Interest rate securities

There is a growing rage of interest rate securities available which the ASX divides into separate classes e.g. hybrid type securities, convertible note, floating interest etc.

Could you please explain these classes and the pro’s and cons of each?

Also, I understood AGB’s were to have been tradeable on the ASX in March but I cannot find any AGB’s listed. Could you please advise how an SMSF can buy AGB’s and whether you would recommend an AGB over say a Bank issued interest rate security?


A: Thanks for the question.

Perhaps if I start with AGBs (Australian Government Treasury Bonds). You can purchase these currently through the Reserve Bank of Australia. They have a facility available for parcels of up to $250,000 – see more here

The ASX will also shortly start quoting a market in Australian Government Treasury Bonds and Treasury Indexed Bonds. The timing seems to have moved out a little – sounds like possibly sometime in May.

Would I buy AGB for my SMSF over investing in a term deposit or a bank issued interest rate security? Generally no – the premium that you pay (ie lower interest rate you receive) for the lowest risk security and the most liquid security (ie the government treasury bond) is not worth it. That said, there may be circumstances when you would:

  1. you generally can’t find term deposits of a maturity of greater than 5 years. On the other hand, AGBs go up to 15 years in maturity. If you think interest rates are going to fall sharply, then buying a long term AGB would make sense;

  2. most of the interest rate securities issued by the Banks are unsecured and subordinated. While I don’t have any concerns over our Banks, if you don’t enjoy taking a little risk, then AGBs might be the answer.

The ASX publishes a guide – ‘Understanding Interest Rate Securities’, which can be downloaded here. This sets out the essential features of each of the 3 categories – government bonds, corporate bonds and hybrid securities - this is a really good starting point.

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