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Creating a retail bond portfolio

The opening up of the retail bond market is very good news for investors like you and I. Bonds are basically debt securities which a company promises to pay you a regular interest for borrowing money from you.

Hopefully more blue chip corporates will start tapping into this segment and not just targeting the high networth private banking market. 


The Perennial bonds was a case in point where a 3-year bond offering a yield of 4.65% were over subscribed by 4x with strong demand from retail investors! 

A James Bond Portfolio

I know of a lady lawyer friend who is extremely risk averse but over the last decade, she has built up a portfolio of bonds worth more than $2 million. 

I nicknamed her "bond gal"  (without her knowledge or approval). She uses her bonus and savings to purchase bonds in a disciplined manner, resulting in the fact that she has now managed to build up a sizable asset base. 

Of course you can argue that she has a high pay to start with that allows her to build up the portfolio as each bond outlay is at least $250,000 but nevertheless, I admire her perseverance to do that.

Creating passive income from retail bonds portfolio?

Most bonds pay coupons twice a year and repay the principal at maturity. 

Let's assume there is a decent bond issuance every month and it pays a 4.5% interest and you invest $10,000 each time. Over a 12 month period, you have created a $120,000 bond portfolio that pays coupon every single month from the second year onwards.  

Monthly Interest received = $120,000 x 4.5% divide by 12 = $450

Now you repeat that process over a long period of time and you will create a bond portfolio that will take care of your needs.

Whether you like bonds or not depends on where you are in your life cycle?

Different people go through life cycles at different points in time. I do admit that I never like bonds when I was much younger. 

People who have been following my blog know i have a high risk appetite. I invest in unlisted pre-IPO companies and punt IPO stocks. I invest or trade in stocks and shares but when someone mention bonds, I will usually sweep it aside as saying the yield is too low. 

As a side note - One of my unlisted companies is going to be listed soon... Fingers crossed... Not sure how it will perform post IPO as I am under moratorium. I will blog this story another time. 

The opening up of the retail bond market changed my view as I no longer need to set aside a princely outlay each time. I can decide the quantum that I want to invest from $2,000 onwards. 

As bonds has lower volatility (it should theoretically) and lower risk of loss (given it pays its principal back at maturity), it will be more suitable for risk averse investors and this comes with age ^_^

How the rich play the bonds game?

I didn't really want to blog much on this but if you think they are happy with the yield, it's not true. 

The rich will take leverage (through the private bank) on the rated bonds for up to 80% of the value and earned a levered return from their bonds investment. 

As such, a rated bond instead of yielding 3% may yield up to 6-8% via leverage. 

Happy retail bonding

I hope the retail market deepens. MAS has been trying to open up the retail market and perhaps we can even see a Temasek retail bond soon?

However, don't expect a high interest payout from a AAA-rated bonds. The higher the credit rating, the lower the interest but at least it opens up more options for smallish investors :)

My bond investment criteria

I am not going to kid you to say it is without risk. Let's take an example of Ezra bonds trading below its par value now. If it can refinance its bonds or repay them at maturity, then no issue. The unrealized loss is temporal. If it can't repay its debt, then the company will be in default and that will spell trouble for all investors alike. 

That is why some equity investors track the credit ratings of a company very closely. If the credit rating is bad, it means the bonds will go below par as there is a fear of default. Consequently, the share price will plunge as well. 

Let's run through some simple criteria I had for bond investing. 

• Yield of at least 3%
• Short tenure of less than 5 years
• Stable business with predictable cash flows or foreseeable revenue
• Decent balance sheet that is not overly geared

My investment target - A $2 million portfolio when I retire 

My target is to create a bond and stock portfolio of at least $2m over the next 10 years yielding at least 5% per year. It will be funded via cash or from my SRS portfolio. 

Not sure if I can achieve but at least I need to start somewhere :)  I want to retire while I am still alive and kicking!

I have kick started that goal with a placement tranche on Perenial Bonds. 

You should create your own goals too and work towards them too!

Happy bonding

6 comments:

  1. Hi Singapore IPO,
    Isn't it very high risk to invest in bond? If the company can default on the interest as well as principal sum.
    The yield of most retail bonds are below 5%, we get zero sum in return if the company goes belly up, don't you think we should invest in the mother share instead.

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    1. It all depends right. Bond is an obligation but paying dividend on equity shares is not. A company must pay interest on bond but opt not to pay dividend on equity. In addition, the company may issue more placement shares when it's time to redeem the bond.

      At the end of the day, bonds are supposedly lower risk lower volatility instruments with limited upside but "guaranteed" payouts. Equity depends a lot on the company's fundamentals.

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  2. Thanks for sharing, Mr IPO. I'm a young investor and I've learnt much from your blog posts, and you're someone I look up to! It will be great to meet you in person one day and learn from your many years of experience in the market.

    Some questions:
    1) Have you seen any defaults before in the singapore bond market? (Not the retail ones)
    2) How is it that we can also leverage to buy bonds like the rich people do? Do we have to put a collateral?

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    Replies
    1. Dallas - thanks for your kind words. All the best in your pursuit. Next time I sell tickets for you to meet me lol.

      1) not that I am aware but there was a report last week on an Indonesian firm default on its bonds. I can't remember if there are S chips that issued CB and defaulted, will need to do more homework on that.
      2) private banks will usually lend to rated bonds only or investment grade bonds. The loan will use the bonds as collateral but I don't think they will lend to retail investors. You will usually need to invest a minimum of $1m before they extend leverage to you.

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  3. so there is a financial cost involved when you leverage. so the yield is not 6 to 8 as stated right mr ipo

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  4. Already net of the charge. They can borrow very cheaply.

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