SGX to offer SGS bond trading

[kazukirai]

Hi all,

I realised that Fundsupermart has a table that shows the price of the bonds and the indicated yield that you stand to gain from holding the bonds to maturity. (link here)

When SGS bonds start trading, I suppose SGX will provide similar info. As it stands, at the prices that the longest dated bond (19.22 years to maturity) is selling, the yield is only 2.81% p.a. - hardly attractive in an environment that is likely to be inflationary or pending rising interest rates.

[freedom]

SGS 90 days T-bill yielding like 0.33 % p.a. what's there to offer to retail investors. The handling fee is much more expensive than bank deposit...

From the 1st post,

A total of 19 SGS bond issues, with maturities of two years or more, totalling S$74 billion will be available for trading on the exchange.

I was replying to redcorolla95's "why SGX does not offer short maturity SGS T-Bill like 3-month one".

the yield is too low for retail investor to beat the commission paid to SGX or the broker.

[tanjm]

When SGS bonds start trading, I suppose SGX will provide similar info. As it stands, at the prices that the longest dated bond (19.22 years to maturity) is selling, the yield is only 2.81% p.a. - hardly attractive in an environment that is likely to be inflationary or pending rising interest rates.

You cannot view it this way. SGS bonds are riskless when held to maturity. So you need to compare it with other, effectively, riskless opportunities (at the moment fixed deposits or topping up your CPF). If you are not in the market for a riskless investment then of course by all means pass it by.

If you want a riskless alternative, and are afraid of rising interest rates, then hold 2 to 5 yr bonds. Rates seldom jump by a lot in a short interval, 50bp is a good guess for a maximum move in a short time, and using the duration calculation, a 50bp rise will result in about a 1% decrease in your 2yr bond price if you were to sell it before maturity.

[kazukirai]

You cannot view it this way. SGS bonds are riskless when held to maturity. So you need to compare it with other, effectively, riskless opportunities (at the moment fixed deposits or topping up your CPF). If you are not in the market for a riskless investment then of course by all means pass it by.

Hi tanjm,

Thanks for the views. Yes, the point on rising interest rates should not be a moot point for investors holding bonds to maturity, I should have separated that view.

[Temperament]

CD and SGS's bond yield were so miserable even 5 years ago, i leave my withdrawable CPF's fund untouched with the CPF's Board, when i was 55.
At any time now i can withdraw all or partial of my fund if needed.
i treat CPF's Board as my "private bank" now.
i also keep my CPFIS account open.
i intend to keep CPFIS brokerage account open till CPF Board disallows me to do so. Remember any fund waiting to buy shares are earning at least 2.5% p/a.

i don't have any bonds.
All my "bonds" are with CPF's Board now.
Not until SGS's bond yields are better than CPF's 2.5% yield, i not moving.

Anyone has better idea, most welcome.
Thank you.

[redcorolla95]

You cannot view it this way. SGS bonds are riskless when held to maturity. So you need to compare it with other, effectively, riskless opportunities (at the moment fixed deposits or topping up your CPF). If you are not in the market for a riskless investment then of course by all means pass it by.

Hi tanjm,

Thanks for the views. Yes, the point on rising interest rates should not be a moot point for investors holding bonds to maturity, I should have separated that view.

Bonds (SGD, UST or any sovereign bond) are not riskless. At best, the bonds are risk-less in nominal terms; what counts is their ability to preserve or grow purchasing power in real terms. You can hold to maturity and watch the purchasing power disappear. In an environment of historically low interest rates together with high inflation, that is extremely challenging.

So the main trade-offs are between:
1. cash/near cash - certain loss of purchasing power, but best for picking up bargains when they appear
2. bonds - some loss of purchasing power, some risk of capital impairment
3. equities / properties - best way to maintain / grow purchasing power, large risk of capital losses
4. commodities alternative assets - like #3
==> none of them are riskless, and we should note some really smart people like:
Soros who're rumoured to be 75% in cash, or Grant who write about the joys of cash
Gross, the largest bond manager in the world staying away from treasury bonds

Assuming the SGD holds, having CPF's tiny 2.5% interest is pretty awesome - almost at the same return as the 15 yr bond (2.53%), even if rates rise you don't have any capital losses, and it's highly liquid. So you get the best of cash & bonds, a free lunch from the govt.

[Temperament]

Hi redcorolla 95,

Thank you very much.
You have summarised beautifully what i am trying to learn and trying to put it into practice. (To find the appropriate or best Asset Allocations).

Most importantly, you have confirmed what i am doing with my CPF's withdrawal fund is proper under toady economic conditions/Gov regulations.

I also learn something new from you.
"even if rates rise you don't have any capital losses, and it's highly liquid.
Wow! Very "Shiok"!
Thank you once again.

