For the first time ever, Temasek bonds are available to retail investors. Launched by Temasek Holdings, 2.7% per annum, $200m of the 5 years bond is available for retail investors and $200m is available to institutional investors. The bond is expected to be over-subscribed and indeed it is, being over-subscribed by 8 times.
Retail investors can use their CPF funds to invest in the bond, which makes it more attractive to investors.
How does bonds fit in?
Bonds usually fit in as a hedge against market downturn. Singapore Saving Bonds are usually considered a safe haven as opposed to stocks and options. To which, I disagree as the bond is only as safe as the issuer is safe.
Another reason why bonds can fit in the portfolio is to achieve returns while sitting in cash. When one has plenty of cash, they cash is being eroded away by inflation. By investing in safe bonds, investors are able to achieve a small return while sitting on cash.
Singapore Government Bonds and Treasury Bills
Singapore governments do issues bond and they can be purchased directly or on the secondary market. The Singapore government does that through bonds and Treasury Bills (T-Bills).
Bonds can be subscribed by using through ATM. If investors are allocated the bond, they will then be the bondholder.
The bondholder can subsequently sell the bonds and T-bills on the bond market.
What are the difference between Bonds and T-bills?
Simply put, T-bills are purchased at a discount. Interest will be paid periodically. By the time the T-Bill matures, the investor would have received interest that is equivalent to the difference between the purchase price and the face value of the T-Bill.
Face Value of 1 year T-Bill = $100
Amount Loaned = $90
Interest = $10
Upon Maturity, investor gets back $100, which comprises of $90 initial capital and $10 interest.
Bonds issued by the Singapore Government are longer term instruments, where interest is paid on a fixed time every 6 months throughout the life of the bond. When the bond matures, the bondholder would get back the initial “loan” that was made.
Face Value of 2-year Bond = $100
Amount loaned = $100
Interest = $10 every 6 months
Total Interest after 2 years = $40
Upon Maturity, bondholder gets back $100 on top of the $40 interest received over 2 years.
How to buy Bonds and T-Bills?
Investors can buy Bonds and T-Bills on the Primary Auction Market as well as the Secondary Bond Market.
Primary Auction Market
The most convenient way is to subscribe for Bonds and T-Bills at DBS/POSB, OCBC and UOB ATMs. Subscribers need to have CDP accounts before they can apply.
Upon allocation, the full amount will be deduced from subscriber’s bank account.
Secondary Bond Market
Bondholders will be able to buy and sell bonds on the secondary bond market as long as they have a brokerage account. By trading on the secondary bond market, the price of the bond can be different from when it was on the primary auction market, thereby, could result in a profit or loss.
Is it worth to invest in Temasek Bonds?
Now comes to the question of if it is worth it? Generally, investing in bonds for the long term doesn’t attract me, not even as a hedge. Although bonds from strong companies are also available on the market, the yield can hardly beat inflation.
High yield bonds are high yield for a reason, they require bondholders to take on higher risk of default, something that doesn’t attract me at all.
Especially for Singaporean, where we can utilize our CPF monies to buy bonds, we need to consider if forgoing the guaranteed interest from CPF, (2.5% – 3.5% from OA, 4% to 5% from SA) is worthwhile.
Statistics have shown that most CPF holders lose money when they withdraw it to invest. This is the reason why you should learn the proper way of investing, before you want to venture into the stock market. After all, it’s your hard earned money, you really don’t want to bet it on “friends'” tips.
Essentially, CPF is as good as a bond itself. Although CPF is a form of enforced savings, it does provide good interest and is after part of our portfolio. Similarly rated government bonds don’t provide interest as high as CPF.
Therefore, I personally consider CPF my long-term high yield bonds without the risk of default that will mature when I am 55.
Therefore, for bonds, I will only consider them for short term liquidity purpose. Long term, I would prefer equities anytime. Removing equities out of the equation, I consider CPF as a benchmark for bonds, if the yield of the bond cannot beat CPF, I would not touch it.
And I must say, a 2.7% Temasek bond for 5 years sounds decent. Definitely that over Fixed Deposit.
Investment in Singapore for Beginners
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