Risks to consider
Exchange-traded AGBs are generally considered to be relatively low-risk investments. This is due to the very low risk of default, due to the fact that interest and repayment is ultimately an obligation of the Australian Government. This low risk of default also means that AGBs typically pay a lower coupon rate than other interest rate products or securities.
The low credit risk does not mean your investment is totally danger-free. Risks that you must understand before investing in any financial product (including interest-earning or debt securities) include credit (repayment) risk, interest rate risk and liquidity (ability to sell before maturity) risk.
Interest rate risk
Interest rate risk is the risk that your income will be affected by an unfavourable movement in market interest rates. Unlike shares or some other interest rate securities such as floating rate notes, the interest rate on an AGB is fixed and does not change during the life of the investment.
However, the price of an AGB can have an impact on your overall return. While prices for AGBs are typically much less volatile than other investments such as shares, they do fluctuate according to supply and demand and a range of other economic factors. An increase in the price of an AGB means its effective interest rate has fallen, whereas a fall in an AGB’s price means the effective interest rate has risen.
If you need to sell the AGB before maturity while it remains below the purchase price, you will also realise a capital loss. On the other hand, if the price of the bond rises, you will make a capital profit. The market price of an AGB includes the expected reinvestment of coupons. If interest rates change, the actual rate at which coupons are reinvested may be different to that assumed in the market price at the time of purchase.
Credit risk refers to the likelihood of the issuer of the bond being unable to make coupon payments or repay face value at maturity. It is directly related to the financial strength of the bond issuer.
AGBs are considered to have the lowest possible credit risk of all debt-based investments, because payments are a direct claim on the Australian Government and the risk of default is extremely low.
Liquidity risk is the risk of not being able to sell your investment quickly and easily in the market if necessary. The price of an AGB fluctuates due to supply and demand as well as a range of other economic factors. However, this risk is relatively low. AGBs are highly liquid debt instruments and are actively traded in the wholesale market. You are able to sell Exchange-traded AGBs at any time before they mature, whilst the market is open.
ASX has appointed dedicated market makers to maintain fair prices for Exchange-traded AGBs.
Cessation of quotation
Note that the quoting of an Exchange-traded AGB ceases five business days prior to the final record date, which in turn is eight calendar days prior to the maturity date.
Links to key information
- Exchange-traded TB information statement from the Australian Government
- Exchange-traded TIB information statement from the Australian Government
- More about Exchange-traded Treasury Bonds (TBs)
- More about Exchange-traded Treasury Indexed Bonds (TIBs)
- Settlement and the role of CHESS
- Comparing bonds
- List of Exchange-traded AGBs - including ASX codes and links to term sheets, prices and charts
- Online course on Exchange-traded AGBs
- Market reports and key information.
More about Exchange-traded AGBs
- Buying and selling
- Taxation and Significant Investor Visa information
- Coupon interest entitlement and important dates
- Getting your money back
- Payments to non-Australian resident investors - including ASX codes and links to term sheets, prices and charts.