Disclaimer: Please note that the information on this website does not constitute investment advice. You should obtain independent financial advice before buying Treasury Indexed Bonds.
Treasury Indexed Bonds are medium to long-term securities issued by the Australian Government for which the Face Value is adjusted for movements in the Consumer Price Index (CPI). Coupon Interest Payments are made every three months, at a fixed coupon interest rate, on the adjusted capital value (referred to as the Nominal Value of the bond). On the Maturity Date, the last Coupon Interest Payment and the Nominal Value of the bond (the value as adjusted for movement in the CPI over the life of the bond) is paid to the bond holder. The Australian Government is liable to make these payments.
Institutional and other large investors choose to own Treasury Indexed Bonds because they provide protection for both income and capital against inflation (as measured by an increase in the CPI) and are liquid (easy to buy and sell).
The Face Value and Nominal Value of a Treasury Indexed Bond both start at $100 around the time the bond is first issued, but whilst the Face Value remains fixed, the Nominal Value is adjusted by changes in the CPI. With inflation (a rise in the CPI), the Nominal Value increases. With deflation (a decline in the CPI), the Nominal Value decreases.
Changes in the CPI affect both the size of Coupon Interest Payments made every three months and the amount paid to the holder of a Treasury Indexed Bond when the bond matures. Treasury Indexed Bonds make Coupon Interest Payments at a fixed rate. Because the fixed rate is applied to the Nominal Value, Coupon Interest Payments can vary in amount from one period to the next. If inflation occurs, the Coupon Interest Payment increases. In the event of deflation, the Coupon Interest Payment decreases.
There is a floor on Coupon Interest Payments which may protect holders of Treasury Indexed Bonds in an environment of deflation: no Coupon Interest Payment will be based on a capital value of less than $100. If the Nominal Value falls below $100, the Coupon Interest Payment will be paid on $100. In the event that the floor is utilised, succeeding Coupon Interest Payments and/or the maturity payment will be reduced by the difference between the Coupon Interest Payment amount which was made and the payment which would have been made in the absence of the floor.
At the maturity of a Treasury Indexed Bond, the holder receives the Nominal Value or the Face Value amount, whichever is greater. This provision also limits the exposure of the bond holder to deflation.
Treasury Indexed Bonds are not traded on an exchange and are typically traded in large parcels, putting them beyond the reach of many investors. On the Australian Securities Exchange (ASX), Treasury Indexed Bonds are traded in the form of CHESS Depositary Interests (CDIs) known as Exchange-traded Treasury Indexed Bonds (eTIBs). eTIBs have the appeal and convenience of being electronically bought and sold through the ASX in small or large parcels.
More information about investing in eTIBs can be found in Buying and selling in eTIBs and in the Exchange-traded Australian Government Bonds section of the ASX website.
If you are a wholesale investor interested in investing in Treasury Indexed Bonds, see the Australian Office of Financial Management (AOFM) website. The AOFM is the debt management office for the Australian Government and issues Treasury Indexed Bonds into the primary market by competitive tender or syndication.