Passive Income Update - June 2020
From the questions asked on my Facebook page, I know readers are interested to know how I looked at my bonds portfolio.
I shared this post in June last year, on how I have built up my bonds portfolio using home equity loans and then levering it up against the invested bonds with foreign currency loans.
Today, let me refresh this post to see how this strategy has turned out.
As a quick recap, I refinanced my home loan in June 2019 and took out an additional $1m equity loan to invest in a bond portfolio that consists of mainly investment grade bonds. My home loan borrowing rate was 1M SIBOR + 30 bps and the all-in rate in June 2019 was about 2.2%. You can refer to the SIBOR chart below.
Due to Covid-19, the SIBOR collapsed As of today, SIBOR has dropped to 0.25% and my all-in rate is now 0.55%. You can see from the table below that for the $1m loan i took out, the interest expense dropped from $1,800 per month to around $735 in June. Based on the June SIBOR rate, this will drop further to less than $500.
I have also shared that the interest on the JPY and CHF loans were 0.75% and 0% respectively. I had used foreign currency loans previously because it was very expensive to borrow in USD. Now that the borrowing rate of USD has also dropped significantly (corresponding with the decline in USD treasury rate - 10Y chart below), it would make sense for me to convert these loans to USD loans when the exchange rate is right but a weak treasury rate also meant that USD currency has weakened against the JPY and CHF.
My loans are up for renewals and the borrowing rates are as follows:
USD 1M - 1.02% 1Y - 1.2%
JPY 1M - 0.55% 1Y - 0.55%
CHF 1M - 0.75% 1Y - 0.75%
The Yen rate has dropped from 0.75% to 0.55% and the CHF rate has increased from 0% to 0.75%. USD rate has dropped from over 2% to 1%. It definitely makes sense to borrow in USD if i want to remove any forex exposure from my portfolio. You can read more about the 0% CHF rate here.
Passive Income
The bond portfolio was constructed with a blended yield of 5.5% and on a levered basis, approximately 10%.
With the decline in my home mortgage rate from 2.2% to 0.55%, my passive income has also increased by $32,745 as I now pay lower interest (shorter red bars) on the loans. In an unbelievable way, I met my passive income goal of $150,000 set out for 2020 due to Covid-19.
The strategy I pursue above is a high-risk strategy (anything that uses leverage) - so use leverage with caution. It is based on the assumption that no bonds will default, so do your homework very thoroughly if you want to consider this strategy as well.
I have shared freely so that you can benefit from my personal experience. Hope this post will benefit you in your pursuit for financial freedom :)
So long for a lazy covid phase 2 weekend . . .
What are the bonds position you are holding?
ReplyDeleteany chance you will share your bond portfolio ? =)
ReplyDeletetried to enquire via my RM for a list of the AAA bonds, and the cost of borrowing etc. but she only seems interested in selling bond funds instead. saying its better, blah blah .. guess the comms is higher for bond
ReplyDeleteTq Mr IPO for sharing all these,...
ReplyDeleteWhat is the cost-of-funds that you are being charged for each of the loans, namely SGD, USD, JPY and CHF please ?
Can you share what are the bonds that you are holding,...
Congratulations on using leverage successfully,.. and on how things turned out.
Thank you for all the questions. I will try to answer them here.
ReplyDeleteThe cost of funds to borrow against the portfolio for USD, JPY and CHF is already in my post. For SGD, my guess it will be between 1 to 1.5%
With regards to my bonds portfolio, i run a very concentrated portfolio as i have very strict criteria:
(1) investment grade bonds - so that i can lever it further
(2) Strong sponsor - e.g. Temasek-linked or reputable corporates
(3) well-diversified
I construct a very concentrated bond portfolio from the secondary market. Holdings include Astrea V Class A-2 and Class B bonds (rated A and BBB), UBS corporate bonds (rated BBB)
Some relevant postings:
https://singapore-ipos.blogspot.com/2019/06/astrea-v-class-1-pe-bonds.html
https://srsfund.blogspot.com/2019/06/srs-portfolio-30-june-2019.html
https://srsfund.blogspot.com/2020/01/goal-no2-passive-income-of-150000.html
hi, when you say secondary market. you mean like FSM/bondsupermarket?
