Bond Revolution In Singapore – Lesson 4 : Retail Bonds In Singapore
There are very few avenues to buy bonds, it seems. Not unless you have a quarter million at hand that makes it easier for banks which does away with the need for a prospectus and would make the buyers “accredited investors” under section 106D of the Singapore Companies Act.
I have been doing some sleuth work and discovered the alternatives are far and few between. And frankly, not much better than 10 years ago.
Here is an table, which is by no means comprehensive, of all the SGD denominated retail bonds listed and traded on the SGX for the past 12 years. The highlighted rows are bonds that have matured or were called back.
For retail bonds, I define by trading denominations of SGD 1 to 20K and not any larger. This list also excludes convertible bonds which are deemed equity.
Notice the barren years between 2002 to 2008 where there was not a single retail issue ? Probably that was where Lehman Minibonds came into the market to fill the retail void. (Comment made as innocent observation with no intent to allege any malpractice on any parties that may be involved in the debacle)
Semi Retail Bonds
I will define as bonds that are minimally denominated between SGD 100-200K ,and incrementally in SGD 1k, as semi retail bonds for the purpose of this article.
Now that the market is out of the wilderness, retail interest is picking up again and issuances are coming out in earnest, it is time to know what is out there and available to us.
More details can be found below.
Singapore Government Securities
Sometime last year, Singapore Government Securities (“SGS”) were introduced into the SGX for retail purchases. It was lauded as a progressive step towards market accessibility, making the securities available to the public whereas in the past, the retail investor would have to purchase these securities Over The Counter (OTC) at the banking counters of primary dealer banks and subject to prices that were not transparent to the public.
For the reader’s convenience, click the link below for the MAS Retail brochure and the SGX page for Singapore Government Securities.
What Do We Know About Retail Bonds ?
I would fathom that a retail bond market would typically refer to the bonds that are accessible to a member of the public, where in some jurisdictions, residency would be a criteria for ownership.
In Singapore, the retail bond market also extends to the investor who does not fall under the “accredited investor” category (see above). Thus bonds denominated in SGD and sold in notional sizes of under SGD 200K would fall under the retail bond category.
As we can see from the table above, Singapore did have a sizable and varied batch of retail offerings between the late 1990′s to the early 2000′s where retail bonds were more actively traded in the stock exchange. These also included the statutory board papers of JTC, HDB and LTA as well as several Asset Backed issues such as Tincel, which was secured on Raffles City and redeemed sometime in 2006 to be repackaged into the Capital Commercial Trust reit.
The market waned as yields plunged, reits came into flavor and the banks started focussing on the more lucrative private banking segment which supported volume (lower transaction costs), were considered sophisticated which minimized litigation risk and saved on the costs of preparing individual prospectuses for each listing.
Retail bond issues were also laborious processes in harnessing the ATM networks of local banks for retail subscription.
The Retail Investor
To be honest, I would not bother to buy a single retail bond on the SGX if I were a retail client.
Not only are the prices pretty wide and volumes are also pretty dismal. In addition, the prices quoted are all inclusive of accreted coupons, rounded up to 2 decimal places, and yields are often absent which makes the experience a harrowing one.
Take offer or bid price of the bond.
Work out the accreted coupon to date from the last coupon date to obtain the clean price of the bond.
Work out the yield of the bond based on the clean price.
Decide on the notional you want to invest in, bearing in mind that the SGS prices on SGX are quoted in the hundredths ie. 101.50 whereas the other retail bonds are quoted in one’s ie. 1.025.
As if it is not confusing enough ?
I wish I could say that it is a clear case but it is not. Besides we were all taught in school that there is no free lunch.
Yet I am suggesting that there is that remote potential especially if the bond is quoted to the dollar primarily because the bond market convention trades to 4 decimal places. So a bond price quoted at 1.024, is missing out on an extra decimal place.
If you have access to the OTC market as well, then there is a chance you can procure the same paper at a different price to make a small profit.
In addition, you can also potentially arbitrage off the ignorance of others especially when a bond or preferred share nears its coupon date. Buying the paper cum dividend and selling it ex dividend at near the same price to some unknowing buyer.
Don’t we all wish life was that easy ?
It is highly likely that this chapter will put you off investing in retail bonds. Common sense will tell you that the market is just too illiquid and the investment process is complicated, particularly on price discovery.
Does it make us feel any better to buy a bond trust fund instead ? And save ourselves the trouble ?
Something tells me that some of us out here are not willing to do so. And I am writing for them. To those who want financial empowerment and will read on to the next Chapter where we will talk about, a topic dear to my heart, buying government bonds off auctions and a little on the Singapore Government Bond market.