If you’re seeking predictable returns and rock-solid safety in your portfolio, Treasury STRIPS might be the most underrated tool in the fixed-income universe. While not as flashy as equities or as familiar as traditional government bonds, STRIPS (Separate Trading of Registered Interest and Principal Securities) are quietly drawing the spotlight in 2025 as interest rate volatility and economic uncertainty persist. Here’s what every Australian investor should know about these unique securities.

What Are Treasury STRIPS and How Do They Work?

Treasury STRIPS are government securities that separate the interest (coupon) and principal payments of a Treasury bond or note. Each payment—whether it’s a future interest payment or the principal at maturity—is sold as an individual zero-coupon bond. Investors purchase these STRIPS at a deep discount and receive the full face value at maturity, with no interim interest payments.

• Zero-coupon: STRIPS pay no periodic interest. Instead, the return comes from the difference between the purchase price and the face value paid at maturity.
• Direct from the government: In the US, STRIPS are created from eligible Treasury securities by financial institutions and sold on secondary markets. In Australia, the closest analogue are Commonwealth Government Securities (CGS) that can be “stripped” by institutional investors, though the STRIPS market here is less developed.
• Predictability: Since the payout is fixed and known in advance, STRIPS offer a high degree of certainty—making them popular for liability matching and long-term planning.

Why STRIPS Are Attracting Interest in 2025

Several macro trends are making STRIPS more appealing this year:

• Interest rate outlook: The RBA has signalled a cautious approach to rate cuts in 2025, while global bond yields remain elevated compared to the ultra-low rates of the past decade. This makes zero-coupon bonds like STRIPS more attractive for locking in yields.
• Inflation uncertainty: With inflation proving stickier than anticipated, many investors are seeking safe harbours for long-term capital preservation. STRIPS, with their government backing and known returns, fit the bill.
• Defined outcomes: Superannuation funds and institutional investors are increasingly using STRIPS to meet known future liabilities—such as pension payouts—without the reinvestment risk of rolling over maturing bonds.

For example, a retiree aiming to secure a lump sum for a future goal (like funding a grandchild’s university fees in 10 years) could use STRIPS to eliminate the risk that fluctuating interest rates will erode their purchasing power.

Risks, Taxation, and Practical Considerations for Australians

While STRIPS offer appealing predictability, investors need to be mindful of a few quirks:

• Taxation on imputed interest: Even though you don’t receive interest payments annually, the Australian Tax Office (ATO) typically requires you to pay tax each year on the accrued interest (the increase in value of your STRIPS), not just at maturity. This “phantom income” effect can catch investors off guard.
• Liquidity and market access: In Australia, the direct STRIPS market is less liquid than in the US. Most retail investors access them via managed funds or ETFs that hold zero-coupon government bonds, rather than purchasing STRIPS outright.
• Interest rate risk: STRIPS are especially sensitive to changes in interest rates. If rates rise, the market value of your STRIPS can fall significantly before maturity—though you’ll still receive the full face value at the end, provided you hold to maturity.

2025 Policy Update: The Australian Office of Financial Management (AOFM) has hinted at a review of government bond issuance formats to enhance secondary market liquidity, which could make STRIPS and similar products more accessible in coming years. Watch this space for developments.

How STRIPS Fit Into a Diversified Portfolio

STRIPS are a powerful tool for very specific objectives:

• Matching future liabilities with known dates and amounts
• Locking in yields for long-term goals
• Reducing reinvestment risk compared to laddered bond portfolios

However, because they lack interim cash flow and are highly sensitive to interest rate movements, STRIPS are best used as part of a broader, diversified fixed-income allocation. For most Australians, this means accessing STRIPS exposure through super funds or fixed-income ETFs rather than buying individual securities.

The Bottom Line

As economic conditions in 2025 remain in flux, the humble Treasury STRIP stands out as a tool for certainty in an uncertain world. Whether you’re planning for a distant financial milestone or seeking to protect your wealth against the unknown, understanding STRIPS—and how they fit into your investment strategy—could give you an edge.