There are five government bonds available on the EasyEquities platform – in both our ZAR and TFSA wallets. But why the excitement from the investment community at the announcement (over 50 trades placed in the first 30 minutes after our CEO Charles Savage tweeted his first purchase)? After all, government bonds have been around for decades.
Activity in the bond market has traditionally been exclusive, mostly due to the large ticket sizes and barriers to access for smaller investors. And when we say “smaller investors”, we aren’t just talking about those of us who invest a R100, but also those who invest a few hundred thousand. Yes, these bonds were bought by entities who invest millions, and the rest of us had a really hard (if not impossible task) to get access to this asset class. Retail savings bonds were designed in an attempt to address this, but distribution has been poor.
Bonds are debt instruments issued by governments and corporations when there is a requirement to raise money. They represent a promise by the issuer to the buyer to repay the principal or face value of the bond at a future date. A type of IOU as it were. Buyers are compensated by regular predefined coupon payments, usually twice annually. For more on “coupons” which we like to think of as dividends, check out our FAQs here.
Bonds provide a predictable cash flow. The dates and coupon percentages are predefined, and if held to maturity, the buyer realises the Yield to Maturity that the bond was bought at. This Yield represents the total return if held to maturity.
- Bonds are often considered less volatile and less risky than other asset classes.
- Bonds tend to offer a higher return than savings rates at banks.
- Portfolio diversification is another important reason to consider including bonds in your portfolio.
Bond prices have an inverse relationship to interest rates and, like other asset classes, can change. Investors can profit from buying when prices are low (yields are high) and selling when prices are high (yields are low), so one will face market risk and opportunities when invested in bonds – hence it is vital to do your research. In short, with interest rates high at the moment, bond prices are lower. Investors could therefore consider buying now and selling when interest rates come down, or hold the bonds to maturity. It all depends on each investor's risk appetite and investment goals. Again, doing research and upskilling is vital to maximise any potential profit.
SA bonds are quoted in yield format, but our clever team under the leadership of investment industry stalwart Nilan Morar, working with exceptional partners like Rand Merchant Bank, have found a way for users to see the price in rands and that we can invest – like all things Easy – based on value – in other words, we say we want R100 or R1000 or whatever amount of the bonds. Yes, our fractional patent again comes into play.
We have chosen to offer bonds that represent specific points on the local bond yield curve. The maturities of the bonds we are offering are 3, 7, 12, 17 and 25 years. These different maturities currently represent yields to maturity of roughly 8.8% and 12.25%. The shape and structure of the yield curve can change over time, and this will affect the price of the bonds we offer.
Upon maturity, we will follow the process as dictated by the National Treasury for each bond issued. For those that we are starting with, the process may be a repayment in three equal parts. This is normally decided upon and announced closer to the published expiry date. If the three-tranche expiry is followed by the National Treasury, normally the first is one year prior to the published maturity date and is normally in cash. New short-dated bonds are then issued for the second and third parts. For example, the R186 has a published expiry of 21/12/2026. The payment dates will be 21/12/2025 (first third), 21/12/2026 (second third in new bonds) and 21/12/2027 (final third in new bonds).
So, long, fascinating and exciting bond story not so short EasyEquities community – we have the opportunity to consider investing in an asset class that was previously not available to most people. We wish you happy investing days as you consider if this is the right product for you. Keep an eye out on our socials and the media for ongoing updates and education on this product.
