Jess
Kia ora, my name is Jess from the external communications team here at the FMA. And you're joining me for another episode of Jess Learns to Invest. Today's episode is going to be all about bonds, and I'm really excited to introduce Kim Martin from the Treasury. Thank you for joining me today. So you've been at the Treasury since 2017, is that right? And your current title is Director of New Zealand Debt Management.
Kim
Yes, that's right.
Jess
Could you tell our audience a little bit about your career history and then a little bit about your investing background as well?
Kim
Yeah. So it's a bit of an unusual career actually. I originally started out as an architect, so I didn't quite know what I wanted to do once I left school. I quite liked fine art and I quite liked math and science. I ended up being an architect and I was working briefly for an architect in Asia, and during that period I became quite interested in the economic development in the area. So then I went over to do a master's at the London School of Economics, which is how I then transitioned into finance. I was working in Italy for JP Morgan Bank in their investment strategy team. At that time, I was looking more at the share market. Then when I came back to New Zealand a few years ago, I had the opportunity to carry on doing investment research, but on the bond side. Now I'm doing something related but different at the Treasury. I'm part of the unit that issues bonds on behalf of the government.
Jess
Oh cool.
Kim
I've also got a 17-year-old daughter and as she's growing up, I'm trying to instil in her the ideas of investment at a really basic level. The idea that if you start investing early, then the benefits over your lifetime will be great.
Jess
Yeah, I love that because I feel like when I was a kid, it just wasn't a big topic that was spoken about. I've even talked to my parents about it recently, and they were like, yeah, we didn't know much about it either. So I love that you're kind of educating her as you learn as you go as well.
Kim
Yeah.
Jess
So today, we're going to be talking all about bonds, and I feel like bonds is probably the topic out of all the different investing types that I know the least about. I remember as a kid, bonus bonds were a thing and my grandparents got myself, my brother and my two cousins all bonus bonds. And as kids, we didn't know what it was. We were like, what is this gift?
Kim
Right.
Jess
Yeah, we were like, this is terrible. I just remember one of my cousins got 100 bucks from it, which was great. And then the rest of us, we got our money back once bonus bonds were no longer a thing. But we didn't get anything extra out of it. So I feel like that's my only knowledge of bonds. So could you just start by telling us what bonds are?
Kim
OK, so bonds actually have very little to do with bonus bonds. The way you described bonus bonds, they're almost like a lottery, whereas bonds are really often thought of as quite a stable type of investment. I know some of your earlier podcasts have spoken a bit about shares.
Jess
OK.
Kim
Yeah. So I'll compare and contrast those two. If you're buying a share, maybe you get $100 and look at a company you want to buy. If that company does really well—say they make shoes—you'll then get a really good return. You might get $180 back from the $100 you put in. If the company does poorly and they don't sell their shoes, when you come to get your money out, maybe you only get $80. So you're really investing to profit from how well that company does. That very same company that makes shoes may also issue bonds, but you're getting quite a different thing when you buy the bond. What you're doing there is you're simply saying, I will lend you this $100 on the expectation that at the end of a certain time period, you'll give me my $100 back. And along the way, for the benefit of giving you the money, you're going to give me a coupon or an interest rate. So it might be 5%. It's a little bit more like putting your money on a term deposit in the bank. You're less able to benefit if the company does well, but equally, you don't get undermined if they do poorly. But in both cases—whether you buy the share or the bond—if the company totally goes bankrupt, you can lose all your money.
Jess
Right. So it sounds like it's slightly less risky than shares.
Kim
Yes, yes. It's a bit more certain. If you buy the bond on day one and say you want the five-year bond, then it's quite certain what you're getting. You get your money back after five years, you know what the interest rate is—what you see is what you get. But equally, it's safer, but it also doesn't have the potential upside that a really great share might give you.
Jess
Gotcha. So when you're choosing what type of investment you want to go for, that's really important to think about. Bonds you kind of know what you're getting when you go into it. Shares maybe not so much. But yeah, the risks are different.
So how much money do you need to invest in bonds? Is it one of these things where you need a lot of money to put in, or can you put in say $5–10?
Kim
Initially, the way we sell bonds is in the wholesale market—essentially to banks—and we do it in a weekly auction. If you want to buy them in that first, or primary market, you have to be a registered bank and buy them in lots of $1 million, so most people don’t have that kind of money to invest. As a retail investor, you buy them in what's called the secondary market. For our bonds, you can buy them in parcels of $10,000 and then $1,000 thereafter. There are other methods we can touch on where you can buy them in much smaller dollar amounts.
Jess
Yeah, so one of my questions was going to be: how can you buy bonds? Where can you go to get bonds?
Kim
Probably without even knowing it, you possibly already own some bonds if you have a KiwiSaver fund. A lot of KiwiSaver funds have an option for what's called either a balanced fund or even specifically a bond fund. If you’ve got a balanced fund, you will have in there some shares and probably also some bonds. So you already possibly own some bonds within your KiwiSaver.
Jess
I didn’t know that.
Kim
If you actively want to go out and you've got a bit of spare cash and want to buy some of these bonds, you can get them through a broker or go to your financial adviser. They can advise you where to purchase them. The first bundle size is $10,000. Equally, in New Zealand, you can buy what's called an exchange-traded fund. The government has a number of bonds on issue, each with a different maturity. We have one maturing next year, one in 10 years, one in 20 years. If you’re buying them individually, you have to choose which one you want. In contrast, exchange-traded funds bundle all of those bonds up and give you access to a range. You can have a bundle of New Zealand government bonds or a bundle that includes some corporate bonds. These can be bought in much smaller dollar parcels through trading platforms.
