XTBs a hedge against rate rise

25-Oct-2016

By Daniel Paperny

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Direct bond ownership was preferable to holding bonds through an exchange-traded fund (ETF), given the possibility of a rate rise, which could affect long-duration bonds in particular, according to the Australian Corporate Bond Company (ACBC).

Speaking to financialobserver, ACBC co-founder and chair Richard Murphy said holders of exchange-traded bonds (XTB) would be less exposed to declines in the bond market if interest rates were to rise as XTB units tended to be of shorter duration.

“If the fund or exchange-traded fund holds long-duration bonds, as many of them do, then the fall in value when rates rise will be quite significant as longer-dated bond prices are increasingly more sensitive to rate changes the longer they get,” Murphy said.

“But things are very different if you hold bonds directly, particularly the three to five-year corporate bonds that XTBs cover.”

The comments come as ACBC unveiled two new tranches of XTBs on the ASX: five floating-rate XTBs and five fixed-rate XTBs.

Having first launched last year, XTBs allow investors to buy units in a trust representing ASX 50 companies’ wholesale bonds, with each unit requiring a low minimum investment of $100.

The bonds are low-risk, defensive investments for investors, who can expect to receive a half yearly income as well as their original investment value when the underlying bond reaches maturity.

The new range, touted as green XTBs, comes in response to growing investor appetite for socially responsible investing and brings the total number of XTB products to 49.

Murphy said the green XTBs recognised a commitment by their issuers to using the funds for purposes that met the requirements of the Climate Bonds International Standards and Certification Scheme, making them particularly attractive to environmentally focused and ethical investors.

The expanded XTB range also reinforced the firm’s commitment to product innovation and improving investor access to corporate bonds on the ASX, he added.

“Our basic investment philosophy is to provide access on ASX to corporate bonds that most investors cannot readily access,” he said.

“As we discovered over the last two years, there are more and more investors and fund managers with socially responsible investing as a key part of their investment philosophy, and they have asked us to provide green bonds via XTBs on ASX.

“Not least so they could use the technology platforms to create green bond separately managed accounts, which is very difficult to achieve with the bonds themselves, which are not on platforms.”

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