Singapore Bonds
This site is about bond investments in Singapore. Singapore has positioned itself as a regional financial hub for South East Asia, and has developed a vibrant bond market for fixed income investment. Singapore's government is also an active issuer of bonds (called SGS for Singapore Government Securities), even though it does not require debt finance because it runs a budget surplus. The government's bond issuance program is partly designed to provide a benchmark bond price (due to its AAA credit rating), which supports the corporate bond market.
There are several ways to invest in bonds: SGS are issued directly by the Singapore Monetary Authority and you can buy bonds through an agent bank; corporate bonds can be bought on the bond market operated by the Singapore Exchange (SGX); and you can invest indirectly in bonds by investing in bond funds.
What is a bond?
A bond is a debt security, which is a type of contract where the issuer (a government or a corporation) owes the bond holder a debt. Depending on the terms of the bond, the issuer is obliged to pay regular interest (called the "coupon") and to repay the face value, or "principal", at a later date (termed "maturity"). Singapore Government bonds have maturities of 2, 5, 7, 10 and 15 years.
Some corporate bonds have additional features, such as "convertibility" which allows the bond holder to choose to convert the bond into shares of the issuer. Conversion of a bond changes the nature of the investment from debt into equity.
Why invest in bonds?
As a fixed interest investment, a bond provides a certain income stream to the investor (unless the issuer goes bankrupt). This reliability of income is not usually found with dividends from shares. The capital value of a bond is also more stable than the value of a share, and on maturity of the bond the investor is entitled to be repaid the full face value of the bond. Share investors do not have a legal right to be repaid capital from a company.
Bonds can also provide diversification in a portfolio. When stockmarkets are going down in bad economic conditions, bond markets can go up if governments reduce official interest rates to stimulate the economy. Having a diversified approach to investments can help preserve the overall capital value of a portfolio.
If a corporate bond issuer goes bankrupt, bonds (like other debts) have to be repaid before shareholders can get anything back from the company. This means that corporate bonds are less risky than investing in shares in the same company.
Finally, for Singapore residents there are tax advantages in earning income from Singapore government bonds.
What is the bond price?
After a bond is issued, the holder can sell it to other investors on the bond market. The market price of bonds will not necessarily be the face value or original issue price of the bond, and will depend on a number of factors such as:
- Credit risk of the issuer - if the issuer is perceived to be "risky" then its bonds will be worth less than those issued by less risky issuers. Government issuers are usually the least risky debt issuers. Singapore Government Securities, and also Australian Commonwealth government bonds, are rated AAA, but not all governments are AAA borrowers. Most corporate borrowers have lower credit ratings than the government, and so must pay a higher coupon rate to investors.
- Coupon rates or interest rates of other securities - if other comparable issuers pay a better rate, then your bond will be worth less than those other bonds. Rising interest rates can therefore decrease the market price of bonds. Conversely, falling interest rates can increase the market price (or capital value) of your bond.
- Inflation rates (and expected inflation rates) - if inflation is increasing, then a fixed dollar coupon and a fixed dollar principal amount which will be repaid in the future will be worth less. Some issuers, such as the Australian government, issue inflation-linked bonds which provide a "real" return over and above the inflation rate.
Because the market value of a bond can be different from its face value, there is a possibility of making a capital gain on a bond investment in addition to securing a fixed income stream.
