When to invest in bonds
I have two questions about bonds, after attending the recent Eureka seminar in Sydney.
- If interest rates remain low and bond yields remain low (3.5% here and 2.5% in the US), does that mean that investing in bonds at the moment is a bad idea and will remain a bad idea for some time?
- Because the only way for interest rates to go in Australia is up (which means the price of any fixed interest bonds bought now will drop and keep dropping as rates rise), does that mean investing in fixed interest bonds at the bottom of the interest rate cycle is plain stupid?
Rosemary Steinfort’s response: Thanks for your questions. You are right about low interest rates now influencing bond returns going forward, but the reason for investing in bonds is to provide some stability in your portfolio and protection from future sharemarket volatility. The reason for owning bonds should not be about the capital growth (or loss) but for the known regular income stream you receive from your investment (see Looking for income in other places).
Interest rates will go up but the timing is an unknown. Some market participants expected rates to rise in the US this year, which would have influenced the direction of our interest rates as we tend to mirror the US interest rate cycle, albeit our interest rates are higher. But we have seen the 10-year bond yield fall in the US and Australia to lower levels since the beginning of this year. A rise in rates will happen and, although you will still be receiving your interest payment based on the yield of your bond when you invested, by holding that bond to maturity you will receive the face value back (subject to no default by the issuer) – so there is no capital loss or gain.
A bond exchange-traded fund (ETF) can hold a diversified selection of bonds that will be maturing at different times. Then, if rates have risen, reinvestment can be made in bonds paying a higher interest rate – so the overall yield of the ETF will rise. This increase will not be instantaneous with the rise in rates but gradual as bonds mature over time (see An equal weighted bonds basket).
I enjoy the thought and logic of Simon Dumaresq's articles on various companies. Is he remaining positive about the future of CTI Logistics (CLX)?
Simon Dumaresq’s response: I remain positive on CTI Logistics, and have high confidence in management’s ability to transition the business through the post-mining capital expenditure boom in WA (see my latest article).
There was a positive recent announcement of an additional 30,000 metres-squared of property purchased at Hazelmere transport and logistics complex. CTI’s third-party warehousing and associated transport services are in high demand, and hence the company is likely to achieve a very positive return on this investment.
Franking credit hoarders
Hi there, can you get someone to produce a list of companies who are top heavy with franking credits, and which might be tempted to increase dividends to get rid of them if Abbott’s budget goes through? (see The great franking credits rip-off).
Editor’s response: Thanks for your letter. Late last year Eureka Report revealed the top 15 franking credit hoarders at the time among the S&P/ASX 200 index (see article). While most listed companies have had the opportunity to at least pay one dividend since that time and the order may have changed, the list still shows many of the worst offenders.