Goal no.2 - Passive Income of $150,000

One of my year 2020 goal no. 2 was to achieve a passive income of $150,000 a year and i hit the target just before the year of the Rat (on new year's eve). (I did what i said i would do in the post).

I bought another $400,000 worth of Astrea V Class B (rated BBB) bonds through my private bank. The bonds has a face coupon of 5.75% but are trading in the secondary market at 103.50. The yield to call is around 5% and I finance this purchase through leverage.

The latest cash flow profile from my bonds portfolio is presented below for your reference (not including the interest expenses i have to pay on my home mortgage and loans taken out, which will deduct around $50k).

The bank was willing to lend me the entire purchase price as i had enough collateral but they did warn me about my concentration risk. 

I asked my banker about the financing options available and the financing cost in the various currencies are as follows:

• USD interest rate around 2.5% (if i recall correctly)
• SGD interest rate around 2.5% (if i recall correctly)
• JPY interest rate is 0.75%
• Euro interest rate is 0.55% (dropped from 0.75% previously)
• CHF interest rate for 1m is ZERO and for 1 year is 0.12% 

"Can you let me know more about the zero CHF interest rate?" i asked. 

"Yes, we are having a promotion now. For 1 month borrowings of at least CHF 250k, the interest rate is zero. For 1 year, it is 0.12%" 😱 The interest expenses work out to be around S$421! Too attractive to miss.

I took a quick look at the 5 year CHF/USD and CHF/SGD chart and decided to finance the purchases using borrowings in CHF and juice up the returns of my bonds portfolio. Most of the time, i don’t hedge my foreign currency loans as they move up and down over time. For example my JPY loans was in a loss position at one point but now has moved into positive territories. The flip side is that you may need to top up the account if the forex moved significantly against you and you don’t have adequate collaterals. 

A lot of readers have asked me (either via comments box) or via email how I did it and wanted more details. I had just explained the currency part above and I have also shared the "step-by-steps" in a post in June last year. You can find the post here.

With regards to my portfolio mix, i have big positions in the Astrea Series of bonds (bought from the secondary market on the first day as it is too “hot” to get it from the primary issuance). I did a lot of research and analysis on the bonds and am comfortable with the structural safeguards as well as sponsor branding even though it is a asset backed securities (not your typical corporate bond). The investment grade ratings also helped allow me to borrow against them. I also have some bank perps such as the UBS SG AT1 at 4.85% (5 year).

My strategy above only works for those who are comfortable taking concentrated portfolio risk (bankruptcy of any bonds will set you back quite seriously) and borrowing in foreign currencies loans to arbitrage on the low interest rate environment elsewhere.  So this strategy is not suitable for everyone, especially those who can’t stomach forex risks. 

Personally i won’t borrow for REITs/Equities since i am already pursuing a high risk strategy.  I find the fixed tenor for bonds works and matches the liabilities better and gives me a better peace of mind.

Hope i have given you enough food for thoughts for this Chinese New Year and perhaps some ideas on how you may juice up your portfolio.

Here’s wishing all readers a happy year of the Golden Rat! Please take care of your health and monitor the Wuhan coronavirus situation closely. Stay safe and stay alert on both personal and investment front.