When you buy a government bond, you are essentially lending the government money for a set length of time. In exchange, the government would pay you a specified amount of interest, known as the coupon, at regular intervals. Bonds are classified as a fixed-income asset as a result of this.
You’ll get back to your original investment after the bond expires. The maturity date is the date on which you receive your original investment back. Varying bonds have different maturity dates; you may buy one that is due to mature in less than a year or one that is due to mature in 30 years or more.
Is it wise to invest in South African bonds?
South African bonds have the highest real yields in the world right now. Long-term local bond yields are up to 9.0 percent higher than comparable instruments in the United States and 11.0 percent higher than those in Europe.
The market’s assessment of the dangers to South Africa’s fiscal position is reflected in these yields. However, according to Philip Bradford (pictured), PortfolioMetrix’s South African head of investments, they are also providing investors with a major opportunity.
“My British counterparts are envious of our bond yields,” Bradford remarked. “Investing in SA bonds is a no-brainer for foreigners, but it’s a no-brainer for local investors.”
He argues that while considering the country’s risk considerations, South African investors are sometimes too “emotionally involved.” Foreign investors, on the other hand, are seeing through the hype and focusing on the opportunities against the risks.
Bradford, who runs the PortfolioMetrix BCI Dynamic Income fund, stated, “As a fund manager, you often have to swim upstream and go against what the normal investor would want to do.” “That includes buying local bonds when there’s difficulties, which we’ve done in the last several weeks.
“In a week or two, we moved from our lowest bond exposure ever to doubling it since markets had dropped off and we were able to lock in yields of roughly 11.5 percent for our investors.”
The yield on the 10-year government bond in South Africa increased from 8.4 percent in early February to roughly 9.6 percent by the end of March. Short-term gains were harmed when prices declined, and some investors expressed concerns about the asset class.
“Because the value of fixed-rate bonds fluctuates, investors prefer to see them through the same risk lens as equities.” But I have a different perspective on bonds. I’m well aware that a bond is completely mean reverting. If it does sell, I’m confident that the cash flow will continue to flow. It’s still a safe instrument to use. The capital value fluctuates, but I’m confident that it will recover by the time it matures.”
The contribution of capital returns to the overall return on the FTSE/JSE All Bond Index (Albi) over nearly 20 years is actually somewhat negative, as seen in the graph below. The income has provided the complete return.
Bloomberg and PortfolioMetrix are the sources for this information. All data is from December 31, 2002, through March 3, 2021, and returns are annualized. Total return of the FTSE/JSE All Bond Index. (To enlarge, click on the image.)
“You get a guaranteed revenue stream at a fixed rate with bonds,” Bradford explained. “And that’s what you’re going to get over time.”
“Because individuals have an equity perspective, they believe that a 5% drop in bond prices is a tragedy. If you acquire a ten percent yielding South African bond and the value of the bond drops by five percent over the course of a year, you still get a net five percent return. But the crucial thing is that you’ll get that 10% the following year, and then another 10% the following year. That capital will eventually return as well.
“This is one of the reasons why bonds are so misunderstood. “It’s because they’re so dull.”
He went on to say that when it comes to investing in local bonds, country-specific risks may be overstated.
“Obviously, there are fiscal dangers,” Bradford added. ‘However, if the situation in South Africa deteriorates significantly, bonds may not be the worst option. Our cash is the item that will give.”
And, in the past, when the rand has blown out, South African bonds have nonetheless managed to record positive returns.
“I believe we’re a long way from what would be considered a South African local currency debt default,” Bradford added. ‘However, I am certain that bonds would be balanced off against the currency in a diversified portfolio in such case.”
Bloomberg and PortfolioMetrix are the sources for this information. The data ranges from December 31, 2002, through December 31, 2020, and is calculated on a quarterly basis. (To enlarge, click on the image.)
Bradford also feels that, with yields at current levels, investors should concentrate on the longer-term opportunities.
“Your anticipated returns over five years are roughly 8.0 percent per year from present levels,” he stated. “Your best-case scenario yields north of 12.0%.” Even if bonds have a horrible year, you will almost certainly outperform cash over the course of a year and earn a positive real return. You will obtain equity-like returns if they have a strong year.”
Bloomberg and PortfolioMetrix are the sources for this information. The data ranges from December 31, 2002, through March 3, 2021, and is calculated on a daily basis. Total return of the FTSE/JSE All Bond Index. (To enlarge, click on the image.)
These high returns also allow income managers to build strategies that target specific outcomes without taking on too much risk.
“Because longer-dated yields are so high, you only need a small portion of your portfolio in them to generate a solid inflation-plus return,” Bradford explained. “If you give me R100 today and want a 6.0 percent return (inflation plus 3.0 percent), I can take R50 and buy one of the longer-dated bonds at a rate of 12 percent. You’ve already received your 6% bonus.
