by Chantal Marx
Government bonds are a popular fixed-income instrument; they are generally less volatile than company stocks and offer higher yields (interest rates) than cash. Bonds are also regarded as an excellent diversifier in an investment portfolio since they do not move in the same way as other investment instruments like equities, listed property, and commodities.
A government bond is a debt instrument issued by the state to support its spending and obligations. Essentially an investor is lending money to the government and in return receiving interest on that loan. Government bonds are often considered low-risk investments since they are backed by national government. Government bonds offer different yields based on the term of the investment. Typically, the longer the funds are lent to government the greater the interest offered to investors
The type of bond described above is known as a "vanilla bond". Governments also issue inflation-linked bonds, whereby the state pays interest linked to the inflation rate during the investment period instead of interest at a fixed predetermined rate.
What are RSA Retail Savings Bonds and how do they work?
RSA Retail Savings Bonds have been specifically created by National Treasury to counter the difficulty for retail investors to directly buy South African government bonds on traditional platforms like the Johannesburg Stock Exchange (JSE).
The product offers the direct purchase of SA government bonds with a minimum investment amount of R1 000. RSA retail bonds offer interest linked to SA government bonds, and are available with two-, three- or five-year fixed terms. Investors can either purchase vanilla bonds or inflation-linked retail bonds. Interest is payable semi-annually or monthly until the maturity of the bond, but investors can choose to "reinvest" or "capitalise" the interest (and earn interest on that interest) if they don't require an income. On maturity, the capital invested initially and any capitalised interest (and the interest on that interest) is returned to the investor.
The types of RSA Retail Savings Bonds
Fixed Rate Retail Savings Bond
The series consists of bonds with two-year, three-year and five-year terms. The bonds earn a market-related fixed interest rate, based on the market yields on current government bonds, and is payable on the interest payment dates until maturity. Different interest rates apply to each of the maturities in the series.
Investors may elect to reinvest the interest payments. Such reinvested interest payments then form part of the capital balance and attract interest at the same interest rate as the capital amount. The minimum investment amount is R1000.
Inflation Linked Retail Savings Bond
The series consists of bonds with either a three-year, five-year or ten-year maturity. Capital amounts invested in these bonds are inflation adjusted every six months over the term, and a fixed interest rate is payable every six months on the interest payment dates, also based on the market yields on current government bonds.
There is no option to reinvest any interest payments for these bonds. The minimum investment amount is R1000.
The Top-Up Bond
The RSA Retail Savings Top-Up Bond consists of a three-year savings term. The minimum initial investment amount is R500 and the minimum the account can be topped up with is R100. Top ups can occur monthly or any other time during the term of the investment. Top-Up Bonds earn a market-related interest rate. Interest will be reinvested quarterly and will attract the same interest rate as the capital amount.
Investors can switch a portion or a full amount of their balance in the Top-Up Bond to either the Fixed or Inflation-Linked RSA Retail Savings Bonds once the capital amount reaches a minimum of R1000.
The Top-Up Bond also has a rolling over incentive attached to it. When reinvesting for another three years after an initial three-year investment, a once-off incentive of 20 basis points (0.2%) will be added to the roll over amount.
What we like about RSA Retail Savings Bonds
What we don't like about RSA Retail Savings Bonds
Our current view on SA bonds
Since the formation of the Government of National Unity (GNU), bonds have rallied strongly due to a perceived reduction in political risk, along with the fading of load-shedding, fuel price declines, a stronger currency, falling inflation, lower interest rates and expectations of stronger growth and possibly successful fiscal consolidation.
We are still constructive on the bond market, however, and expect decent returns from the asset class over the next 12 months. While investors would not receive any capital gains on RSA Retail Savings bonds because of the way they are structured, we think current yields are still attractive - particularly when compared to cash instruments.
How to gain access to RSA retail savings bonds
RSA Retail Savings Bonds can be acquired at the South African post office or online through https://secure.rsaretailbonds.gov.za.
