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Should You Invest in RSA Retail Bonds?

March 4, 2024
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Josh Viljoen
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Josh Viljoen

What are government bonds and how much are the returns?

 

A government bond is a debt-based investment, where you loan money to the government in return for a fixed rate of interest. Governments use bonds to raise funds that can be spent on new projects or infrastructure, and investors can use them to get a fixed return paid at regular intervals and add an element of safety to their investment portfolios.

 

When you buy a government bond, you lend the government an agreed amount of money for an agreed period. In return, the government will pay you back a set level of interest at regular periods, known as the coupon. However, you also have the option to reinvest this interest. This makes bonds a fixed-income asset. Once the bond expires, you'll get back your original capital investment and interest if you have chosen to reinvest. The day on which you get your original investment back is called the maturity date. Different bonds will come with different maturity dates. South African government bonds have maturity dates of 2, 3 and 5 years.

 

The interest rates of the RSA Retail Savings Bonds are derived from the Government Bond Yield Curve. The yield curve reflects the interest rates over the various terms at which marketable Government Bonds are traded daily on the Johannesburg Securities Exchange (JSE). The Government Bond rates or yield to maturities, from which the RSA Retail Savings Bonds interest rates are derived are determined by market forces like supply and demand and macro-economic factors like inflation.

 

The interest rates on government bonds can change from month to month. However, once you invest in a government bond your interest rate on the investment date is fixed for the entire period of the bond. Thus, it is important to try lock a high interest rate by investing at opportune times. When investing in government bonds you have the option to receive interest payments monthly, bi-annually or have the interest payments reinvested. Reinvesting the interest payments will give you the greatest return but doesnt have the benefit of receiving steady cash flow. RSA retail bonds are currently offering the highest yields since April 2020 when global financial markets took a serve hit as a result of the COVID-19 pandemic.

 

The current interest rates on RSA retail savings bonds are:

2-year fixed rate: 9.25%

3-year fixed rate: 9.75%

5-year fixed rate: 11.00%

 

How much will I receive if I invest in government bonds?

 

If you decide to re-invest your interest payments a R10 000 investment will have the following returns depending on the maturity period chosen:

 

2-year fixed rate: R11 989,07 (IRR of 9.49% per annum)

3-year fixed rate: R13 313,72 (IRR of 10.01% per annum) 

5-year fixed rate: R17 094,44 (IRR of 11.32% per annum)

 

As can be seen from the above figures government bonds are currently offering a very attractive low-risk investment opportunity. While government bonds are incredibly low risk it is important to note that no investment is risk-free. When investing in a government bond you are still exposed to the risk of the government defaulting and not being able to meet its debt obligations. Scenarios like this are incredibly rare but are not uncommon.


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