Most investors tend to be more familiar with the stock markets and shares. So, let’s talk about bonds today.
Historically, bonds display lower volatility compared to stocks. In today’s volatile environment, bonds offer a safe instrument for passive income from their bond yields.
You might also like
With increasing interest rates, it is a good time to lock in the higher yields using investment grade bonds for longer periods. In addition to the high yields, there is the potential for capital gain when interest rate drops as bond price is inversely proportional to interest rates.
2022 was an extremely exceptional bad year for bonds. Looking at the Global Aggregate USD Bond’s returns, the bond dropped 13% in 2022 with Intra-year decline (lowest drawback) of 16%. This is exception as for most other years (16 out of 20 years), bond returns were positive with relatively lower fluctuations. This extraordinary event was a result of the steep interest rate hikes by the US Federal Reserves from 0.25% to 4.50% in 1 year.
In comparison, the 3 major US indexes (Dow, S&P and Nasdaq) dropped between 9-33% last year. So, while high interest rates are bad for bonds, they are worst for stocks.
Most believe that the interest rate hikes are reaching their peak with the peak forecast being 5.5%, before the rates start to drop.
The fall of SVB has shined the spotlight further on the steep rate hikes. Against a backdrop of concern over contagion and instability spreading through the wider global banking industry, it is unclear how long and how steep the coming rate hikes would be.
Bonds tend to do well during rate hikes
i) Bond Performance After Rates Peak
Statistics from the last rate hikes in 2006, 2000, 1985 have shown that investing in bonds just before the final rate hike can generate returns of between 3.3% to 10.2% in the first 12 months, and 5.9% to 15.6% annualized returns over the next 5 years.
As the high yields are locked in before the peak of the rate hikes, there is additional potential gains once rates are reduced.
ii) Strong Correlation between Interest Rates & Bonds
Another way of looking at this; a 1% fall in interest rates would see an additional 23.2% capital gains for 30-year long-term US Treasury Bonds.
In fact, the longer the duration of the bonds, the higher the potential returns.
Even US Investment grade bonds shows nice sensitivity and good potential returns of 13% against a 1% fall in interest rates.
iii) Global Fixed Income Yields are already up
Meanwhile, the current yields for the different types of bonds have also climbed, with Investment-grade bonds climbing from average 3% in 2021 to almost 5% in 2022.
High yield bonds (which are generally riskier), has also climbed from 3-7% to 7-13% in the past year.
The Classic Investment Clock
In a classic economic cycle, when commodity prices rises as it did in 1Q22 (partly due to Russia-Ukraine war), interest rates will be raised to deal with inflation and rising costs.
This continued until 3Q22 where inflation continues to rise. In a classic cycle, real estate prices will start to fall but this differs in Singapore due to our unique home-owing culture as Singaporeans continue to hold on to their properties.
We’re at the crossroads between Slowdown and Recession now, where the interest rates are almost at the peak and we should see interest rate falls and bonds outperform in 2023.
4 common type of Bonds you can invest in Singapore
Hopefully you are convinced of the advantages bonds can bring in a rising rate environment. Here’re some common bonds you can consider:
1) Singapore Saving Bonds & Treasury Bills – For risk free and short duration investing
Most people are familiar with the Singapore Saving Bonds (SSB) and Treasury Bills (T-bills) as they offer one of the safest options to park your free cash, with no/low lock-in periods at yields that were slightly higher compared to previous years.
This offers a very flexible option for emergency funds and funds that might be needed in the next 1 to 2 years but might not be as attractive for longer term investing as the yields are likely to drop in the next 1-2 years.
2) Corporate Bonds
- Retail Bonds
There’s no good upside for retail bonds at the moment as most listed under SGX are still trading at close to $1, and are not showing any significant discounts in their trading price.
- Wholesale (OTC) bonds – Corporate Bonds – Bank Bonds
They require a minimum investment of USD200k or SGD250k and might not be suitable for most retail investors. However, this might be a good investment option for high net-worth / accredited investors. For example, the DBSSP 3.300% Perpetual (USD) bond is giving a yield of 5.887%.
Do note that this is a perpetual bond and comes with a call date, and investors should look for bonds that have their coupons reset for better yields. This offers a good alternatively for higher returns locked in for a longer period.
Some examples:
- Wholesale (OTC) bonds – Corporate Bonds – REIT Bonds
For even higher yields, the REITS Bonds are offering yields of 5-6% with call dates in 2025-2026, offering investors the opportunity to lock in higher yields for the next 2-3 years. The downside however, is that the minimum purchase requirement is SGD250k
Some examples:
- Wholesale (OTC) bonds – Corporate Bonds – Mid Cap Bonds
Alternatively, there are mid-caps that offer yields >5% with fixed maturity dates.
However, these are mid-cap companies and are often companies that most investors are not familiar with, not all investors might be comfortable with them.
Some examples:
3) Bond ETFs and Bond Unit Trusts
More commonly, bond investors invest in Bond ETFs and Bond Unit Trusts, which offers a basket of bonds with low minimum investment requirements of SGD1k.
