I have held a Temasek Bond since 2018, bought on my specific request. At the time, the RM did not think to recommend it to me and instead showed me bonds from Singapore airlines, banks, and property. Those ended up as lackluster investments looking back now.
Glad that I had the sense to insist on a government bond. It has since given me excellent 9% returns each year, and on top of that has appreciated 10.6%, giving a capital gain of USD $27,000. I bought it at 102.2, and sold at 113.
I’ve been thinking about this sale for a long time and mentioned it here before too. To explain my reasons for selling, the bond is callable, meaning that the value will eventually return to 100 in 2028. That is still some time away, but the bond should continue to decay and then accelerate as it gets closer to its callable date. That would evaporate my capital returns.
Secondly, bonds are traded over the counter, meaning that actual prices are opaque and doesn’t match what I see on Bondevalue. Even now, I can see it is trading for over 114 at Bondevalue but the best price my bank is giving is 113. It gives me a feeling of being ripped off and I wonder if I’m really offered a fair price. I’ve come to prefer funds, as I can see what price I would get directly at Bloomberg or the fund’s website.
In addition, I have found bonds not to be not as good a safe haven as advertised. In bad times the spreads widen tremendously, dramatically reducing what can be pulled out. In the last crisis in 2020, the price crashed along with everything else (though not as much). There is no substitute for simple cash in a crisis.
Convenience plays a part in this decision as well. The Temasek bond paid out in USD twice a year. Switching to the new funds would pay out in SGD every month, making it much easier to manage my monthly expenses.
Finally, I have a limited credit line at my bank, which would require showing more funds to increase. I have found this to be more difficult to do as I don’t have employment income any more and the rest of my funds are tied up in stocks. It has been impossible to get the banks to recognise my U.S. stock portfolio and lend based on that.
A more efficient use of funds would be to re-allocate my existing credit line into higher yield funds. After including my profits, my yield on the Temasek bond was about 7%. If I free up the funds and re-allocate it, my yield would jump to about double of that. My estimate is that I would add another $600-$800 in passive income every month.
My anticipated re-allocation would be to the Allianz Income and Growth as well as increase my position in the Blackrock China Bond Fund. Thinking about a split of $80,000 and $80,000 ($46,000 currently invested) respectively, with a blended leveraged yield of about 15%-17%. I also may want to open a Citigold account, as I found their rates to be the most respectable. Still have some time to make the decision, and I’ll do another post expanding on this.
There are of course some downsides to the move. I would incur 1% sales charge to buy into the funds, as well as an additional 1.5% in expense costs every year. The expense cost is not really felt as it is factored into the price itself. But bonds don’t carry these expense costs, which can add up over the years.
The move also increases my risks. The Temasek bond can be considered rock solid and impossible to suffer a margin call. But both the funds I mention above are in the moderate to high moderate risk range, and far more likely to require additional funds in a crisis. On the other hand, I would be invested in a far bigger basket of stocks and bonds, rather than a single bond from the Singapore government. It’s a calculated risk, and I’m betting that we won’t see another huge sudden crash like in early 2020. In any case, my contingency plan would be to let go of my SPF ETF and tech stocks if needed.
Lastly, with interest rates rising, it is a good possibility that bond funds will drop in price. But I still anticipate that returns would be in at least the high single digits. Again, a calculated risk.
Will be looking to reduce stock margin from $300,000 to ~$150,000. This should be more efficient as privileged banking rates are much better than brokerage rates (~1.5% compared with ~2.5%). Have sold 3 shares of Amazon at USD $3,184 last night. Not happy at that price since it was trading above $3,700 recently, but my margin % was uncomfortable at below 200%. Will keep reducing when given the opportunity.
Have a good weekend everyone!