Retail Savings Bonds (RSBs), also called government bonds, are a type of fixed-income investment offered by the South African government. When you purchase an RSB, you’re essentially loaning money to the government for a specific term (usually 2, 3, or 5 years) in exchange for a guaranteed interest rate paid semi-annually.
Side note: If you’re unfamiliar with bonds in general, check out the in-depth article on Things You Need To Know When Investing In Bonds.
Unlike shares or funds, government bonds tend to offer a predictable return and are considered a ‘relatively low-risk’ investment. This isn’t risk-free, and will elaborate further down in the article.
A Brief History of RSBs
Governments have been issuing bonds for hundreds of years. For South Africa, bonds were only made accessible for South African consumers in 2004. RSA Bonds, are issued by the Asset and Liability Management division of the National Treasury and are listed on the Bond Exchange of South Africa.
There are different types of bonds, but for this article, you need to know that RSBs are interest-bearing bonds with no fees.
How Government Bonds Work: Investing and Earning
Imagine a business contact who is importing flour from Colombia. He’s short on cash flow and needs money to bridge the gap between the supplier and the customers. You, arrange for a loan agreement where he will pay you the money back with interest.
Simple?
Well, sort of.
Similar to the example above, you can borrow the government money for things like infrastructure projects, paying salaries and servicing debt. They then promise to return the money with interest over the period selected.
Government bonds tend to have a 2, 3, or 5 year term and a minimum investment amount of R 1 000.
Government Bond interest – fixed or inflation-linked?
- Interest (called the coupon) is paid every 6 months
- You can choose between fixed or inflation-linked bonds (similar to property home loans). Fixed bonds have higher interest rates, but inflation-linked bonds are safer, especially if you’re expecting an economic meltdown and want to keep your purchasing power of your Rand.
It’s important to note that calculations use the simple interest model, not compound interest.
So your business contact importing flour from Colombia has multiple investors. to assist in cash flow and risk management, he needs to add extra complexity to make the deal sweet. The government does the following to mitigate risk.
Here are the current Retail Savings Bond Rates (as of March 18, 2024)
| FIXED RATES | INFLATION LINKED RATES | RSA TOP UP BOND (RATES FIXED*) |
|---|---|---|
| 01 – 30 Apr 2024 | 01 Dec 2023 – 31 May 2024 | 01 Apr 2024 – 30 Jun 2024 |
| 2 Year Fixed Rate 9,50% | Inflation Linked 3 Year Bond4,50% | RSA Top Up Bond Rate10,00% |
| 3 Year Fixed Rate 10,00% | Inflation Linked 5 Year Bond4,75% | |
| 5 Year Fixed Rate 11,25% | Inflation Linked 10 Year Bond5,25% |
Top-up RSA bonds
Staying with the flour example, you might not have the full amount required by your friend and can arrange to pay money over as you get it. RSBs are the same. In 2022, a top-up bond was created that allows for recurring deposits throughout the 3-year term. You can also switch a portion of your savings into a fixed rate or inflation-linked bond after one year. This is especially nifty if inflation goes above 25% – similarly to what happened in the early 2000s.
What if I want to withdraw my money?
When your investment term ends, you will receive your original investment amount (called the principal) back in full, along with the accumulated interest.
If you want to withdraw your money earlier than normal, you can also do this. There is a one-month penalty fee payable on withdrawal.
What is the tax implications of government bonds?
Tax is part of life and eats into your investment returns. Similar to interest on cash or equivalents, the first R23,800 (R34,500 for those over 65) of annual interest income is tax-free. The rest of the interest is taxable at your normal (PAYE) tax rate.
Where to Invest in RSBs
How do I invest in Retail Savings Bonds? Unlike traditional bonds, RSBs are not directly tradable on stock exchanges. Here’s where you can invest:
- National Treasury Website: You can invest directly through the secure online portal on the National Treasury website
- Post Offices: South African Post Office branches offer RSB investment services.
- Banks: Some banks, like Standard Bank and Absa, offer RSBs as part of their investment products.
- EasyEquities currently offers Retail Savings Bonds.
Why I won’t invest in retail savings bonds
I know that most would disagree with me here, but luckily this is my blog and I am legally allowed to have an opinion. Though positive about South Africa, I just don’t believe that our salvation will come from the government – it will come from the private sector.
Investor:
— Frugal Sibusiso 🇿🇦 (@FrugalLocal) December 6, 2023
"I will not invest in any company that is corrupt "
Also investor:
"The returns on government retail savings bonds are too good not to invest in"
We know that much of South Africa’s foreign debt is in USD (156.1 USD bn in Sep 2023 to be exact). Unfortunately, South Africa does not have the opportunity, like the US, to print more dollars if their debt becomes payable.
This could leave SA in a difficult spot, similar to Argentina a few years ago, which was unable to service its debt. The effect was spiralling inflation that was misrepresented by the government which was seen in the Big Mac Index as well as a mismatch between official and actual inflation.
I know this might be an unlikely situation, however, we know from writers such as Nassim Nicholas Taleb that a black swan could wipe out a person’s life savings overnight – and they do happen.
Conclusion
With all of that said, Retail Savings Bonds are still an option for people who want a well-diversified investment portfolio. The returns are predictable and can assist older people in having an expected annual income for easier budgeting.
Happy investing