A new investment market will open for retail investors in May when the Australian Securities Exchange (ASX) offers exchange-traded Australian government bonds.
The ASX will offer a range of bond maturities that investors will be able to buy and sell through their existing full-service or online broker accounts.
Australian government bonds are fixed-income securities that pay interest periodically and return their face value at maturity. For investors whose investments are concentrated in shares or property, they offer diversification into a low-risk income-producing asset class.
Government bonds are usually bought by institutional investors, which buy in minimum parcels of $500,000. High-net-worth investors can buy bonds from specialist brokers that offer them in minimum parcels of $50,000.
To make them available to retail investors, the ASX will offer them in the form of CHESS depository interests (CHESS is the ASX's settlement and holding system). In this form, they will be sold in $100 units.
The general manager of retail distribution at online broker CommSec, Brian Phelps, says clients will be able to buy and sell bonds through their trading accounts in the same way they buy and sell shares.
Phelps says CommSec brokerage will be the same as for Australian share trading, starting at $19.95 per online transaction. Settlement of a trade will take place in an existing trading account, so clients will be able to view their bond holdings in the same place as their share and managed-fund investments.
Two types of bonds will be sold on the ASX: conventional bonds and indexed bonds. Indexed bonds provide protection against inflation by adjusting their face value in line with the movement in the consumer price index.
There will be a range of maturities and coupon rates. Government bonds on issue have maturity dates stretching from December 2013 to September 2030. The ASX has not yet announced the range of maturities that will be on offer.
Current bond yields are low - about 2.7 per cent on a three-year bond and 2.9 per cent on a five-year bond. After taking inflation into account, the real rates of return at the moment are close to zero.
Robert Mead, a portfolio manager at fund manager Pimco, says investors should look at bonds as a defensive asset in their portfolio.