“That means I could put the rest of my money into bank floating-rate bonds, which would yield 4.0 percent to 6.0 percent, or I could just sit in cash.” The return will be smoother as a result of this. I can currently provide you 7.5 percent if you invest half of your money in fixed rate bonds and the remainder in cash.
“Using a flexible technique like this helps us to maintain a yield comparable to the Albi while keeping a significant amount in cash.” That implies we’ll be able to dodge a sell-off and instead invest to lock in greater rates.”
Patrick Cairns is the South Africa Editor of Citywire, a global source of information and analysis for professional investors.
In South Africa, how long does a bond last?
In many nations, there is a “The term “bond” refers to a savings vehicle rather than a product for obtaining property financing. The phrase “In Europe, the term “mortgage” is more commonly used.
In South Africa, a bond is a sum borrowed against a property, either to purchase it or to raise finances. The bond holder (borrower) is expected to make a monthly payment of interest and capital in exchange for the bank (or other lending institution) awarding the bond. In the event that the bond holder fails to pay, the lender will utilize the property as collateral.
Types of Bonds
- Fixed-Rate Bonds A fixed-rate bond is one that the lender commits to issue for a specific length of time. This is a good option for clients who want to know exactly how much they’ll have to pay each month with no surprises.
- Variable Rate (Prime) – The bond is issued at the lender’s standard lending rate. It can rise and fall in response to changes in their lending rates.
- Prime Minus – The lender agrees to grant the bond at a lower rate than they would normally lend. Incompass Bonds negotiates on behalf of their clients.
Terms of Bonds
South African bonds are typically issued for a period of 5 to 20 years. It’s critical that your bond offers you payment flexibility – even a small increase in your monthly bond payment can save you thousands of rand over the course of many years.
Different Classification of Bonds
- Commercial Bonds for example, the acquisition of a commercial building or office.
- SemiCommercial Bonds – such as a guesthouse, this type of property has both a commercial and a residential component.
For more information on Property Finance, please use the links below
Is it necessary to take out a bond when you don’t have to? Even though a bond is not necessary to finance a property purchase, the combination of exchange control, consumer credit rules, and the potential need for flexible, competitive credit lines may necessitate its creation.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
Do bonds make monthly payments?
Bond funds often own a variety of separate bonds with varying maturities, reducing the impact of a single bond’s performance if the issuer fails to pay interest or principal. Broad market bond funds, for example, are diversified across bond sectors, giving investors exposure to corporate, US government, government agency, and mortgage-backed bonds. Most bond funds have modest investment minimums, so you may receive a lot more diversification for a lot less money than if you bought individual bonds.
Before making investment selections, professional portfolio managers and analysts have the expertise and technology to investigate bond issuers’ creditworthiness and analyze market data. Individual security analysis, sector allocation, and yield curve appraisal are used by fund managers to determine which stocks to buy and sell.
Bond funds allow you to acquire and sell fund shares on a daily basis. Bond funds also allow you to reinvest income dividends automatically and make additional investments at any time.
Most bond funds pay a monthly dividend, though the amount varies depending on market conditions. Bond funds may be a good choice for investors looking for a steady, consistent income stream because of this aspect. If you don’t want the monthly income, you can have your dividends automatically reinvested in one of several dividend choices.
Municipal bond funds are popular among investors who want to lower their tax burden. Although municipal bond yields are normally lower than taxable bond fund yields, some investors in higher tax brackets may find that a tax-free municipal bond fund investment, rather than a taxable bond fund investment, provides a better after-tax yield. In most cases, tax-free investments are not suited for tax-advantaged accounts like IRAs.
In South Africa, how are bonds taxed?
It’s critical to understand how your investments will be taxed if you want to maximize your investment returns and meet your long-term investment goals. Every investment type has its own set of tax rules, and the many sorts of taxes you may owe are determined by your personal circumstances, the nature of your investment vehicle, and the underlying assets. Your marginal tax rate, the rate at which you invest, and the nature of the income you receive are all essential considerations. Because the amount of tax you pay affects your investment returns, it’s critical to know how you’ll be taxed ahead of time.
If you own bonds or have cash in the bank, the interest you receive will be taxed according to your marginal tax rate. Interest on South African Retail Savings Bonds, in your savings account (including your medical savings account), and in a stokvel are all examples of this. The tax band you fall into on the PAYE tax tables determines your marginal tax rate. As a result, the greater your marginal tax rate, the larger the amount of tax you’ll pay.
Taxpayers are entitled to an annual exemption on all interest income received, which is presently fixed at R23 800 for those under 65 and R34 500 for those over 65. Remember that any interest, even if it is below the threshold, must be disclosed for tax purposes. Keep in mind that the annual exemption does not apply to overseas interest profits, however you may be allowed to deduct any withheld foreign tax. Foreign interest profits must be declared in the Investment Income section of your tax returns when filing your returns.