ReplyDeletemore often than not, these will be at above par value right? if they are investment grade type.
these are all available to the masses, so the only benefit if we buy via bank, is leverage right?
in what situation, will they ask you to "pay back" ? not sure the technical term, but is it "margin call"?
It is the OTC market (not FSM or bondsupermart). You can check with the bond desk at your brokerage firms but many of the bonds need to certify that you qualify as an accredited investor before they will allow you to buy the bond. Assuming it is a "A" grade bond, most of them will offer you 50% of the par value as loan. If it is above par, you don't need to top up but if the Loan to value drops below 50% or the price of bond drops below par, then you would need to top up
DeleteDear Mr IPO, I have been following your blog for last few years but this is my first comment/query. Appreciate it if you could shed some lights on your leverage approach: Thanks in advance:
ReplyDelete1. Firstly, you took a home equity loan to raise some fund (say SGD2M) ard Jun 2019. This home equity loan was costing you approx 2.2% back in Jun 2019. Was this loan tie to 1M-Sibor or FHR as in DBS? My understanding is DBS no longer offer loan tie to Sibor.
2. Secondly, you opened a private banking acc with DBS Treasures to gain access to the leverage facility (say 2 to 1) ie. deposit SGD2M from home equity loan to gain access to another SGD1M of credit facility. You converted the SGD1M credit facility into CHF as that was the best currency to borrow back in Jun 2019 but now may convert to USD loan.
Assuming my narrative is correct, shouldn't your total borrowing costs equal to interest costs from home equity loan plus credit facility ?
Hi KT,
DeleteMy responses as follows:
Q1 - The mortgage loan is with Standard Chartered Bank (not with DBS). When i refinance my existing home loan, i took out additional "equity" loan. The loan interest rate was tied to SIBOR.
Q2 - Your second narrative is not so correct. I use the (say $1m cash from home equity loan) to open the account and then use it to buy $1m worth of investment grade bonds. Based on the $1m worth of investment grade bonds, the bank then loan me another $500k(LTV of 50%) to buy additional bonds worth $500k. I can loan the $500k in USD, CHF, JPY or EUR, depending on which currencies i would like to be exposed to. The cost of borrowing depends greatly on the type of currencies back then.
3 - yes correct. In computing my passive income, i took into account the interest i need to pay for the home equity loan + the credit facility. However, if cost of borrowing for the credit facility is 0%, then effectively, it is just the home equity loan + potential forex exposure.
Hope that explains :) let me know if i am not clear.
Thanks for the prompt response. My own experience with leverage credit facility is never as low as 0% even for negative currency (EUR) due to bank spread. Btw, you have a pretty good combination in SCB and DBS. Thanks again for sharing.
ReplyDeleteYes, absolutely. They make around 30-40 pips when you take the forex loans !
DeleteHi Mr IPO, Can you advise what is the currency that you opt for your loan renewal? And what are the considerations for the decision?
ReplyDeleteAnd I am puzzled why the loan has to be renewed? Is there a lock in period or expiration?
I renewed in the same underlying JPY loan. All Loans can be renewed for one month, 3 months, 6,9 12 months. You can also swop the loans for other currencies. The loans I am referring to are loans against the bonds, not the mortgage loan.
DeleteHi Mr IPO, in your case, do you renew for 1 month or otherwise? What are your consideration for the tenure? Is your staying with JPY loan is to avoid another forex spreads to other currency loan?
ReplyDeleteI renew part of the JPY loans on a monthly basis and the rest for 9 months.
DeleteHi Mr IPO, you renewed on the same JPY loan instead of another currency to avoid forex losses?
ReplyDeleteYes. I can wait for a better rate before converting
DeleteHi Mr IPO, do you finance under Multi-currency Revolving Term Loan (MRTL) facility?
ReplyDeleteActually I don’t know but it sounds like it. It’s just borrowing against the bonds I own.
Delete