Until they mature, Treasury bonds pay a fixed rate of interest every six months. They are available with a 20-year or 30-year term.
TreasuryDirect is where you may buy Treasury bonds from us. You can also acquire them via a bank or a broker. (In Legacy Treasury Direct, which is being phased out, we no longer sell bonds.)
How do retail government bonds work?
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.
What does a retail bond entail?
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.
What are the benefits of purchasing government retail bonds?
Retail Bonds are the most cost-effective way to save. Your money is invested with the South African government, which ensures that the capital invested is secure. Interest and capital are sent into your bank account instantly, making it a very safe way to invest.
What exactly is a government bond and how does it function?
A government bond is a type of government-issued security. Because it yields a defined sum of interest every year for the duration of the bond, it is called a fixed income security. A government bond is used to raise funds for government operations and debt repayment.
Government bonds are thought to be safe. That is to say, a government default is quite unlikely. Bonds can have maturities ranging from one month to 30 years.
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.
How can I go about purchasing government retail bonds?
Answer: You can purchase an RSA Retail Bond in one of two ways: online at www.rsaretailbonds.gov.za; or by mailing an Application Form to the National Treasury at “The Head, Asset and Liability Management Division, The National Treasury, Private Bag x115, Pretoria.”
Is it wise to invest in retail bonds?
In the previous post, I mentioned money market accounts, which are either bank money market accounts or unit trust money market funds with current returns of roughly 4.4 percent and no fixed term. These funds or accounts are connected to the repo rate and track the repo rate’s upward and downward swings. Bank money market accounts offer a variable rate of return based on the amount invested, but unit trust-based money market funds offer a fixed unit price regardless of the amount deposited.
Fixed deposits were left out because their yields vary greatly depending on the term and the institution.
Cash, in any form, is not a good long-term investment, especially if you are under 65, because interest generated is taxed.
The only time cash in the form of a money market or fixed deposit account makes sense is if the investor is tax-exempt or if the funds are being saved for a purchase within the next two years.
Interest-bearing investments can be justified when money are invested in a special trust for a minor child, a special needs individual, or an NGO because these structures are tax-free. In the trust deeds of such vehicles, these types of investments are frequently designated as the prescribed investment of choice.
You enter the ‘growth’ space of the financial environment whenever you contemplate investment periods of longer than five years.
A 35-year-old with more than 20 years till retirement should, in my opinion, concentrate on high-growth assets such as shares and commercial real estate, as well as a healthy offshore exposure.
Retail bonds are a wonderful option for retirees who want income and are eligible for additional tax benefits. Retail bonds are taxed in the same way as cash and fixed deposits are taxed. Under the current circumstances, I would be hesitant to invest in a fixed five-year retail bond. The repo rate was recently hiked by 0.25 percent and is expected to continue to rise in the near future, making the 8% retail bond unappealing.
Depending on inflation, interest rates could easily approach and surpass a prime rate of 10% in the following two to three years. The inflation linker puts you ahead of inflation, but depending on your tax rate, the margin shrinks. If your tax rate is 30%, the yield on an inflation plus 4% retail bond drops to 6.3 percent in total if inflation is 5% (5 percent + 4% = 9 percent – 30% tax rate = 6.3 percent).
A 10-year retail bond with an interest rate of 8% is the same. If you are taxed at 30%, your return will be cut to 5.6 percent. The only difference is that you’re now locked in for ten years at a time when interest rates are expected to rise to normal levels. Remember that before Covid, the typical money market rate was around 10% per year.
When you’re retired, retail bonds make sense. Because they are backed by the government, they are a secure investment with a reasonable return (tax depending). However, I would not recommend investing in retail bonds as a means of securing future retirement income.
Given your age and depending on your investment horizon, you should aim for returns above inflation + 6% net (after-tax) as a retirement provisioning investment objective. After taxes, no cash or interest-bearing investment will provide that consistently.
If you’re a growth fund skeptic, consider income funds and low-equity multi-asset funds. Consider why it is so crucial to have a healthy proportion of exposure to growing assets locally and offshore while investing for retirement in the essay ‘Investments: Beware of the Cost of Conservatism’ that you referred to.
The lower your rate of return, the more money you’ll need to save to reach your retirement objective.
For instance, if you require R125 000 a month in 25 years (the equivalent of around R37 000 now with 5% inflation), you will require approximately R37 million. Assuming you have R1.5 million (the aim you should have at age 35 if you earn R37 000 per month and want to retire at age 60) so far and plan to retire at 60, you will need to make the following monthly contribution to attain your goal:
- Future value of current provision at 8% return = R10.2 million (shortfall = R26.8 million)
- Future value of current provision at 12% return = R25.5 million (shortfall = R11.5 million)
The numbers are self-evident. However, don’t be alarmed by the numbers. In actuality, you’ll start little and gradually increase your payments as your income rises. I just used a level contribution calculation to emphasize the need of decent returns and the consequences of being overly conservative.
What is the procedure for paying RSA retail bonds?
There are two types of bonds available: a fixed-interest option and a new inflation-linked bond that is inflation-protected.
The National Treasury created a retail bond to encourage households to start saving alongside businesses and government. It delivers guaranteed returns, may be purchased for as low as R1 000, and has no commission, agency, or service fees.
In addition, rather of investing through a third party, the Retail Bond allows investors to take management of their own savings portfolio. The RSA Retail Bonds offer competitive rates and perks similar to those offered by the government in the capital markets. Individuals, like enterprises and corporations, will now have access to those benefits.
Retail Savings Bonds promote personal economic empowerment by providing a safe and secure alternative investment instrument that provides consistent and reliable returns, as well as fostering healthy competition among investment instruments in the marketplace, all to the benefit of the individual investor.
The RSA Retail Savings Bonds’ simplicity and dependability should contribute to greater financial and economic knowledge in South Africa as a whole over time. As a result, South Africans from all socioeconomic backgrounds would have the opportunity to become financially empowered, a development that should encourage a savings culture and economic maturity.
Process
- Directly at the National Treasury, 240 Madiba Street, Pretoria, 0002 (Cnr Thabo Sehume and Madiba Street).
- On the interest payment date, both interest and capital are deposited straight into your bank account, ensuring no delays.
- Option for interest payments – semi-annual or monthly payments (monthly repayments for over-60s only)
Supply and demand
Government bond prices, like any other financial asset, are determined by supply and demand. The supply of government bonds is determined by each government, which will issue new bonds as required. Bond demand is determined by whether the bond appears to be a good investment.
Interest rates can have a significant impact on bond demand. When interest rates are lower than a bond’s coupon rate, demand for the bond rises since it is a superior investment. However, if interest rates climb above the bond’s coupon rate, demand will fall.
How close the bond is to maturity
Newly issued government bonds are always priced with current interest rates in mind, which means they will often trade at or near par value. And by the time a bond reaches maturity, it’s essentially a payoff of the original loan – meaning that as it approaches this moment, the bond will move back towards its par value.
A bond’s price is influenced by the number of interest rate installments left until it matures.
Credit ratings
Government bonds are typically seen as low-risk investments due to the low possibility of a government defaulting on its loan payments. However, defaults do occur, and a riskier bond would often trade at a lower price than a bond with a lower risk and same interest rate.
The three major credit rating agencies — Standard and Poor’s, Moody’s, and Fitch – use their ratings to assess the danger of a government defaulting.