What is a bond?
A bond is a security issued by the government on which they pay interest.
For example, when you buy a maturing 10-year Singapore Savings Bond today, it entitles you to receive 110% of what you have invested or S$1.21 for every S$1 that you invested at the start.
The issuer guarantees these rates of returns because it borrows your money for 10 years and promises to pay back your principal, plus interest at maturity.
Singapore bonds are popular investments at Saxo Capital Markets pte because you can trade them in the secondary market (on SGX), where investors seek higher yields than what is available to banks or CPF.
What does this mean?
As long as there aren’t too many bonds out there (the limit is 10 times the number of issued bonds) and there isn’t an excessive supply of new bonds, you can sell your bond for more than what you bought it.
This usually happens when interest rates are falling, so that existing bonds with higher interest rates look less attractive. Just like any investment, however, Singapore Bonds come with risk though the government guarantees returns.
This means that if inflation turns out to be higher than expected (i.e., consumer price index goes up), your earnings will not keep pace with inflation and you’ll end up earning less in real terms.
The Republic also has two types of securities – fixed-coupon securities or FCS (bonds) and floating-rate notes or FRNs that are linked to short-term interest rates.
What are the different Singapore bonds?
Unlike most bond issuers, the Republic has two kinds of securities – fixed-coupon securities or FCS (bonds) and floating-rate notes or FRNs.
The former is your standard bond instrument, where you loan the Government money for a set amount of time with an interest rate that is guaranteed at issuance.
The latter is an IOU from the Government which lets you lend it money for a defined period but enables it to repay you interest based on overnight interest rates.
Can foreign investors buy Singapore bonds?
Foreign investors can hold both FCS and FRN in their portfolio but they can only trade them on SGX.
They may not trade them domestically in Singapore, but they can choose to hold them through an SGX-approved custodian if their country of residence has signed the ASEAN Free Trade Agreement (AFTA).
You cannot open an account by yourself at any commercial bank here nor transact bonds directly with the Government.
Foreigners can only invest in Singapore Bonds through an approved intermediary that is licensed by the Monetary Authority of Singapore (MAS).
What is its yield?
You can check out interest rates for FCS and FRN on MAS’ website.
If you want to track bond market movements, you can always download a Bond Connector app, which shows daily prices and yields for bonds in the secondary market.
Each time you trade a bond, the issuer receives a coupon payment from that trade.
In the secondary market, investors compare yields on individual bonds and look for ones that are trading at steep discounts to their face value (and therefore offer high returns).
How much do you earn?
When you buy an FCS, they fix your return at issuance, but it can vary slightly after that due to market price fluctuations. However, dividends usually fall within a narrow range around the initial rate promised.
With FRN, because it’s linked to short-term interest rates which change every day, your return may vary.
Also note that if interest rates fall, existing bonds with higher interest rates will trade at lower prices in order to entice investors into buying them, which means you might earn less than what it promised at issuance.
What are the risks?
Keep in mind that Singapore Bonds come with credit and liquidity risk (meaning that the issuer might not pay interest or return your principal).
So, before investing, it’s important to understand the issuer’s financial position and its ability to repay you your money.
Also, note that there is no principal protection with Singapore bonds – if there isn’t enough demand for new bonds, issuers can decide to merge outstanding issues so as to reduce the total number of outstanding FCSs.
This means older series of a bond will trade at a lower price as they compete for buyers against newer series.