Bonds have long been seen as a conservative investment, but sophisticated investors have been piling in because of still low interest rates and the strong Singapore dollar.
They like the higher interest rates on offer and the security that comes with buying bonds from credit-worthy blue chips or a rock-solid government.
And there has been a long queue of sellers eager to get their business.
Singapore companies have been flogging bonds hand over fist of late, with debt issuance up 8.3 per cent year-on-year at US$12.1 billion (S$15.1 billion), according to preliminary data from ThomsonReuters.
Earlier this month, Aspial Corp, a jewellery and property company, received $160 million worth of orders from mostly private bank customers, lured by a 5.05 per cent coupon rate for the five-year $85 million bond issue. The coupon rate is paid in two instalments annually.
For retail investors, the lack of a more vibrant fixed income instrument market in Singapore is especially frustrating, given the paltry returns on savings deposits at present.
What are bonds?
Bonds are debt securities issued by borrowers such as governments or companies seeking to raise funds from the financial markets. They are also known as fixed income securities because most bonds pay interest income at periodic intervals throughout the life, or the tenure of the bond.
This interest is known as the "coupon", which is expressed as a percentage of the principal, known as the "face" value of the bond.
Bond prices are usually expressed as a percentage of face value. Upon maturity, bonds are redeemed at face value and bondholders are paid 100 per cent of the face value.
Investors earn returns when they receive coupons - or interest payments - and if the price of the bonds increases.
If you buy a bond at 100 per cent of the face value and hold it until maturity, your return is equal to the coupon you receive. If you buy a bond at more or less than the face value, your return is based on the coupon you receive plus any capital gain or loss from holding the bond - that is, the difference between the price you paid and the price at which you sold the bond.
The yield on a bond, or its return, depends primarily on the credit quality of the bond issuer.
The highest-quality bonds are usually those issued by governments, followed by government-linked entities, banks and companies.
Bonds of issuers with higher credit quality generally trade at lower yields than bonds of issuers with lower credit quality. A higher yield compensates investors for the higher risks they are exposed to with poorer-quality bonds.
What is on offer?
There have been 75 Singapore dollar-denominated corporate issues worth $11.68 billion this year, according to Bloomberg. There were 72 deals worth $9.5 billion in the same period last year.
But these are exclusively designed for institutional or sophisticated investors.
To buy even one lot of these bonds, which are traded via a network of bank dealers, would set an investor back $250,000.
Retail investors who find it challenging to meet the minimum investment amounts of corporate bonds could consider getting bond-related unit trusts and Singapore Government Securities (SGS), says Mr Lee Choon Kiat, treasury and investment sales head of DBS' consumer banking group.
There are 11 listed retail bonds, 22 Singapore Government bonds and 11 fixed income-linked Exchange Traded Funds (ETFs) available on the Singapore Exchange for retail investors.
SGS are Treasury bills and bonds backed by the Singapore Government, and can be acquired through selected bank ATMs. A minimum investment of $1,000 is required. Treasury bills tend to have shorter maturities of three months or 12 months, while the bonds have maturities of two, five, 10, 15, 20 or 30 years.
An SGS can be held till maturity or sold before maturity in the secondary market via a dealer bank or on the SGX.
Worst-case scenario
Investing in bonds can be a dicey deal. The biggest risk is still the prospect of rising interest rates, even though the United States Federal Reserve last week confirmed its policy of ultra-low interest rates.
Interest rates and bond prices have an inverse relationship. If interest rates go up, bond prices come down. The price adjustment compensates the buyer for the coupon, which is lower than comparable market rates.
Similarly, if rates fall, the buyer pays a higher price for receiving a coupon that is higher than comparable market rates.
Investors who choose to sell their bonds in a rising interest rate environment will suffer a capital loss if bond values are below the price they paid. On the other hand, if investors continue holding the bond, they will incur opportunity cost as their funds could have been invested in higher-yielding instruments.
Price fluctuations may not matter as much for investors who buy and hold as they will receive interest throughout the life of the bond and the principal at maturity, provided there is no issuer default.
Investors in bond funds, on the other hand, may be affected by interest rate movements as these will impact a fund's net asset value and the price at which investors can redeem their units.
In addition to market-driven price fluctuations, bond prices can suffer if investors feel that the issuer's creditworthiness, or its ability to repay debt, has deteriorated.
For instance, if the issuer gets into serious financial difficulties, the likelihood of a default will increase. If a default occurs, investors may lose all or a substantial amount of their investment.
If the bond issuer becomes insolvent or bankrupt, creditors, including bondholders, are generally repaid first, before shareholders. Bonds are therefore generally regarded as less risky than shares.
Bond issuers may be rated by credit rating agencies such as Fitch, Moody's or Standard & Poor's. Credit ratings represent the opi- nion of the credit rating agencies as to the creditworthiness of the issuer.
But credit ratings are not a recommendation to invest in the bonds. They also have their limitations as the issuers' financial strength can change quickly. There is no assurance that any revisions to the ratings will be made in a timely manner.
Other risks
While bonds may be attractive for those who want a source of regular income or to diversify their investment portfolio, the choices available to retail investors on the Singapore Exchange are limited.
The alternative is to buy the bonds from the secondary or over-the-counter market operated informally by a network of banks. But the entry barriers are high - $250,000 for one lot of the bonds on offer.
Investors sometimes face a confusing set of fees charged by the banks as well as the wide spread between the bid to buy and offer to sell, which effectively raises transaction costs.
Investor Chua Wee Meng had bought Olam International's retail bonds and perpetual securities on the morning after the proposed Temasek-led buyout of the company in March.
Olam perpetual securities - a bond-like instrument with a 7 per cent coupon - jumped 10.23 per cent to $100.53 on March 14, following news of the takeover bid.
The perps had been languishing at well below their $100 par value for nearly 18 months even though they had made a big comeback from an all-time low of $75.439 in late November 2012, following the attack on the firm by shortseller Muddy Waters.
While Dr Chua's investment in Olam bonds paid off, he raised the issue of pricing on the secondary market. "Dealers told me of wealth management and advisory firms charging unsuspecting retail clients up to 3 per cent transaction fees on bonds," he said.
Worse, there is no uniformity in the fee structure. "Some banks incorporate their fees in the bid and offer prices, while others charge an additional fee of 0.25 per cent to 3 per cent over and above the bid-offer spread," Dr Chua added.
Latest developments
Bonds for retail investors are still hard to come by, as Mr Kaushik Rudra, Standard Chartered Singapore's global head of credit research, explains. Such bonds tend to have higher requirements for issuers in terms of disclosure and paperwork, and carry higher distribution costs for the issuer, he says.
Meanwhile, Temasek Holdings might soon be making its much-coveted bonds available to retail investors. Its president Lee Theng Kiat said in April that the firm hopes to offer Temasek bonds to such investors "when there is a suitable opportunity to do so".
This article was first published on June 22, 2014.
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