Buying Government Bonds in South Africa
This might be an unconventional investment opportunity, but it is certainly one you don’t want to miss out on. Buying government bonds is a great way to tap into a new market while also helping the government to raise money. Retail bonds in South Africa is one of the most sought-after investments due to its HUGE returns.
Bonds are not exactly like the other shares you could be investing in. While a government is in a way similar to a company, its overall goal is to raise money to improve the lives of citizens as opposed to simply making a profit. That being said, we do have a capitalistic government, so making extra money for the coffers is not unheard of. But government bonds, in particular, are not used to make money which will remain stagnant, instead, the bonds serve a very important purpose.
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What Are Government Bonds?
Government bonds are offered by any government entities which have issued bonds and listed them on the JSE Debt Board. They do this purely to raise funds for any large government managed projects in need of a capital injection. The kinds of projects can include anything from roadworks to the building of new state hospitals and even power stations.
Offering government bonds via the JSE Debt Board has been a successful way to raise money since its inception in 1994.
Basically, investors are lending their money to the government entity which has listed a bond. By listing the bond, the entity is in a better position to raise the money it needs, especially because it allows the investors to sell the loan to another, perhaps better off investor.
What about Dividends and Yields?
When you invest your money in shares on the JSE, you can usually expect to get dividends paid out when the company makes a profit. This is the primary reason why most people set up their portfolio with a mixture of companies. Some investments will grow over the long term while others start paying dividends quite soon after the share has been bought.
If you choose to invest in government bonds, you won’t get dividends but you will get interest. A bond is a loan, and you, in a way, become the loan provider when you invest in the bond. You can expect to earn regular interest payments while you will also get all of your money back after the loan period. Some bonds take years, these as you can imagine are normally the bigger bonds, while smaller bonds can have a shorter time period.
Up to R 1 trillion has been listed on the JSE Debt Board, and this accounts for about 90% of the liquidity on the JSE. A team of primary advisors are appointed by the National Treasury. These 8 advisors are there to create a market for their listed debt. There is big money here, and there is good money to be made when you invest in the right bonds.
So Who Can Invest In These Bonds?
Primarily, the market is used by the primary dealers along with banks, agency brokers, issuers, inter-dealer brokers and everyday investors. The primary dealers are there to set the prices of the bonds. They are able to add liquidity to the bonds market and they can account for the majority of the flow through the JSE.
The agency brokers and inter-dealer brokers are there to act as intermediaries. They work with banks as well as investors, selling their bonds to those looking to invest.
Bonds are mostly for big investors lloking for big yields. Generally, these investors take on these bonds in order to satisfy certain portfolio needs. Every serious investor should have a diversified portfolio, one that includes shares from the large-cap, mid-cap and small-cap companies. A portfolio can be improved and could yield better profits when you choose to also have a few government bonds.
Important Bond Features
Shares are unlike government bonds in a number of ways. Before you decide to invest in a bond, it’s best to know these relevant features:
- The interest on any government bond can be fixed, floating or even non-existent. If you want to receive interest, you need to make sure that you invest in the right bonds.
- As each loan has certain characteristics that appeal to certain types of investors, the secondary market is active.
- These are the most liquid bond markets in Africa and they are only found on the JSE.
- Government bonds have more liquidity than corporate bonds.
- A bond is a far less risky investment than those of corporate bonds.
- Bonds are far less risky than the general shares that you can buy on the JSE.
- The downside is that the government bond generally pays out less than a corporate bond.
Government bonds are only issued in South African Rands and are still considered to be the most secure form of investment in South Africa.
How to Buy Government Bonds
Step by Step Guide
- Because these bonds are listed on the JSE, the bonds can be bought through a qualified, trustworthy investment broker. If you have never bought bonds before, it is best to work with someone who knows what they are doing and who has your best interests at heart. In the financial world, you might come across people who try to take advantage of you.
- We recommend that you only work with certified, experienced brokers and investment specialists. One of the biggest benefits of working with a broker is that they will be able to help you with your portfolio. If you are investing in shares as well as bonds, you can’t go wrong working with an investment broker.
- But working with a broker is not the only way that you can buy government bonds. Most banks in South Africa also sell government bonds. Buying through a bank gives every investor an easy way to buy bonds and you will be buying from a reputable financial institution.
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