Bonds winning over fans on rising yields but experts warn against over-exuberance

BONDS may be a good addition to investing portfolios as interest rates and inflation are on the rise, but industry experts advise that investors keep to a balanced allocation in order to mitigate risks.

Monthly demand for government-backed fixed income instruments – Singapore Savings Bonds (SSBs), Singapore Government Securities Bonds (SGS Bonds) and Treasury Bills (T-Bills) – have soared alongside yields.

Total bid values at the latest T-Bill auctions came in at more than double the amount on offer, and subscription rates for the latest tranche of SSBs also exceeded the amount available.

Lim Choon Siong, research analyst at Providend, said the various government-backed bonds would have attracted both institutional and individual investors, given their diversification benefits and given that they are the most secure form of investments in Singapore.

For retail investors, shorter-duration bonds, such as T-bills, or bonds that can be redeemed anytime, such as SSBs, would also likely be more popular than SGS bonds, as longer-duration SGS bonds are more susceptible to price risk when yield rises.*

“T-Bill investors, however, need to be aware that if yield decreases, they may find themselves having to reinvest in a lower yield environment at maturity, while SSB holders can remain invested in their existing issue,” Lim said.

Although interest rates have risen significantly on an absolute basis, investors should also take into account relative return.

Alfred Chia, chief executive of SingCapital, noted that the higher yields are still insufficient to counter the effects of a “stubborn” inflation rate.

Singapore’s core inflation climbed to yet another multi-year high of 5.1 per cent in August, while headline inflation clocked in at 7.5 per cent. The Monetary Authority of Singapore has forecast full-year core inflation of between 3 and 4 per cent, while headline inflation is expected to range between 5 and 6 per cent.

“It is important to use bonds instrument as part of an investment portfolio that has equities and bond investment,” Chia said. As for the per cent to be allocated to each asset class, Chia said it would depend on the investment profile and risk appetite of the investor.

Investors should also pay attention to the liquidity of the instruments they buy, said Richmond Zhan, head of fixed income at Phillip Securities.

SSBs are very liquid due to the guaranteed redemption at par. For T-Bills, which have short-term tenors, market analysts said it is best to hold them to maturity. SGS Bonds, meanwhile, are only liquid in the wholesale market.

“Investors are always chasing yield, so it is up to the market to determine a sweet point with the risk profile to attract investors,” Zhan said.

*Amendment note: A previous version of the story incorrectly stated that T-bills can be redeemed anytime.