The following are some Bond ETFs that might suit investors of varying risk appetites:
| Bond ETF Name | Exposure | Yield |
| ABF SG Bond ETF | Singapore government or government linked bond | ~2.5% |
| Nikko AM SGD Investment Grd Corp Bd ETF | SGD investment grade bond | ~3.1% |
| iShares JP Morgan USD Asia Credit Bd ETF | Asia Bond | ~4.4% |
| iShares Barclays Cap USD Asia HY Bd ETF | Asia High Yield bond | ~7.8% |
| Vanguard Total Bond Market ETF | USD bonds | ~2.6% |
| Vanguard Total International Bond ETF | Global Bonds | ~1.6% |
- SG Government Bond ETFs – eg. ABF Singapore Bond Index Fund – A35
This index fund holds SG Government / SG Government related bonds and has a current distribution yield of 2.5%. While this might seem low in today’s low interest rate environment, there is the potential for capital gains when interest rates start to drop.
- SG Investment Grade Bonds – Eg. Nikko AM SGD Investment Grade Corporate Bond ETF (MBH)
With a current distribution yield of 3.1%, holding this ETF helps diversify your portfolio into a basket of SG banks, REITS, Insurance and other Corporate Bond without the high capital requirements of an OTC Bond.
- Regional Bond – Eg. iShares J.P Morgan USD Asia Credit Bond ETF (N6M)
This ETF offers exposure to bonds issued by governments, government linked and corporations in Asia (excluding Japan), and has a current distribution yield of 4.4%. The higher distribution yield is achieved by holding a basket of both high and low yield bonds from varying countries, maturity and credit ratings.
- Asia High Yield Bonds – Eg. iShares USD Asia High Yield Bond ETF (O9P)
This ETF invests in USD-denominated high yield bonds issued by Asian governments and Asian-domiciled corporations and has a current distribution yield of 7.8%. This bond has performed weakly in the last few years due to its heavy exposure to China and its Property-related bonds, but there is the potential for improved performance and upside as the China economy recovers.
- USD Bonds – Eg. Vanguard Total Bond Market ETF (BND)
For US Bonds, the BND ETF provides exposure to the investment grade US bond market, but at a low distribution yield of 2.6%.
- Global Bonds – Eg. Vanguard Total International Bond ETF (BNDX)
For Global Bonds, the BNDX ETF is a very well diversified bond that has broad exposure across major bond markets outside of the US and has a current distribution yield of 1.6%. With such a low distribution yield, the main selling point of the global bonds would be the potential capital gains that can be realized when interest rates drop.
4) Bond Funds
The last type of Bond instrument that investors can consider is Bond Unit Trust (Bond Funds). Bond Funds are actively managed and might have slightly lower rebalancing cost compared to a Bond ETF.
Here’re some examples:
| Bond Fund Name | Exposure | Yield |
| UOB United SGD Fund CL A (Dis) | Short Duration Bond | ~2.0% |
| Eastspring Investments: Singapore Select Bond Fund | SGD Bond | ~4.5% |
| UOB United Asian High Yield Bond Fd SGD (Dis) | Asia High Yield bond | ~7.0% |
| PIMCO GIS Income Fund | Global Bond | ~6.4% |
| AB FCP I – Global High Yield Portfolio Cl AT SGD Hedged | Global Bond | ~7.0% |
- Short Duration Bonds – United SGD Fund
The United SGD Fund is a short duration fund with a 2.0% distribution yield.
- SGD Bonds – Singapore Select Bond Fund
The Eastspring Investments Unit Trusts – Singapore Select Bond Fund invests primarily in familiar SG companies and offers a 4.5% distribution yield.
- Asian High Yield Bonds – United Asian High Yield Bond Fund
For higher yields of 7.0%, the United Asian High Yield Bond Fund provides access to Asian High Yield Bonds.
- Global Bonds – PIMCO Global Investor Series PLC Income Fund
The PIMCO Global Investor Series PLC Income Fund is a very attractive global bond fund with an average credit rating of A+ and distribution yield of 6.35%
- Global Bonds – AB FCP I – Global High Yield Portfolio CI AT SGD Hedged
Alternatively, the AB FCP I – Global High Yield Portfolio CI AT SGD Fund invests in high yield bonds and offers a distribution yield of 7.0%.
Conclusion
Thanks to the rate hikes, we saw bonds offering pretty good returns.
However, in recent weeks, bonds are back in the spotlight for negative reasons – i.e. the banking crisis.
With the $17 billion writeoff of Credit Suisse AT1 bonds, some investors might feel that bonds are risky assets now.
While it is true that bonds are not principled guaranteed (especially when the borrower fails), they are still considered a low-risk form of investment that hedges against the volatility of the stock market while providing passive income and the potential for future capital gains.
This article is my personal opinion, do note that the markets are volatile in the midst of the bank crisis. Please do your own due diligence before investing. If you need help, let me know here.
