AIBs to be the new ASBs

Does anyone remember Australian Savings Bonds? ASBs were available on tap to retail investors between 1976 and September 1987, with new issues formally suspended in January 1988. At that time, they accounted for a surprising 25 per cent of outstanding government securities.

The Commonwealth government at the time "replaced" the ASBs with a facility established at the Reserve Bank of Australia to allow retail investors to purchase Treasury bonds or CGS in minimum parcels of A$1000. This facility still exists, but it is doubtful that many people even know about it, let alone use it.

Does it matter that retail investors or perhaps more importantly, self managed superannuation funds, don't have ready access to a risk-free asset? Well, at the time the government suspended the ASBs, it considered retail investors had access to a wide range of investment opportunities provided by the private sector that offered better returns anyway.        

However, in the aftermath of the GFC and its re-run in recent weeks, there are many individuals who are close to retirement but are now thinking that they may not be as close as they thought, because of the devastation that has been wreaked on their SMSF. Many SMSFs would be looking a lot healthier today if they had been able to invest in bonds of any sort and not just shares and property.

The Australian Securities Exchange is making this argument in its efforts to encourage the development of a retail corporate bond market. Moreover, the ASX is seeking the buy-in of the Treasury and AOFM to have CGS quoted on the exchange.

The ASX argues the absence of a retail CGS market is one of the major impediments to the development of a vibrant corporate bond market. The development of a retail bond market underpinned by CGS would provide retail investors with an ability to diversify their investments and reduce the volatility of their returns.

The ASX says this is especially relevant for an ageing population, expanding self managed superannuation and the need for greater certainty in income streams, which CGS would provide. Unfortunately, it seems the enthusiasm of Treasury and AOFM for the development of a retail CGS market has diminished with the size of forecast budget deficits for coming years.

It is understood that consideration is being given now only to the possibility of making Australian Infrastructure Bonds available to retail investors, as mentioned in the May budget statement. Quotation of these bonds on the ASX is an option.

If AIBs are to be the twenty-first century version of ASBs, let's hope they carry over one of the 'unusual' features of ASBs. ASBs gave investors an option to switch to a new series of ASBs at full face value and without penalty, if the new series carried a higher coupon. If the AIBs have this feature, they will be a winner.