The Ins and Outs of Bond Investment in Singapore
With an ever-increasing bond investment market in Singapore, more and more investors are taking this route today. Bond investments have something to offer to both the issuer and the investor and each of them gets their fair share of benefits. However, before you start making bond investments, here is everything you need to know about bond investment in Singapore.
Reasons Why Corporates Issue Bonds Rather Than Getting A Loan
When companies need money they have the option of borrowing from banks. In fact, that’s probably the most obvious choice. So, why corporates choose otherwise and issue bonds rather than getting a loan? Well, here are a few reasons for that.
- First of all, the interest rate that companies have to pay to bond investors is on the lower side as compared to what’s often associated with bank loans. Keeping interests to minimum allows companies to make the most of the borrowed money and, hence, they issue bonds as the interest rates hit extreme lows.
- Issuing bonds allows companies to borrow large amounts at very low rates of interest and lets them to invest more in their infrastructure, growth and different projects.
- It also allows companies to have much more freedom of operation as there are no restrictions which are usually associated with bank loans.
- When companies issue bonds, they’re able to attract more lenders quite efficiently. There aren’t many issues with record keeping either as same deal is offered to all the bondholders.
- There’s a lot more flexibility in issuing bonds as well with wide variety of offerings available.
Different Types Of Bond Investments Available To Singapore-Based Investors
There is variety of bond options available to Singapore-based investors. However, all these bond options can be divided into two broad categories i.e. Government Bonds and Corporate Bonds. Let’s check out what types of bonds are on offer in each of these categories.
The government-issued bonds are aimed at acquiring enough funds to support spending of government. They’re considered low risk bonds for investors as they have the backing of government credit and default is quite unlikely. Below are a few government bonds options available to Singapore-based investors.
1. Singapore Government Securities Bonds And Treasury Bills
SGS bonds and T-bills are the marketable instruments of debt from Singapore Government that are very safe for the investors due to full credit backing of the government. It is obligatory for the Singapore Government to pay SGS bond holders a fixed amount as these securities get matured. Remember, however, that Singapore Government Securities bonds and Treasury Bills can’t be cashed before they get mature but investors can still sell them whenever they want in SGS market.
These bonds are available to both retail and institutional investors and have the backing of Singapore Government.
2. Singapore Savings Bonds
These are non-marketable debt securities from the Government of Singapore. It’s a relatively newer bond investment that has been specifically designed for the retail investors who are interested in a low-risk and low-cost savings product.
These bonds are also safe enough like the Government securities mentioned above as they also have the backing of Singapore Government. Besides, they follow a step-up interest rate model which means investors can get higher returns for holding the bond longer. The investors receive interest payments every six months and the principal amount is returned once the bond gets mature. In addition, it’s a low-cost investment option as all you have to pay is just $2 as bank fee for application and the redemption requests.
Besides Government-backed bonds, the investors in Singapore can also invest their money in a variety of Corporate Bonds as well. These bonds usually have higher rates of interest associated with them but they carry greater risk as well. Here are different types of Corporate Bonds accessible to investors in Singapore.
1. Perpetual Securities Or Perpetual Bonds
They are the hybrid securities with features of equity as well as a debt. And, despite having some features of conventional bonds, they aren’t the exact same thing.
First, they don’t have any maturity date. Second, redemption of perpetual securities is not obligatory for the issuer. And, if the bond issuer is not interested in exercising redemption, your only exit is to sell your perpetual securities at a secondary market. This will also expose you to liquidity risks and price fluctuations in the market. So, you should be well-aware of the risks before choosing this option.
2. Bond Funds
Buying units in the bond funds is another way to invest in Corporate Bonds in Singapore. Different kinds of these bond funds available in Singapore include regional bond funds, global bond funds, sector/industry specific bond funds, country-specific bond funds, and the high-yield bond funds. The investment objective varies from one option to the other. Even though many of them pay regularly, it is important that the investors examine their total returns at the time of evaluating how well a bond fund can perform. The returns not only include the income from bonds held but also the gains/losses of the bonds over time.
Identifying Good Bond Investments And The Yields To Expect
There are a few things that can help identify good bond investments and the yields that can be expected from a bond investment. Let’s look at a few things any investor should take into consideration before making a bond investment in Singapore.
1. Risk Profile & Target Return
Performing risk-disposition self-assessment is really important before investing in bonds. This helps in determining the amount of risk an investor can take when making such an investment. As a result, a proper overall strategy is formulated. The factors to consider here include negative effects that a failed investment may have, potential costs for every risk, and a target return for the investment overall.
2. Re-purchasing Of The Bonds By The Issuer Before Maturity
Another risk factor to be taken into consideration is whether the issuer of the bonds will be ready to re-purchase the bonds before maturity if the investor wants to do so. This is usually known as the ‘call risk’ of the bond and addresses the likelihood of issuers redeeming the bonds earlier than the maturity dates due to falling rates of interest or a raise in market prices.
3. What Secures The Bonds?
Obviously, investors would want to invest in bonds where they have maximum likelihood of receiving their money back if the issuer becomes insolvent or goes into default. So, it is important to determine whether the bonds are secured or not. Besides, the investors should also look for ranking seniority for bonds when it comes to pay out in insolvency.
4. Knowing The Starting Yields
The potential yields on bond investments can be predicted depending on a couple of important factors. And, the most important of them is the starting yield. It’s a major determinant of the future returns as far as Government bonds are concerned. Studies show that starting yields explain about 85% of variability in the returns of Government Bonds. Understanding changes in yields is also important to predict what kind of yields can be expected from an investment but not as much.
So, there are quite a few options available for bond investment in Singapore but the investors should perform all the assessments before actually making an investment to maximize returns.