Australia helps retail investors buy government bonds

May 9, 2013

Australia arguably has one of the best individual retirement systems in the world. The government-sponsored system – superannuation – requires mandatory employee and employer contributions to retirement savings. In certain need-based circumstances, the government may also contribute. Australians take funding their retirements seriously, and the government is giving them a powerful new tool to save by moving trading of government bonds onto the Australian Securities Exchange (ASX). From the government:

Deputy Prime Minister Wayne Swan and Minister for Financial Services Bill Shorten today announce that Australian Government Bonds (AGBs) will be available for trading on the Australian Securities Exchange for the first time on 21 May.

Why is this important?

This will enable retail investors to buy and sell AGBs in a similar way to how they buy and sell shares. The retail trading of AGBs will make it easier for mum and dad investors, including many self-managed super funds, to hold and trade Commonwealth-backed bonds.

How did the government do this?

The Australian Office of Financial Management (AOFM) has made technical and commercial arrangements with the ASX and the selected registry operator to support the start of trading. The AOFM has also prepared concise disclosure documentation for retail investors.

Issuers are responsible for seeking exchange listings of their securities and providing retail disclosure. By moving these bonds to an exchange platform, the government is ensuring that retail investors are able to have the lowest possible transaction costs. If an investor needs to sell a bond, she is not just at the mercy of what a dealer desk wants to offer without any means of price comparison. The government is helping protect the savings of its citizens.

In contrast, the United States Treasury provides retail investors with Treasury Direct, a direct issuance platform. This is a good system, but it may be limited. Investors can buy bonds, but they cannot resell them to the government. When a retail investor wants to sell a Treasury bond, she must enter the over-the-counter market where the outcome is unclear.

Here is how a major broker platform offers to buy or sell 10-year Treasury bonds:

There is no way to know if the yields are quoted low, and if the investor is getting an unfair price, or not. The Wall Street Journal publishes prices at the end of each day, but what if an investor needs a price mid-day for a retail-sized lot? There is really nowhere to go to get that information.

If the U.S. Treasury followed the path of Australia and pushed retail Treasury trading onto the New York Stock Exchange Bonds platform, investors would have fair access to the debt of their nation. More importantly, since Treasury yields are the anchor for the entire fixed income market, retail investors would have an easy means of comparing all other yields – both bonds and CDs.

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