Discount Bonds in Australia: 2025 Insights & Investor Strategies

With interest rates fluctuating and global markets bracing for uncertainty in 2025, Australian investors are increasingly looking to discount bonds as a way to balance risk and reward. But what exactly is a discount bond, and why are they making a comeback in local portfolios? Let’s break down the essentials, highlight current trends, and unpack what you need to know to get started.

What Is a Discount Bond?

A discount bond is a debt security sold for less than its face value. When the bond matures, the investor receives the full face value, pocketing the difference as profit. For example, if you buy a $1,000 bond for $940, you’ll earn $60 upon maturity, in addition to any interest payments (if applicable).

Key characteristics of discount bonds include:

• Sold below face value: The purchase price is less than the amount paid at maturity.

• Zero or low coupon: Some discount bonds pay no periodic interest (zero-coupon), while others have lower-than-market coupons.

• Common examples: Australian Government Treasury Notes, semi-government securities, and certain corporate bonds.

Discount bonds can be attractive when market interest rates rise, as existing bonds with lower coupons drop in price to remain competitive, thus trading at a discount.

Why Discount Bonds Are Gaining Momentum in 2025

The Reserve Bank of Australia (RBA) has signalled a “higher for longer” rate environment for much of 2025, with inflation proving sticky in key sectors. This has caused some existing bonds to fall below their face value, creating opportunities for savvy investors.

Several factors are fuelling renewed interest in discount bonds:

• Rate volatility: As the RBA keeps rates elevated, bond prices have dropped, and more are trading at discounts.

• Capital appreciation potential: Investors can benefit from the bond’s price rising as it approaches maturity, especially if interest rates eventually fall.

• Portfolio diversification: Discount bonds offer a defensive asset with predictable returns, appealing during equity market turbulence.

• Tax efficiency: Some discount bonds may offer tax advantages, particularly for buy-and-hold investors, depending on the bond structure and tax rules for 2025.

For example, in early 2025, several Australian corporate bonds issued at par in 2021–2022 are now trading at discounts due to the rapid rise in yields. Investors able to purchase these at lower prices can lock in attractive yields to maturity, especially as consensus grows that rate cuts may be on the horizon in late 2025 or 2026.

Risks and Considerations Before Buying Discount Bonds

While discount bonds can be a smart addition to a balanced portfolio, there are risks and nuances to keep in mind:

• Credit risk: The issuer may default, especially with high-yield corporate bonds. Always check credit ratings and issuer fundamentals.

• Interest rate risk: If rates continue rising, the bond’s price could fall further, increasing potential losses if you need to sell early.

• Liquidity: Some discount bonds, particularly in the corporate space, may have limited secondary market trading, making it harder to exit positions quickly.

• Tax treatment: The ATO treats the difference between purchase price and face value as income in some cases, so consult up-to-date 2025 tax regulations for your specific bond type.

For government-issued discount bonds, the risk of default is minimal, but for corporate bonds—especially those issued by smaller companies—scrutiny is essential. The ASX Bond Market and several online brokers now provide improved transparency, research tools, and real-time pricing to help Australian investors make informed decisions in 2025.

How to Add Discount Bonds to Your Investment Strategy

If you’re considering discount bonds in 2025, here are practical steps to get started:

• Set your investment horizon: Discount bonds work best when held to maturity, so align your purchase with your financial goals.

• Assess risk tolerance: Government and blue-chip corporate bonds are generally safer, while high-yield or lower-rated bonds carry more risk but offer bigger discounts.

• Diversify: Don’t put all your eggs in one basket. Blend discount bonds with other fixed income and growth assets for a balanced portfolio.

• Use reputable platforms: The ASX, government bond auctions, and major brokers are the safest ways to access discount bonds. Compare fees, access to new issues, and after-market liquidity.

• Stay updated on rates and policy: With possible RBA cuts in late 2025, the window for locking in attractive yields may not last forever.

Real-world example: In January 2025, several large super funds added three-year discount bonds from major banks to their defensive allocations, anticipating both steady income and capital gain if rates fall by 2026.