This article was written in collaboration with POEMS By PhillipCapital. All views expressed are the independent opinions of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
When it comes to building an investment portfolio, asset allocations are 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 should diversify our investments across the different asset classes.
The two most popular asset classes in the market today are stocks and bonds.
Most of us would already be familiar with stocks. Be it on the Singapore Exchange (SGX) or overseas exchanges such as the New York Stock Exchange (NYSE) and Hong Kong Exchange (HKEX), there is no shortage of listed companies or ETFs that we can invest in.
However, with bond investing, our options are far more limited.
Currently, on the SGX, there are only about 10 listed retail bonds, excluding Singapore government bonds. Even then, some of the listings are from the same company (e.g. Azalea Asset Management, SIA). Trading for another two has also been suspended: Hyflux and KrisEnergy.
Given the meagre selections, it’s no surprise that most investors are not heavily invested in bonds. But does this have to be the case?
Bonds Are Largely Traded Over The Counter (OTC)
All around the world, companies issue bonds all the time. The main difference is that unlike stocks that are listed and traded on stock exchanges such as the SGX, most bonds are traded in over-the-counter (OTC) markets. They are popularly known as wholesale bonds.
OTC markets are decentralised. This means that market participants – whether you are a buyer or seller – deal with one another directly, not through a centralised exchange. OTC markets are similar to how we buy or sell foreign currencies. When we need a foreign currency, we go to a moneychanger. We trade the currencies based on the offered exchange rates. Different moneychangers will offer you different rates.
The same concept applies to wholesale bonds. Since these are traded over the counter, we have to explore OTC markets rather than train our eyes just on retail bonds listed on stock exchanges.
How To Access Bonds Via OTC Markets
To gain access to OTC bonds, you need the service of a broker. Similar to the role of a moneychanger, your broker will quote you the prices of the bonds you wish to buy or sell.
Investors in Singapore can consider 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, one of Singapore’s most established brokerage firms that has been around since 1975.
On the PhillipCapital bond site, you can find a wide range of wholesale bonds issued by listed companies. These include SPH REIT, Thomson Medical Group and UBS.
Wholesale bonds trade in minimum denominations of S$250,000. Compare this with retail bonds that trade in lot sizes of only S$1,000. To make the vast wholesale-bond market more accessible to investors, PhillipCapital Bond Desk offers 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 can 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, you can do so 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 only a call or email away. You can 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 can use other financial assets such as cash, shares, ETFs, unit trusts or bonds as collateral to obtain financing for their bond purchases.
Every bond has 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 an illustration, an investor who purchases a Grade A bond receives annual coupons of 4% p.a. At an investment of S$250,000, this means his coupon payment will be S$10,000 a year. To increase his returns, the investor can choose 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, with a loan of S$500,000. With the bonds’ coupons of 4% p.a., the investor will now receive annual coupon payments of S$30,000. Based on a financing charge of 2.68% p.a., his net receipt will be S$16,600. This gives him a return of 6.64% p.a.
|Bond Portfolio||Annual Return||Cost||Total Annual Return|
|Initial portfolio: S$250,000||S$10,000 (or 4%)||No leverage||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 loan amount. The best way to find out is to speak to your trading representative.
Do note that bond financing is a double-edged sword. While it can potentially increase your returns, it also increases your risks. If the bonds you purchase decline in value, your losses would 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 with a face value of S$250,000 that pays a 4% coupon semi-annually will pay you S$5,000, twice a year. This means 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 as well as the accrued interest you will receive or pay under the bond trade ticket. Bond prices quoted are all-in.
If you wish 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 your application, please fill in this form 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: