Should I Be Buying Bonds Now?
Bonds have come back into focus as global central banks have embarked on a rate hike cycle. At the moment, SGD-denominated corporate bonds are currently providing a decent yield of 4.42%¹ (as of 4 May 2023).
The attraction for direct bond investing is as follows:
As long as you hold to maturity and the issuer does not default, you get back your principal.
You lock in the yield from the time of purchase until maturity.
Coupons can be used as a form of income.
Great for liability matching — If you have certain expenses or payments that you need to make at pre-determined intervals, matching your bond coupons and maturity to that liability can be very useful to nett each other off.
However, there are some important considerations:
High capital requirement (direct bonds typically sell for SGD$250,000 or US$200,000 per bond) which means it creates a concentration risk unless you have a large amount of capital (SGD$10M or up).
With concentration risk, defaults can be devastating for your portfolio as previous bond defaults have shown for local investors. Below are some examples:
a) China Evergrande Defaults on Its Debt.
b) Credit Suisse says $17 billion debt worthless, angering bondholders.
c) S$3.2 billion in face value of Singdollar bonds and perpetual securities rocked by defaults.
d) Swiber defaults on its bond coupon payout.Buying direct bonds can be costly. Average transaction cost can vary between 0.61% - 0.90%⁽²⁾⁽³⁾ as compared to globally diversified bond funds which transact for as little as 0.03% p.a.
Coupons become a form of cash drag — If you have a bond portfolio of S$1M that gives you a yearly coupon of 4%, payable every six months, that S$20,000 will be sitting in cash as it cannot be reinvested since a single direct bond cost S$250,000.
Are direct bonds the right choice for you?
It really depends. However, for most investors, a well-managed bond fund will most likely have the highest economic value as compared to holding individual bonds. Stay tuned for part 2 of this series where we will be looking at the benefits and important considerations for bond funds.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If you are not sure if you should be holding direct bonds as compared to bond funds or would like a better understanding of bonds in your portfolio, click here to schedule a chat with us. (Our 30-minute exploratory meeting is complimentary - either Zoom or In-Person)
References
¹S&P Singapore Corporate Bond Index
²Harris, Lawrence. “Transaction Costs, Trade Throughs, and Riskless Principal Trading in Corporate Bond Markets.” SSRN Electronic Journal, 2015
³“The Hidden Costs of Retail Purchases in Municipal Bonds - S&P Global.” S&P Dow Jones Indices, June 2022