Bond investment is debt instruments by the issuers. By buying a bond investment, bondholders are effectively lending monies to the issuer, in return for interest, called coupons. Well, many would definitely remember the Lehman Brothers Mini-bonds saga 10 years ago where even trained financial advisors cannot understand the Mini-bonds. The saga created quite a scandal and much protest at Hong Lim Park. Eventually, the government had to stepped in to control the situation.
Having lived through the saga doesn’t mean that bonds are dangerous instruments (psst, the mini-bonds aren’t really bonds in the first place) as a matter of fact, bond investment is as safe as stocks.
That statement is in contrast to what many financial advisors, students and professionals would have learnt.
Everywhere else, bonds are classified as safer than stocks.
However, I stand by my statement that bond investment is as safe as stocks. This is because just like stocks, the bonds are only as safe as the underlying issuer is.
Behind every stock is a company. Similarly, behind every bond is also an issuer.
The Argentinian government issued a 100 year bond in 2017. Would you consider this bond investment to be safer than stocks? (Yep, you will definitely be around 100 years later to redeem your loan to the Argentinian government.)
What attracts investors to this bond? Probably because of the promise that it is safe (or safer) and the 7.9% yield which has since swung between single-digits to double digits within a single year.
Here comes the stunning fact, Argentina has defaulted on their debt 9 times in the last 20 years. 5 times in the since 1982.
Just let that sink in.
Whereas a strong company like Singtel, SATS and VICOM has not gone bankrupt once since 1982 and does not seem close to doing so.
And if a bond investment is so safe, what happened to the Mini-bonds sage? The reason why is is a saga is that many people, trained or untrained, educated or uneducated were bought into the idea that it is safer, when in actual fact, it is not.
Volatility vs Safety
The reason behind the notion that bonds are safer than stocks is because stocks are more volatile than bonds. Stock prices move more than bonds.
It is true that stock prices movements are more volatile than bonds, but that doesn’t mean that they are more dangerous.
A Honda Jazz depreciates at almost 10% a year, a 10% downwards movement every year. But does that makes the car an inherently dangerous equipment so much that people will get sleepless nights? No. I have never known a person that has sleepless nights because his car depreciated by 10%. However, I have known many that has sleepless nights because their stocks dropped by 10%.
Low volatility is not safer. Bonds and stocks are only as good as the entity that they represent. There will be some bondholders or bond funds that provides lucrative returns of between 4% to 6% consistently.
To achieve those returns, high yield bonds that are below investment grades will be utilized as there is no way investment grade bonds will generate such yields.
It is not that high yield bonds are terrible sure-lose investments, however, investing in high yield bonds require some knowledge and skill as high-yield bonds are high yield are a reason.
Bondholders needs to have the ability to differentiate which bond issuer is able to sustain the bond repayment and turn the tide around to become investment grade. Then again, if the bondholder can filter out the turnarounds to invest in sustainable junk bonds, why bonds and not stocks?
Bonds available to Singaporean
With that said, it is still ok to invest in bond investment. As long as the bonds issued by strong governments and companies, the investment will turn out fine. However, the stronger the entity, the lower the returns as the risk of default is a lot lower.
Bonds are available to Singaporean to invest. As a matter of fact, we can even invest in bonds using our CPF.
The Singapore Government do issue bonds for investors to invest in which are available to retail investors to invest in. The most popular one recently is the Temasek bond which has a return of 2.7%/annum. The bond was so popular, it was 8 times over-subscribed.
Monthly, the government issues the Singapore Government Savings Bond as well, which in my opinion is better than any savings plan and fixed deposit.
Investors can also buy and sell other government bonds on the bond market, the secondary market as long as they have a brokerage account.
All in all, generally, the returns from safe bonds do not really beat inflation, which by defaults makes it a bad investment to have over the long term. For the short term, it can be a useful instrument. However, at the end of the day, the bond is as safe as the issuer is, therefore, it is imperative to know how safe the issuer is.
Investment in Singapore for Beginners