Bond markets experienced a significant downturn in the first half of 2022. The Reserve Bank of Australia, as well as the central banks of the United States, New Zealand and Canada, started to increase their official interest rates to address high levels of inflation in their domestic economies. Higher interest rates, and the expectation that interest rates will continue to rise in the short term, have caused Bond prices to fall. This led to negative investment returns, particularly for our Conservative and Mix Your plan Fixed Interest plans.

What are Bonds?

Bonds are a type of investment that pay regular, fixed coupons (or interest) for a fixed period. At the end of this period (also known as the Bond’s maturity), the principal amount is repaid.

Bonds are a way for a government or company to raise money by borrowing from another organisation. When we invest in Bonds, we’re effectively lending money to governments and corporations in Australia and overseas.

Generally, Bonds are considered low risk investments as they experience less fluctuations in value than higher-risk assets, such as Shares and Property. However, the expected returns from Bonds are also lower.

What type of Bonds does GESB invest in?

Our Bond investments include fixed and floating debt securities issued by governments and corporations in Australia and overseas. When a Bond is rated investment grade, this means it has a relatively low chance of ‘default’ (where the Bond issuer fails to make a required payment on its debt). We refer to these types of Bonds as Investment Grade Bonds.

Our default plans - My GESB Super and My West State Super - as well as our Conservative, Balanced and Growth plans, invest in Investment Grade Bonds alongside other asset classes, such as Cash, Shares and Property. Plans with lower risk profiles, such as our Conservative plans, will have higher allocations to Investment Grade Bonds. Plans with higher risk profiles, such as our Growth plans, will have lower allocations to Investment Grade Bonds.

Our Mix Your plan Fixed Interest only invests in Investment Grade Bonds¹.

Why do Bond prices change?

Bonds trade regularly on financial markets – so the value of Bonds can go up or down daily.

The main reason Bond prices change is due to the interest rate environment. In the short term, falling interest rates can increase the value of Bonds because the Bond holder has ‘locked in’ an attractive (higher) rate of interest, so the bond becomes more valuable. On the other hand, rising rates may negatively impact a Bond’s price because a low rate of interest has been locked in and, therefore, the bond becomes less valuable.

Bond prices can also change if there are concerns that the Bond issuer can’t pay its debts or if a Bond issuer defaults on its debt.

Over the long term, higher interest rates can improve potential returns as the money from maturing Bonds can be reinvested into new Bonds with higher coupon rates. However, past returns may look poor.

What does a negative return mean for me?

Negative returns resulting from rising interest rates are generally temporary for Investment Grade Bonds. Negative returns are only permanent if a Bond issuer defaults on its repayment, or if the Bond holder sells a Bond at a lower price than the purchase price.

Over a 20-year period, our Mix Your plan Fixed Interest is expected to experience less than three years of negative returns.

While short term investment returns are difficult to forecast, over the long term, the reinvestment of maturing Bonds into new Bonds with higher coupon rates should lead to improved returns, particularly for our Conservative and Mix Your plan Fixed Interest plans.

Where can I learn more about my investment?

You can see what plan your super is invested in by logging into Member Online or checking your latest Member Statement.

It’s important to make an informed decision before changing your investment plan, especially during times of market volatility. You can learn more about your investment options and compare the performance of our plans in our Investment and performance section.

You may also wish to seek financial advice from a suitably qualified adviser to help you decide which plan best suits your situation and needs.