NB.
So far i don't really understand commodities shares. i know they can be highly cyclical due to various types of influences.
i have never buy into this sector.
It seem to be a great sector for trading.- Futures and what not?
i only understand a little of "standalone commodity"- GOLD.
Care to share your view.

[redcorolla95]

The general case for investing is that certain commodities over time give the same long-term return as equities e.g. some of the data points are since Jim Rogers started his index & the inception of the GSCI, but because they have traditionally have had low correlation with equities, including them in your portfolio is theoretically supposed to help to maintain the same return while lowering your risk, i.e. both commodities & equities are not supposed to crash at the same time.

Now, over the last 100 years, the average commodity have roughly tracked inflation, except oil, gold, silver & some rare earths. Some people think that the world is going to be a very different place in the next 100 years because:
China & India are buying more gold, eating meat, driving cars
Inflation is high & paper currencies are in trouble
We are running out of farmland (with topsoil still intact), fertilizers (phosphates & potash), and cheap energy

Some of the reasons not to invest are:
There are few reliable ways of estimating how much gold or beef should be worth bcos they don't generate cashflow. Reasonable people will find it very hard to disagree that Orchard Road is a nice place & Coca-Cola is a great company, that dividend/rental 2% yields are expensive and 5% would be cheap. Whereas perfectly reasonable people can totally disagree about whether gold should be $500 or $1500 or $5000.
When there're all these financial investors piling into commodities, they tend to be bullish & bearish on most things at roughly the same time, i.e. so when everybody starts selling everything at the same time like in end 08 - early 09, commodities fall together with equities, i.e. your portfolio is not as diversified as you thought it would be.

Far smarter people than me have put out arguments on both sides, so do your own research:
Pro-commodities: Einhorn, Paulson, Hussman, Grantham
Neutral: Buffett (who used to own oil stocks ExxonMobil & ConocoPhilips), Marks

[Temperament]

The general case for investing is that certain commodities over time give the same long-term return as equities e.g. some of the data points are since Jim Rogers started his index & the inception of the GSCI, but because they have traditionally have had low correlation with equities, including them in your portfolio is theoretically supposed to help to maintain the same return while lowering your risk, i.e. both commodities & equities are not supposed to crash at the same time.

Now, over the last 100 years, the average commodity have roughly tracked inflation, except oil, gold, silver & some rare earths. Some people think that the world is going to be a very different place in the next 100 years because:
China & India are buying more gold, eating meat, driving cars
Inflation is high & paper currencies are in trouble
We are running out of farmland (with topsoil still intact), fertilizers (phosphates & potash), and cheap energy

Some of the reasons not to invest are:
There are few reliable ways of estimating how much gold or beef should be worth bcos they don't generate cashflow. Reasonable people will find it very hard to disagree that Orchard Road is a nice place & Coca-Cola is a great company, that dividend/rental 2% yields are expensive and 5% would be cheap. Whereas perfectly reasonable people can totally disagree about whether gold should be $500 or $1500 or $5000.
When there're all these financial investors piling into commodities, they tend to be bullish & bearish on most things at roughly the same time, i.e. so when everybody starts selling everything at the same time like in end 08 - early 09, commodities fall together with equities, i.e. your portfolio is not as diversified as you thought it would be.

Far smarter people than me have put out arguments on both sides, so do your own research:
Pro-commodities: Einhorn, Paulson, Hussman, Grantham
Neutral: Buffett (who used to own oil stocks ExxonMobil & ConocoPhilips), Marks

Thank you for your view.
I think commodities as a sector are more volatile than other sectors in the markets.
But i understand for any equity, you always have 2 sides of a coin, if you care to search for it.

[greypiggi]

Hi guys, sharing how i do my bond portfolio in current environment. Interest rates so and forseeably low until start 2013 as the Fed says. High inflation of about 5% but sure to slowdown with economic slowdown. So here is what i did with bonds. Will be glad to get any comments/ comparisons.

Low risk as possible, so only investment grade or near investment grade bonds.
Ok with some foreign exposure.
Ok with leverage but only for near term bonds of 1-5 years.

So i constructed a bond portfolio that is 80% SG bonds, 10% USD, 10% GBP. Most SG bonds will yield 4-5% range. USD and GBP range from 7-8% but with currency risk.
Did a bond ladder starting from 1 year expiry to 10 year and a couple of perpetuals.
Allow myself debt of up to 30% of asset value. So far used 20%. Interest rate ranges from 1.2-1.5%.

Combined and thanks to the leverage, I am yielding 5.5% or so on bond holdings. Quite happy with this compared to equity portfolio which is down 5% no thanks to today!

One new way I learned to remove the currency risk is to borrow in the investment currency. Eg. rather than buy a AUD bond, i borrow in AUD to pay for the bond. It actually removes currency risk significantly.

Also,i need to watch interest rates because if they move up, all the perp value will drop and existing bond prices will fall too. So i need to wait for them to mature and buy in again at better yield.