After-tax money is used to invest in collective investment plans, or unit trusts. Any local or international dividends received on your investment which is the portion of profits that a company delivers to its investors are taxed at a flat rate of 20%, with the corporation automatically withholding and paying the Dividends Withholding Tax (DWT) to Sars. The corporation that pays the dividend withholds DWT automatically, thus the taxpayer does not need to file any additional tax information.
Remember that selling any investment results in a capital gains event, so make sure you understand the CGT implications before selling any unit trusts. The first R40 000 of a capital gain on a collective investment earned in a tax year is tax-free, after which earnings are taxed at a 40% inclusion rate, indicating that only 40% of the profit you generate over R40 000 is taxed. Capital gains are taxed at your marginal tax rate, which means that the highest CGT rate is 18%. Remember that a capital gains event occurs when you sell your unit trusts, not when you sell the underlying assets in your portfolio. Any capital gains from international investments will be converted to rands at the average exchange rate when you sell them.
A Real Estate Investment Trust (REIT) is a publicly traded real estate investment trust. South African Reits allow investors to participate in property assets around the country by purchasing shares in a JSE-listed property business, which includes retail, commercial, industrial, and residential properties. Reits are taxed differently than other publicly traded firms in that they do not pay corporation income tax and do not pay dividends tax. Keep in mind that if you invest in Reits as part of your unit trust portfolio, all Reit payouts must be reported on your tax returns and will be taxed at your marginal rate.
You will not be taxed on distributions if you hold Reits in a retirement fund, and the option to reinvest and compound these before-tax dividends within your retirement fund over time is a big benefit. Aside from that, any rental income from an investment property is taxed at your marginal rate.
Investors profit the most from pension, provident, and retirement annuity funds because all contributions are tax-deductible up to 27.5 percent of taxable income, up to a maximum of R350 000 per tax year. Furthermore, any growth gained in a retirement fund is not subject to CGT, dividend withholding tax, or income tax. As a result, investors might reap significant long-term tax savings via compounded tax benefits. When you withdraw money from your retirement account, you must purchase an annuity with at least two-thirds of your capital, and the income from this annuity will be taxed at your marginal rate.
A tax-efficient investment, a TFSA allows taxpayers to invest up to R36 000 per year, with a lifetime limit of R500 000. Even while a TFSA isn’t as tax-efficient as a retirement account, there are still tax advantages to saving in one. Because all investment premiums are paid with after-tax funds, no tax is due on interest or dividends, and no capital gains tax is due on disinvestment, your potential return is larger than with a typical unit trust. Because of the nature of a TFSA, frequent contributions will reduce compounding effects and your capacity to save tax-free in the future, therefore it’s best to invest in a TFSA for the long term. It’s also worth remembering that if you exceed your yearly contribution maximum of R36 000, you’ll be subject to a 40% tax penalty, so keep track of your annual donations.
An endowment is a policy offered by a life insurance firm that allows high-income people to receive tax benefits. Endowments are taxed at a rate of 30% in the hands of the insurance company, which means that if your marginal income tax rate is greater than 30%, you may be eligible for tax benefits since the favorable tax rate will reduce the amount of tax you pay on your investment increase. Endowments, on the other hand, can be fairly limited, as you must put your money away for a minimum of five years. If you possess an endowment, you are subject to a 30 percent tax on interest income, a 20% tax on dividends, and a 12 percent CGT rate.
What are the drawbacks of holding government bonds?
Government bonds have the advantages of being more secure investments, having tax advantages, and allowing investors to support actual projects. A lower rate of return and interest rate risk are both disadvantages.
In South Africa, which bank is best for investing?
In South Africa, which bank offers the best interest rates? Nedbank has the best fixed deposit rate for 2022, with a 10.60 percent effective interest rate, followed by Standard Bank with a 10.55 percent effective interest rate, and African Bank in third place with a 10.50 percent effective interest rate for a 60-month investment.
In South Africa, how do you buy bonds?
An RSA Retail Savings Bond is a government of South Africa investment that pays fixed or inflation-linked interest over a certain period of time. RSA Retail Savings Bonds are offered in the following forms:
- The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years. Fixed Rate Retail Savings Bonds pay a market-related fixed interest rate on interest payment dates until the bond matures. Each of the maturities in the series has a different interest rate.
- The Inflation Linked Retail Savings Bond series includes bonds with maturities of three years, five years, and ten years. The principal invested in Inflation Linked Retail Savings Bonds is adjusted for inflation over the period, and a floating interest rate is paid every six months on interest payment dates.
The minimum investment amount is R1,000.00, while the maximum investment amount is R5 million.
- Directly at the National Treasury, 240 Madiba Street, Pretoria, on the corner of Thabo Sehume and Madiba Streets.