Hi Justin, this is a common misconception. These are very different investments. To start, there is no recourse for US borrowers if they default on a home loan, they can walk away from the property and are not liable for any debt. Totally different here, where mortgagees are responsible for the entire debt. Also with higher LVR loans the banks will take out lender's mortgage insurance, so in the event of default, the bank expects the insurer to make up the shortfall - a significant protection for Australian RMBS investors.
Great explanation Andrew
That's true William, in an ETF you have no maturity date, whereas direct investors have that comfort. Also, in some cases income is high but the yield to maturity is much lower and not attractive, so investors really need to dig a little to get the full picture.
Hi Peter, thanks for your comments. Hybrids are very complex investments and each one is different, meaning investors should read each prospectus to understand the risks involved. Investing direct and through a fund means you may be quite concentrated - probably worth reviewing. High yield bonds are great for diversity, as you can get exposure to lots of different industries. While they can also be complex, specific debt research should help you decide whether they are right for your portfolio. One last point, many investment grade bonds are now yielding over the 4% mentioned from your hybrid fund. These are higher rated and less complex than the hybrids. Let me know if you are interested in learning more about bonds. Regards
Thanks Mr T, I agree its all about the risk and return equation and whether as an investor you think you are being paid enough. It's always interesting to compare what else is available and zipMoney as a competitor is a worthy benchmark.
Hi Stephen, The perceived credit risk of the company issuing the bonds was the most important factor during the GFC. Very low risk company bonds were ‘flight to quality’ and performed well. At this point in the cycle investors preferred Longer dated fixed rate bonds with long duration to lock in high rates - they reasoned interest rates would have to fall. High quality floating rate bonds with short durationwould have also performed well, but poorer credits less so, given a greater perceived chance of default.
Thanks Bob, I'm not surprised its been a real out performer.
I agree the proposed changes are a long way from becoming law and I would expect some concessions if Labor win the next election but there is no guarantee existing terms will be grandfathered
Hi Andy, I agree its low and not very appealing.The main investors in this bond would be institutions, mandated to hold certain investment grade percentages. Typically they can't access the same deposit rates as retail investors and huge sums mean the government guarantee to $250,000 doesn't cover their investment. At this stage of the cycle, when interest rates are low and many assets look over-valued, investors start to focus on capital preservation rather than yield. Telstra is a large corporate, known to overseas investors and should have no trouble refinancing or repaying this bond when the time comes. The other benefit of low risk bonds is that they are generally liquid, allowing investors to access capital on a T+2 basis and invest in something else. There are other investment grade bonds available paying circa 4%, that might make better sense.
Hi Geoffrey, unfortunately we can only offer these bonds to 'Australian residents for taxation purposes'. You'll need to find a bond dealer/ broker in New Zealand in order to set up an account and trade.