How to Invest in Bonds in Singapore

How to Invest in Bonds in Singapore

Bonds are considered the “safe” option in the investment world, although nothing is guaranteed. Simply put, a bond is basically a loan from you to whichever government or entity (like a company) you are purchasing the bond from. Returns come in the form of interest (called coupons) on the loan you have given.

bonds

Bonds are also known as fixed income securities because the interest income is paid out at periodic intervals throughout the tenure of the bond. Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value.

So, it just like if you lend money to a friend and he gives you an I.O.U (I owe you). This I.O.U is the bond. As part of the agreement, he will give you interest (coupon) throughout the agreed lending period. At the end of the agreed lending period, he returns you the money.

The yield on a bond depends primarily on the credit quality of the bond issuer. In any local market, the highest quality bonds are usually government bonds. They are usually followed by quasi-government or government linked entities, banks and then companies.

Do note that when comparing bonds across different countries, an emerging market government bond may not necessarily be safer than a well-rated corporate bond.

While deemed as low-risk investments, bond interest rates have been the lowest ever for the past decade and offer very little returns.

You can read more technical details about bonds in general here.

Singapore bonds that you can purchase include:

Singapore Government Securities (SGS) issued by the Monetary Authority of Singapore (MAS).

Quasi-government bonds issued by Statutory Boards

Corporate bonds issued by Singapore companies and financial institutions

Singapore Savings Bond issued by MAS.

SGS are available as Treasury bills (T-bills) and as general bonds, and are backed by the Singapore Government. T-bills tend to have shorter maturities of 3 months or 12 months, whereas the bonds have maturities of 2, 5, 10, 15, 20 or 30 years.

You can buy SGS at primary auctions (through local agent banks or via local bank ATMs). The minimum investment amount is $1,000.

Investors can also choose to hold the SGS to maturity or sell them before maturity in the secondary market. You can trade SGS bonds in the secondary market through your stock broker or platforms like Fundsupermart. You can read more about SGS here.

You can also trade in statutory board and corporate bonds listed on SGX in the secondary market. These are bonds not issued by the government but by commercial organizations. Corporate bonds generally have a much higher yield than SGS but there is also more risk, such as the company running into cash flow problems and defaulting on the bond repayments.

 

In 2015, a new type of government bond called the Singapore Savings Bonds will be available as an initiative by the government to provide a low-cost investment options to retail investors. The savings bond is for 10 years and the interest rates will be linked to the long-term Singapore Government Securities (SGS) rates. But unlike SGS bonds, which pay the same interest rates every year, the new product will start with smaller interest rates that will keep rising, the longer you hold on to the bond.

The yields of the Singapore Savings Bonds are low but the benefit is that you can redeem them in any given month before the bond matures with no penalty. This makes these bonds very liquid. So, the Singapore Savings Bonds are really very similar to a fixed deposit but with possibility slightly higher returns. You can read more about these bonds here.

 

Bottom Line: Conventional personal finance wisdom states that bonds are an integral part of every portfolio to mitigate risk.

While the most aggressive and high risk investors look down on bonds due to the low returns, for the majority of Singapore passive investors, you should invest in some bonds for security. Call it our “kia si” nature.

Alternatively, you can consider bond mutual funds or bond ETFs.

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