SSA bonds: characteristics, benefits and risks

What are SSA bonds?

SSA bonds are issued by public-sector borrowers, which could include national governments, international institutions, public bodies or government-backed institutions. The money generated from SSA bond issuance is used for economic development, social programmes, and infrastructure.  

Like a regular bond, the SSA bond issuer borrows money from the investor and pays interest every six months, returning the face value of the bond when it matures. The bonds may be issued at £1,000, £10,000 or more.

SSA bonds benefits

Credit quality

One of the main benefits of SSA bonds is their credit ratings, which are often either AA or AAA, meaning credit rating agencies believe they have some of the lowest chances of defaulting on the loans – just under the rate of government bonds such as gilts and treasuries. However, SSA bonds tend to have slightly higher interest rates than government bonds. 

Expert tip from Dan Coatsworth:

The balance of security and slightly higher returns means SSA bonds might appeal to investors that want a regular source of income while keeping a low level of risk.

Diversification

SSA bonds are popular when market conditions become less certain, because they offer a regular stream of income, and have a lower risk of default. They also have a variety of lifespans.  

However, relying on a single investment type can create concentration risk even among lower-risk investments. Holding a variety of assets can reduce that risk.  

Learn more about diversifying your portfolio

Liquidity  

Because SSA bonds are sometimes issued at small values, like £1,000, some investors will choose to purchase them from issuance and hold it for the entire lifespan.

However, there’s a large market to trade SSA bonds if an investor decides they want to buy after issuance and/or sell before maturity. The bonds can be sold on the market, and the value will be based on how far along the bond is in its lifespan, and how attractive the product is looking in comparison to other investments.

Read more about liquidity

SSA bond risks and things to consider

•   Inflation risk: Inflation might be more than the return provided by the SSA bond, which could mean your money losing its buying power. Inflation risk is common for all fixed interest investments, unless they have a specific inflation-link attached.
•   Interest rate risk: If interest rates rise just after you’ve bought the SSA bond, the return you’re getting might look less attractive by comparison.  
•   Reinvestment risk: There’s a risk that you may not be able to achieve a similarly favourable rate when your SSA bond matures. If interest rates fall while you’re invested, at maturity you might get a lower rate if you roll over into another SSA bond. By contrast, if you buy a government bond that’s longer dated, you lock into its yield for a longer period. Depending on how interest rate expectations move, that could end up being better or worse than the return achieved by buying a series of SSA bonds.
•   Default risk: Investors must consider the risk of the bond issuer not repaying the face value of the bond at maturity.

Learn about balancing risk and return

How to buy SSA bonds