IN A NUTSHELL: Debt can be a good investment. When you invest in debt you lend money to a government or business for a fixed term of between 2 and 30 years. When the term expires you get your initial investment back, and you also receive regular interest payments (usually paid out every 6 months) for the duration of the investment.
What’s the difference between debt investing, bonds and fixed-income investing?
Nothing. These are merely different names for the same thing.
How risky is debt investing?
Investing in debt is riskier than keeping your money in cash but less risky than investing in shares, unit trusts or property. Government bonds, even those from unstable nations, are typically guaranteed by the relevant country’s national treasury. All bonds are given a credit rating by international agencies like S&P and Moody’s – the lower the credit rating, the riskier the investment, the better the yield.
It must also be noted that bonds aren’t nearly as liquid as cash or shares. While they are tradeable instruments you shouldn’t expect to be able to sell them at very short notice – especially if you have a large number of bonds.
How good are the returns?
The annual interest rate for regular payments, also called the coupon rate, can typically range from 1% to 12%.
When it comes to trading in bonds, as always in the world of investing, it’s a matter of risk versus reward. Debt investments carrying more risk yield better returns.
Is it worth investing in bonds from state-owned enterprises (SOEs) like Eskom or Transnet?
The short answer is yes. Because these entities have so many problems, they are forced to offer very attractive terms to anyone who’s willing to take on their debt. Eskom bonds currently have worse credit ratings than South African government bonds. But unless the whole country goes bankrupt, investments in Eskom bonds are guaranteed by the National Treasury. In fact, in early 2023, the investment firm JP Morgan encouraged investors to buy Eskom bonds.
Should retirement funds invest in debt?
Regulation 28 states that “up to 100% of a portfolio can be invested in cash, or in debt instruments issued by or guaranteed by the South African government; otherwise, the limit for debt assets is 75%.”
In practice, however, most funds in South Africa invest 75% of their assets in shares and about 20% in debt instruments like bonds. Bonds are an important component of any diversified portfolio.
The effects of interest rates and inflation
When interest rates go up, bond prices typically go down, making it a bad time to sell bonds before their maturity date. When inflation is high, bonds with fixed coupon rates are less attractive – at times like these you’re better off opting for bonds that are linked to inflation.
Factors that influence the bond price
4 Ways to invest in debt
- Large investors (such as retirement funds) can buy government bonds directly from the National Treasury.
- Government bonds are traded on the Johannesburg Stock Exchange (JSE) and can be bought and sold between maturity dates, sometimes at less than face value.
- Bond Exchange Traded Funds (ETFs) and Bond Unit Trusts track baskets of government (and sometimes corporate) bonds and are a good way of spreading risk.
- Individuals can invest directly in government bonds through RSA Retail Savings Bonds. These can’t be sold on the secondary market, so your investment is tied in until maturity.