NZ Government Bonds

[Alan3285]

Yes, they're "listed" - you can find them under "Fixed Interest" on the Direct website. I've always bought them over the phone, so have no idea if you can buy or sell on-line.

{Alan hangs his head in shame}

Can't work out why I didn't see them there

Must have done a 'boy look'!

Thanks,

Alan.

[ENP]

How do you buy them when the first come out though? I'm aware how to buy them when they are on the NZDX but is there like IPO or something for them? Same with corporate bonds. And what are Redeemable, Perpetual Preference Shares

[ENP]

Ahh I've done a bit of research and found out what preference shares are. These seem like great investments... with high interest. Please explain if I'm worng?

Is the coupon the initial interest % rate and then the buy yield % the difference if the bond has gone up or down in price?

[Alan3285]

Hi ENP,

Ahh I've done a bit of research and found out what preference shares are. These seem like great investments... with high interest. Please explain if I'm worng?

That depends on lots of factors.

Sometimes they are good, sometimes not so.

You'd have to take into account many things such as (but not limited to):

- Default risk
- Current alternative rates / investment options
- Trust deed

Others may add to this list perhaps.

Is the coupon the initial interest % rate and then the buy yield % the difference if the bond has gone up or down in price?

Yes.

However, bear in mind that with some prefs, the rate might change, say, annually. If so, it is often based off some benchmark rate (1 yr swap rate for example) and with a margin on top.


HTH,

Alan.

[GTM 3442]

In todays climate, where I see interest rates rising over the next 5 years, perpetuals with an annual reset are probably a good idea for some proportion of your portfolio.

But a lot of people have lost a lot of money because they bought perpetuals without realising that they were, indeed, perpetual , and that the only way to get at the capital was to sell them.

Interest rates had fallen, rates had been reset, and they got hit with a double whammy - their interest was cut, and their capital eroded.

They have their place. But a careful maturity profile will give a similar effect.

[Alan3285]

In todays climate, where I see interest rates rising over the next 5 years, perpetuals with an annual reset are probably a good idea for some proportion of your portfolio.

But a lot of people have lost a lot of money because they bought perpetuals without realising that they were, indeed, perpetual , and that the only way to get at the capital was to sell them.

Interest rates had fallen, rates had been reset, and they got hit with a double whammy - their interest was cut, and their capital eroded.

They have their place. But a careful maturity profile will give a similar effect.

Absolutely great advice to anyone that is investing with a need for income - always make sure their maturity profile is nicely spread out.

I'm not sure I would recommend any 'reset' prefs for an investor that needed the income from them.

Alan.

[GTM 3442]

I'm not sure I would recommend any 'reset' prefs for an investor that needed the income from them.

Alan.

It's a precaution in case of inflation. Only a proportion.

[Alan3285]

It's a precaution in case of inflation. Only a proportion.

Fair enough - a small proportion perhaps ;-)

I guess I would see a utility equity share as a good inflation hedge too though. Something like an electric company, or Ports of Auckland perhaps.

To be honest, its not something I have spent a lot of time considering, since I am not investing for the income at this point, so I am after total return, and if I get nothing for a while, I don't have to worry.

Alan.

[GTM 3442]

Alan - For my sins, I got to look after my mothers money a few years ago.

After exiting anything which wasn't an income share (such as LNN, CEN, PFI, KCE etc, which we kept), and making sure that nothing went back into a finance company when it came due, I set up a Fixed Interest portfolio:

40% Govt Stock, with staggered maturities
40% Senior Bank Bonds across all the big banks, with staggered maturities
10% Bank Perpetuals
10% Corporate Bonds with staggered maturities

It's all set up with a 5-year time-frame, so 20% of the portfolio matures each year.

We also set aside 3 "speculations", which tend to make money overall, but which provide a bit of interest.

And shares in anything which does a shareholder offer (eg OBV) that she's interested in.

Seems to have worked out well.

[GTM 3442]

What actually scared me the most was that I went to two reputable financial planning organisations (no names, no pack drill), and they wanted to put her into places which aren't there any more. I value their suggestions occasionally, and she would have seen a 50 - 75% capital loss has we followed their advice.