What are the different types of bond investments you can make in Singapore?
Bonds are some of the most popular types of investment in Singapore. Amongst the four main asset classes, you will find the average Singaporean investor always ending up investing in bonds. The reason for this is the availability of low-risk government bonds. Irrespective of whether you are or aren’t well-versed with different types of bonds, you might be familiar with ‘Singapore Savings Bonds’ and other government bonds in Singapore. Every year, the Monetary Authority of Singapore (MAS), records a rise in the number of people subscribing to the bond. As per reports from the Straits Times, more than 6300 investors submitted applications for February this year, totalling to investments worth $172 million. This figure is higher than what the MAS recorded last year.
There are different types of bonds that you can invest in. To determine the best bonds to buy in Singapore, you need to first have an understanding of what the current offerings in the market are. Let’s take a look at each of them one by one.
Types of bonds
Singapore Government Securities
We earlier discussed about Singapore Savings Bond (SSB) being one of the most popular bond options in Singapore. Since its launch in September 2015, the SSB has been backed by the Singapore government. SSB gives its investors a step-up interest rate that increases each year as long as you don’t redeem the bond. It has a maximum holding of $100,000 per individual. It also allows investors to withdraw their money at any moment. If you end up withdrawing your money before the maturation period, you won’t even be penalised.
You can invest in Singapore Savings Bonds via ATMs at any of the three local banks. It offers an interest rate that is calculated at every issuance and you can invest and redeem the bonds in multiples of $500.
Another option under government bonds is the Singapore Government Securities Bonds and Treasury Bills (T-bills). This is a relatively low-risk investment option as it enjoys a full credit backing of the government. The Singapore government pays SGS bondholders a fixed amount on maturity. Unlike SSB, Singapore Government Securities Bonds and T-bills cannot be encashed before the maturation period. But you can choose to sell these bonds at any point in time in the SGS market.
SGS Bonds are selling at a minimum denomination of $1,000. T-bills are short-term bonds with a maturity period of 1 year. SGS bonds are relatively longer-term with varying maturity periods of two, five, ten, twenty, and thirty years.
Bond ETF
Bond ETFs are essentially quasi-government bonds that are issued by government-linked entities. In Singapore, it is issued by the Housing & Development Board (HDB) or the Land Transport Authority (LTA). Alternately, they are also sold at over-the-counter markets in denominations of $250,000.
The ABF Singapore Bond fund is an ETF managed bond by Nikko Asset Management. Investors can invest in bond funds for an amount as low as slightly over $100.
There is basically no maturity period for investors, although individual bonds within the fund mature. What happens is that the fund will use the proceeds to buy into other bonds. To receive your principal, you will need to sell your holdings in the open market.
Corporate Bonds
These bonds are usually issued by companies when they are in need of money. Companies opt for issuing bonds to investors as opposed to taking loans. There are many reasons why corporates do this. We will soon discuss them in one of the points below.
Corporate bonds usually come with a higher rate of interest and high risk. Some of the common types of corporate bonds available to Singaporeans are:
Perpetual Bonds
These are 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, a redemption of perpetual securities is not obligatory for the issuer. And, if the bond issue is not interesting 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.
Bond funds
Buying units in 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 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.
This was brief on some of the best bonds to buy in Singapore. With this background, let’s take a look at some of the reasons for corporates issuing bonds to people.
Why corporations issue bonds rather than taking a loan
Corporations prefer issuing bonds to people as they have to pay lower interest rates to people in comparison to what they would have to pay to the bank. With low-interest rates, companies will be in a better position to capitalize on the borrowed money, thereby enabling a higher growth rate.
Taking a loan from a bank would mean too many restrictions for companies. Issuing bonds give them a certain level of freedom. Lastly, when companies issue bonds they increase their chances of attracting investors, clients, and lenders.
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