When it comes to building an investment portfolio, asset allocations is one critical component that we shouldn't ignore. The idea is that we should not be putting all our eggs in one basket. Rather, we ought to diversify our investments over the different asset classes.
The two most popular asset classes in the market today are bonds and stocks.
Most of us would already be familiar with stocks. Be it on the Singapore Exchange (SGX) or overseas exchanges like the New York Stock Exchange (NYSE) and Hong Kong Exchange (HKEX), there is no shortage of listed companies or ETFs that people can invest in.
However, with bond investing, our options are far more limited.
Currently, on the SGX, there are just about 10 listed retail bonds, excluding Singapore government bonds. Even then, some of the listings are from exactly the same company (e.g. Azalea Asset Management, SIA). Trading for an additional two has also been suspended: Hyflux and KrisEnergy.
Given the meagre selections, it's no wonder that most investors are not heavily committed to bonds. But does this have to be the case?
Bonds Are Largely Traded Over The Counter (OTC)
All around the world, companies issue bonds constantly. The main difference is that unlike stocks that are listed and traded on stock markets such as the SGX, most bonds are traded in over-the-counter (OTC) markets. They're popularly known as wholesale bonds.
OTC financial markets are decentralised. This means that market participants – regardless if you are a buyer or seller – cope with one another directly, not via a centralised exchange. OTC markets are similar to how we buy or sell foreign currencies. Whenever we need a foreign currency, we go to a moneychanger. We trade the currencies in line with the offered exchange rates. Different moneychangers will offer you different rates.
The same concept pertains to wholesale bonds. Since these are traded over the counter, we have to explore OTC markets instead of train our eyes just on retail bonds for auction on stock exchanges.
How To Access Bonds Via OTC Markets
To access OTC bonds, you need the service of the broker. Similar to the role of a moneychanger, your broker will quote the prices of the bonds you intend to buy or sell.
Investors in Singapore can think about using PhillipCapital (POEMS) to search for bond prices and place their bond trades. POEMS (Phillip On-line Electronic Mart System) is a trading platform by Phillip Securities, the brokerage arm of PhillipCapital, certainly one of Singapore's most established brokerage businesses that has been around since 1975.
On the PhillipCapital bond site, you can find a wide range of wholesale bonds from listed companies. These include SPH REIT, Thomson Medical Group and UBS.
Wholesale bonds exchange minimum denominations of S$250,000. Compare this with retail bonds that trade in lot sizes of only S$1,000. To help make the vast wholesale-bond market more accessible to investors, PhillipCapital Bond Desk provides a Bonds50 product line, comprising wholesale bonds traded in denominations of S$50,000. To invest in Bonds50, however, you need to be an Accredited Investor. If you are an Accredited Investor, you can access all executable bond quotes on POEMS. You may also place your bond orders online just like shares, without having to go through your trading representative.
Whether you wish to buy wholesale bonds sold in minimum denominations of S$250,000 or Bonds50 products in denominations of S$50,000, that can be done by opening a trading account with PhillipCapital.
Unlike investing in bonds via banks where you may not have direct access to their bond desks, the PhillipCapital bond desk is just a call or email away. You are able to call them at 6212 1818 or email them at [email protected] to speak to their in-house bond specialists.
Bond Financing Can Increase Your Potential Returns
One service that PhillipCapital offers is bond financing.
With bond financing, investors may use other financial assets such as cash, shares, ETFs, unit trusts or bonds as collateral to obtain financing for their bond purchases.
Every bond includes a default grading: Grade A, B or C. Grade A bonds offer 70% loan-to-value (LTV) financing and Grade B bonds 50% LTV. Grade C bonds are not marginable. You can find out more about the grading of each bond here.
To give sign, an investor who purchases a Grade A bond receives annual coupons of 4% p.a. At an investment of S$250,000, what this means is his coupon payment is going to be S$10,000 a year. To increase his returns, the investor can pick to purchase another two Grade A bonds.
By using bond financing to purchase another S$500,000 worth of bonds, his bond portfolio now becomes S$750,000, having a loan of S$500,000. Using the bonds' coupons of 4% p.a., the investor will now receive annual coupon payments of S$30,000. With different financing charge of 2.68% p.a., his net receipt will be S$16,600. This gives him coming back of 6.64% p.a.
|Total Annual Return
|Initial portfolio: S$250,000
|S$10,000 (or 4%)
|S$10,000 (or 4%)
|Portfolio with bond financing: S$750,000
|S$30,000 (or 4%)
|S$13,400 (or 2.68%)
on S$500,000 leverage
|S$16,600 (or 6.64%)
POEMS also offers preferential financing rates, depending on your bond portfolio and amount borrowed. The best way to find out is to confer with your trading representative.
Do note that bond financing is really a double-edged sword. While it can potentially increase your returns, it also increases your risks. When the bonds you purchase decline in value, your losses could be amplified as well.
Wholesale Bonds Are Traded on Clean Pricing
Another thing to pay attention to when buying or selling bonds is accrued interest. Bonds pay coupon payments, usually semi-annually or annually.
A bond having a face value of S$250,000 that pays a 4% coupon semi-annually pays you S$5,000, twice a year. What this means is S$10,000 in total each year. However, if you buy a bond before the coupon payment date, you will need to compensate the seller for accrued interest.
For example, if the semi-annual coupon payment of a bond is S$5,000 and the seller has held it for three months before selling it to you, you will need to pay the bond price plus his 3-month accrued interest of S$2,500.
What's good about trading through a platform like POEMS is that you will be able to see your principal along with the accrued interest you will receive or pay under the bond trade ticket. Bond prices quoted are all-in.
If you intend to start investing and trading wholesale bonds, you can open a POEMS account today with PhillipCapital.
PhillipCapital is offering S$150 of eCapitaVouchers to all DollarsAndSense readers who purchase their first wholesale bond through POEMS. Upon submission of the application, please fill in this type to be eligible for the promotion.
For a quick overview, you can also refer to our infographic on how to trade wholesale bonds like stocks: