The Australian Commonwealth government along with the states and territories issue bonds to help pay for goods and services they provide. Globally, other sovereigns and their states and municipalities as well as government run entities also issue bonds. Combined, global government bonds make up a large percentage of the global bond market.
The vast majority of domestic and international government bonds are fixed rate securities. So, the coupon or interest rate at first issue is the rate that must be paid for the term of the investment.
Changes in interest rates or the economy can only be reflected in the price of the bonds as the interest rate does not change. Investors buy government bonds knowing they are taking interest rate risk.
Higher interest rates will see government bond prices fall.
Lower interest rates will see government bond prices rise, as has been the case over the last ten years or so.
For example, not so long ago, Australian Commonwealth Government bonds (ACGBs) were issued at four or five per cent fixed, per annum. Declining interest rates made the fixed high yield attractive and investors were prepared to pay more for the bonds. The higher secondary market bond prices effectively reduced the overall yield until maturity, in line with market expectations.
No matter how high the price of a bond gets, investors will only get the $100 face value back at maturity. This is a difficult concept. More of the return is paid in interest payments until maturity and so far, investors that hold ACGBs to maturity have always made a positive return.
Usually, to a lesser extent, governments also issue inflation linked bonds.
Globally, government bonds can be issued for very long terms. The longer the term, the more a change in interest rate expectations will have on the price of the bond.
A range of government bonds is listed on the ASX and they are available in dedicated funds such as ETFs and managed funds as well as part of mulit-sector fixed income and multi-asset products. Some state government and territory bonds can be bought from the issuers from $5,000.
More Information: Three Types Of Bonds
The Australian Office of Financial management (AOFM) – The AOFM is a specialised agency within Treasury responsible for management of Australian Commonwealth Government debt. The AOFM’s activities include: the issue of treasury bonds, treasury notes, management of the Australian Government’s cash balance and management of a portfolio of debt and investments.
The AOFM aims to manage Australian Government net debt at least cost, over the long term, subject to an acceptable level of risk, and to contribute to supporting financial market efficiency.
TCORP – Provides the NSW government family with investment management, financial management, solutions and advice. It champions and protects the financial interests of the state and helps deliver sustainable returns and financial efficiencies to its clients to achieve their broader business objectives.
TCV – Treasury Corporation of Victoria provides tailored loans and financing, advisory and investment services to meet the needs of the State and its people.
QTC – Queensland Treasury Corporation is the Queensland Government’s central financing authority.
WATC – is the Western Australian state’s central financial services provider, working with its public sector clients to achieve sound financial outcomes.
WATC’s principal activities involve funding and debt management, asset and investment management, financial advisory services, financial risk management and treasury management services and systems.
SAFA – The South Australian Government Financing Authority functions as the central financing authority, captive insurer and manager of the passenger and light commercial vehicle fleet operations for the Government of South Australia.
NTTC – The Northern Territory Treasury Corporation undertakes the financial management of the Territory’s public finances.
ACT – Provides strategic advice and delivers services to the ACT Government to help improve the Territory’s financial position and economic management.