Corporate bonds as an alternative to term deposits

Corporate bonds as an alternative to term deposits

More investors are looking at bonds to protect their retirement savings.

More investors are looking at bonds to protect their retirement savings.

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UNINSPIRING term deposit returns have caused many investors to look at bonds for the first time as means to bolster and protect retirement savings, according to Australian Corporate Bond Company chief executive Richard Murphy.

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UNINSPIRING term deposit returns have caused many investors to look at bonds for the first time as means to bolster and protect retirement savings, according to Australian Corporate Bond Company chief executive Richard Murphy.

Mr Murphy, who also co-founded the company, said bonds were a very common form of fixed income.

"The government and many of Australia's largest companies borrow money by issuing bonds. They're basically a loan that's repaid with interest," he said.

While people might be familiar with government bonds, Mr Murphy said they were probably less familiar with corporate bonds, as they have traditionally been restricted to larger investors.

"However, this situation has recently changed," he said.

"Investors can now access the benefits of corporate bonds through a range of products on ASX, including funds, Exchange Traded Funds (ETFs) and Exchange Traded Bond units (XTBs).

"Corporate bonds offer steady, predictable income, and - importantly - capital stability. They feature far less price volatility than shares or hybrids and provide a higher rate of return than the most common form of fixed income - term deposits.

"For example, the yields available on XTBs, which offer exposure to specific, individual corporate bonds, were as high as 5.2 per cent on December 1, 2016, while the rate for the best three-to-six month term deposit that day was 2.85 per cent.

"On the same day, a portfolio of five high yield XTBs offered 4.11 per cent, giving investors a 44 per cent better return than the best term deposit."

Mr Murphy said corporate bonds sit just above term deposits on the risk-return spectrum.

"Put simply, with corporate bonds you're lending money to ASX-listed companies rather than a bank, as you do with a term deposit.

"The extra return on offer is in exchange for the extra risk that comes with lending to a company over a bank. There is an increased risk of the company defaulting - but it is a small one.

"It's also important to remember that corporate bonds aren't government guaranteed for the first $250,000, unlike term deposits.

"All well-balanced investment portfolios should be diversified with shares and fixed income. And as a rule of thumb, the more we age, the more fixed income we should have.

"Corporate bonds put defensive capital stability into your retirement savings, which is a great way to safeguard your nest egg and defend yourself against falling shares and dividends."

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