more liquidity for you is to consider some of the bond exchange traded funds that trade on the Australian stock market.  These are easy to buy and sell through any online broker. Have a look at VGB for a government bond fund provided by Vangaurd - one of the worlds largest providers of managed funds and exchange traded funds.  More information on that is here https://www.vanguardinvestments.com.au/retail/ret/investments/etfdetailVAGBIE.jsp

However, be careful - bonds are different to high interest saving accounts, in that with a bond the capital value of the bond can rise and fall (and does so with interest rates).  Typically, if the interest rate falls, the value of a bond will rise.  If interest rates increase, typically bond values will fall (with the potential that you can lose money).

Bonds have been going up strongly in value over the last couple of years as interest rates have crashed.  My personal view is that there is a significant degree of risk in buying bonds right now (google "bond bubble" and you will find plenty of conspiracy theories), and my personal evaluation is that at the moment shares are potentially lower risk (and that's where I have my money).  If the risk of loss of capital worries you, I suggest that you should do a lot more research on bonds and how they work before buying any!

Hope that helps

[arrow1963]

Use Ubank.  As long as you set up an automatic contribution of $200/month into your account, you get their top interest rate (4.9% right now).  Why bother with the 4-month specials?

That's almost double the yield on 2 year government bonds (2.8%)

http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/


As far as I can tell, the only reason to go into bonds right now (relative to high interest savings or term deposits) is if you think interest rates will fall further, and you'd like to have the potential for capital gains on your bond fund.  There's no way I'd pay 2% in yield and .25% in expenses for that option.

[rue]

Thanks for the information.  It is really helpful & BigChrisb I think I will go with your advice and let the idea of bonds go.  I will stay with the online savings accounts.  Arrow the U bank is good but I won’t go below 5.00%.  My time scales and numbers are so tight I think the extra small percentage will help.  The way I look at it if I have the 100,000 now and put it in an account that pays 4.9% then I have 4,900.00 dollars a year to live on while if I make the effort and move it to 5.10 % I will have 5,100.00 dollars and with numbers that low an extra couple hundred make all the difference.   I’m not great with maths so hope I have worked out the interest returns right!  Thanks again guys really really helpful.

[arrow1963]

Ummm, you don't get to choose whether or not you go under 5%.  The Reserve Bank of Australia sets the benchmark interest rate, which will bleed through to whatever you're offered on a cash account.  'The market' decides the price of shares, while corporate directors determine what their annual dividend payment will be (deciding the dividend yield of the sharemarket).  You can choose to be at a different point on the 'cash now vs. capital growth' and 'risk vs. reward' scales, but make no mistake, you don't get to choose what your risk-free return will be.

Secondly, if $200/year is going to ruin your retirement plan you need to save more money.  I don't know exactly what your situation is, but if you're willing to live on less than $10000/year you can save over $20K working full time at Australia's minimum wage.  Work another 4 or 5 years and double your living standard (over the next 50?).

[Richard3]

The way I look at it if I have the 100,000 now and put it in an account that pays 4.9% then I have 4,900.00 dollars a year to live on

And what about inflation?

[rue]

Thanks!  It is tricky : ) The 5% line is what I have drawn pyschologically to keep me motivated to maximise the interest and move it.  I have got away with it is so far but bear in mind it was 6% 12 months ago lol!  Im with ME bank right now at 5.10% and have half in terms, with other banks, that are higher and dont mature for a couple of years paying out annually (which I currently put back into the savings pot).  I was just fixated by the bonds as YMOYL advises them but I knew it was written before the latest GFC and things have changed.  Just needed to get it out there and then out my head.  Happy facial hair!