5 Factors That Singapore Investors Have to Consider Before Investing In Bonds

2021 has proven to be a tricky year to purchase the financial markets. After witnessing one of the worst stock market crashes in recent times, where broad country indexes such as the S&P 500 declined by about 30%, the stock market then rallied back quickly, spurred on by stimulus measures rolled out by governments around the world.

Given our prime volatility in the stock market, it comes as no surprise that some investors may prefer bonds over stocks. When investing in bonds, you are choosing to purchase the debts being issued by governments and corporations. This is as opposed to investing in stocks, in which you become a part-owner of a corporation.

In general, bond prices are usually less volatile, are considered safer, and may sometimes share an inverse relationship with the stock market. Also, unless designed otherwise, bonds are legally obliged to spend a fixed and regular coupon payments, which provides predictable cash flow for income seeking investors. This is because compared to stocks where dividend payments are neither fixed not compulsory. This makes bonds an important component of your asset allocation mix.

Investing in the bonds being issued by corporations is typically seen as simpler than investing in stocks. However, this doesn't mean it's as straightforward as what some investors may think.

In this article, we highlight 5 factors that Singapore investors need to consider before investing in bonds.

# 1 Interest Rates & Coupon Payments

One of the main reasons many investors decide to invest in bonds is for its stable coupon payments. This is typically an annual or semi-annual payment that bond issuers pay to bondholders who invest in the bonds. Bond issuers, whether or not they are government, quasi-government or private companies, are legally obliged to help make the promised coupon payments and repay the first capital upon the bond's maturity.

For example, City Development Ltd, that is one of the largest real estate companies in Singapore and part of the Straits Times Index (STI), has a 10-year bond that was issued in 2021. Called the CITSP 3.480% 03APR2023 Corp (SGD), it provides a semi-annual coupon payout of 3.48%. This means if you invest in a bond with a par value of $250,000, you will get interest coupon payments amounting to $8,700 each year. On April 2023, the bond will mature, and the amount borrowed will be returned to bondholders at that point in time.

# 2 Risk And Rating

While investors naturally want higher returns by means of higher coupon payments, you have to remember that with higher expected returns come higher risk.

If a bond issuer isn't perceived by the financial markets as a great borrower, it should take to compensate potential investors by providing them a higher coupon payment.

Some bonds might be rated by one of the big three rating agencies – Standard & Poor, Moody's and Fitch. These are independent rating agencies that measure the quality of bonds being from corporations. Many investors, including institutional investors, may rely on these ratings to aid their bond investment decisions. However, we need to note that there are many bonds issued in Singapore that do not have credit rating. An unrated bond doesn't equate to a poor quality or high-risk bond, but rather, simply means that it was not rated by rating agencies.

As bond investors, you need to do your homework before investing in bonds, regardless of whether the bonds are rated or not. You want to lend your money to creditworthy corporations knowing that they will return you the principal amount you borrow and the coupon payments promised.

One method of getting more information about the bonds that you are looking to invest in is through Bondsupermart, a platform that gives free bond information, tools and credit analysis to bond investors. Bondsupermart has recently published its 2H 2021 Recommended Bonds Report, which may be a valuable resource for Singapore bond investors seeking to pick out quality bonds to take a position. You can access the report for free here to get an independent analysis on a few of the featured bonds.

# 3 Maturity Of The Bonds

Unlike stocks where your investment horizon can be indefinite, most bonds are issued with a maturity date, that you should know before you make your bond-investment decisions. This may be from a few years, to possibly as much as 10 years or more. Some bonds might even be perpetual bonds, which means that coupon payments will continue indefinitely before the companies or the investors decide to redeem the bonds.

The maturity of the bonds is an important factor that you should not ignore. The longer the maturity, the riskier a bond are usually since you are lending to the bond issuers for a longer period of time.

As an investor, you should ideally choose a maturity period you are confident with.

# 4 Secondary Market

After a bond continues to be issued, you can still buy and sell the bonds around the secondary market. For example, should you invested in a 10-year bond and need to sell it after 5 years, you can do so on the secondary market.

Before investing in a bond, it's worth knowing the secondary market which it can be traded on. Instead of stock investment, which are usually publicly owned on an exchange, most bonds are usually traded on the over-the-counter (OTC) market. The OTC marketplace is a decentralised market where dealers are the type that are buying and selling bonds from investors.

Since they may be traded on the OTC or with an open exchange, it's important to know that bonds can also increase or decline in value around the secondary market. For example, when it comes to the City Development Ltd bond – CITSP 3.480% 03APR2023 Corp (SGD), we see can from the current price being quoted on Bondsupermart the indicative bidding price (by 29 July 2021) is 102.498. What this means is an investor who holds a face worth of $1,000,000 of the bonds can sell it for $1,024,980 today around the OTC market.

If you are looking to buy bonds, you can likewise consider bonds around the secondary market. Platforms like Bondsupermart are ideal places that you can look at to choose from an array of bonds. This provides you with extensive choices to choose from based on what's suitable, instead of only subscribing to new bonds being issued.

# 5 Yield-To-Maturity

If you are buying a bond from the secondary market, you should be looking at the yield-to-maturity to determine your investment return, as opposed to the coupon payment.

For example, if you were to invest in one of the SIA bonds – SIASP 3.030% 28Mar2024 Corp (SGD) – Retail, you would be able to tell, just by taking a look at its name, that the bond provides a coupon payment of 3.03% per year (payable semi-annually).

However, because the bond happens to be trading at an asking price of 100.237 (as of 29 July), you will need to pay $100,237 for a bond with a par worth of $100,000. As such, your yield-to-maturity (i.e. the returns that you get by holding the bonds to maturity) is going to be lower at 2.980%, and never the coupon rate of 3.03%.

Bonds Can Provide Stable Returns At Reduced Risk, But You Have To Choose the best Bonds To Invest In

Similar to stocks, bonds are not created equally. There are top quality bonds that you can invest in as well as bonds that you may prefer avoiding – if you can't stomach the additional risk of investing in them.

The advantage of investing in bonds over equities is that your returns are generally secured as long as the bond issuers do not default. That said, you need to make sure that you invest in the bonds being issued by the right companies. Otherwise, you might end up making an investment loss if the company defaults on its payment.

If you wish to learn more about choosing the right bonds, Bondsupermart's recently published 2H 2021 Recommended Bonds Report can be a good place to start. The recommendation provided in their report is based on an independent analysis by their analysts.

Of course, investors must do their own due diligence also.

Bondsupermart helps you with this by providing the right tools that you should find suitable bonds to purchase. This includes their bond selector, and you'll discover the right bonds based on your requirements, chart centre for you to track the performance of numerous types of bonds, and a bond calculator for you to get the information about any specific bonds before making a bond-investment decision.

For those who need to learn more about bond investing first, there's a Bond Basics category which you can use to find out more about investing in bonds.

Bondsupermart is going to be holding a webinar on 12 August 2021 for everybody who is interested to invest in bonds or have questions about investing in bonds. You are able to sign up for the webinar today here.

If you are prepared to start investing in bonds, it can be done through Bondsupermart's partner, FSMOne, which can provide you with access to the bonds that you wish to purchase. You can also get advice on bond investing through iFAST Global Markets, which has advisers that can advise you on suitable bonds to purchase.