Jess
Interesting. Could you go into a little more detail on how you make money from bonds?
Kim
There are a few choices to make. As we've talked about, there's always risk and return. Even within bonds, there are different risks. One is called a credit rating, which gives you a symbol of the risk that a company or government won’t give you your money back. It’s a bit like school grades: AAA is the top, and it goes down from there. Why that matters is that a AAA bond will offer a lower return because you're more confident you'll get your money back. A lower-rated bond might offer a higher return, like 6% instead of 4%. That’s 4% each year for the time you own the bond. You also decide how long you want to tie up your money—this is called the maturity. Generally, the longer the term, the higher the interest rate.
Jess
Is that also what “bond term” means?
Kim
Yes, exactly. That plays into how you make money. You decide how much risk you want to take and how long you want to lock your money away. At the end, you get your money back.
Jess
How do you decide which bonds to buy?
Kim
Issuers include companies, councils, and governments. You might know some household names. You look across all of those and think about not putting all your eggs in one basket. If you have $10,000 to invest, you might put $1,000 in each. Then think about your time frame and risk appetite. Do you want AAA bonds with lower interest but more certainty, or are you willing to take more risk for higher returns?
Jess
It all comes back to goals, right?
Kim
Yes.
Jess
How do you keep track of your investments in bonds?
Kim
It depends on how you bought them. If they’re in your KiwiSaver fund, you probably have an online portal. If you bought them through a broker, they’ll send you periodic updates or give you access to a portal. If you bought them through a trading platform, you’ll have an online portal too. You should also receive interest payments periodically—every quarter or six months—into your bank account. At maturity, you get your money back.
Jess
Is it better not to check your investments too often?
Kim
Generally, bonds are less volatile than shares, so there’s less to see. But if you want to sell before maturity, that’s different. Let’s say you invested $100 in a bond with a 5% interest rate. Two years later, you want to buy a motorbike and need the money. You can sell the bond. If interest rates have gone down to 2%, your bond looks attractive and someone might pay you $105. But if rates have gone up to 10%, your bond looks less attractive and someone might only pay you $80. So if you hold it to maturity, you know what you’re getting. But if you sell early, you could be better or worse off.
Jess
Would it be better to just buy and hold?
Kim
It depends on your motivation. If you want stability, buy and hold. If you want to trade, that’s possible too.
Jess
Does that come down to risk?
Kim
Yes, and how much time and energy you have. If you don’t want to look at it every day, buy and hold is a good option.
Jess
What are some advantages of bonds compared to other investment types?
Kim
They’re reasonably stable and simple. You know what you’re getting, especially if you hold to maturity. That’s why people closer to retirement might hold more bonds. They’re a good option for beginners too.
Jess
Is it good to have bonds as well as other types of investments?
Kim
Yes. That’s the idea of diversification. You might have some bonds, some shares, maybe some property. All have their own advantages and disadvantages.
Jess
Are bonds a good option for beginner investors?
Kim
I think so. But if you’re young and have a long time before you need the money, you might want to take more risk and invest in shares for higher returns.
Jess
Can you decide the length of time when purchasing a bond?
Kim
Yes. Depending on the issuer, there will be a menu of options. A company might have bonds maturing in one, three, or five years. The government has a wide range, including bonds maturing in 2054. You can choose what suits your goals.
Jess
Are there any other disadvantages to bonds?
Kim
Yes. One is credit risk—if the issuer goes bankrupt, you won’t get your money back. You can judge this by the credit rating. Another is liquidity risk—whether you can sell the bond at a decent price when you want to. Government bonds are very liquid, but lesser-known companies might not be. There’s also market risk if you sell before maturity. Finally, there are more complex types of bonds. For beginners, I recommend starting with “vanilla” bonds—straightforward ones.
Jess
Why does the government offer bonds?
Kim
It’s not just to give you something to invest in. The government has lots of things it wants to spend money on—schools, hospitals, etc. At budget time, it looks at what it wants to do and its revenue from taxes. If there’s a mismatch, it needs to borrow money. Issuing bonds is how it does that. This is common across governments worldwide.
Jess
To wrap up, could you give one key piece of advice about bonds?
Kim
Think about your broader objectives—your time frame and how bonds fit with your other investments. If you’re looking for something more certain and want steady income, bonds may be a great option.
Jess
Awesome. I feel like I’ve learned so much about bonds today. I didn’t know much about it, and it’s quite good when you explain the difference between bonds and shares. I tend to think they seem quite similar, but there are quite a few differences.
Kim
Yes. It can be confusing if it’s the same entity or company doing both.
Jess
Thank you so much for your time today, Kim. As we wrap up, could you tell our listeners where they can find out more information if they want to know more about bonds?
Kim
On the FMA website, there’s a useful table of information. We also have our own website New Zealand Debt Management and there are various other platforms. If you have a financial adviser, they can help too.
Jess
Awesome. Thank you so much for watching. I hope you enjoyed that episode all about bonds. If you want to find out more, head to our website www.fma.govt.nz. We’ll see you next time.
*The content of this podcast is of a general nature and is not financial advice. The thoughts and opinions of guest speakers are not those of the FMA. The FMA recommends that our audience seek advice in respect to investing from a regulated financial adviser. The FMA does not accept any responsibility for loss that any person may suffer from following it.*
