Temasek Bond (T2023): Why I am investing a little

Singapore bonds market seems to be heating up the past few months. There was the Singapore Savings Bonds (SSB) in September 2015, followed by Astrea PE Bond in June 2018 and Temasek Bond in Oct 2018. I was not sure if it is because I only gained more awareness of the Singapore bonds market recently. Or it was because of the success of MAS’s recent introduction of two new regulations that might have facilitated the offering of corporate bond to retail investors in May 2016. I wasn’t planning to look at bonds so fast, but opportunity I thought I should give this a chance. Cheers to my first foray into bonds!

Why Temasek offers corporate bonds

Typically, companies use corporate bonds as a form of financing to raise capital without diluting the current shareholders’ equity. I am not sure if that was Temasek’s primary intent. With a group shareholder equity of S$272.7 billion, does Temasek really needs to raise an additional S$400 million for financing? Temasek’s Chief financial officer Leong Wai Leong mentioned that the issuance of Temasek bonds helps to increase their funding flexibility; by broadening it’s stakeholder base to include funding from retail investors.

Personally, I think Temasek’s offering of a corporate bond is a rather symbolic move to stimulate the retail bonds markets. The government has been trying to cool down the hot Singapore’s property market for a while. The stimulation of the bonds market is a subtle nudge by the government’s to channel funding that has been going into the capital heavy property market, into a the Singapore bonds market. Hopefully, more institutions will follow their lead and issue their own version of a corporate retail bond.

What is really important for me, as the guy on the street, is that I have another investment vehicle that I can consider now.

Temasek Bond product description

Before buying any financial products, we need to have an understanding of the key features of the products and the risks involved.

Temasek Financial IV Pte. Ltd. is the issuer
Temasek Holdings is the Gaurantor
Fixed coupon rate of 2.70% per annum, payable every six months
5 year tenor, with maturity date on 25 Oct 2023.
100% redemption of principal amount at maturity, unless otherwise stated in the T&C of the bond.
Offering Size of S$400 million

S$200 million placement to institutional, and accredited investors. Min placement of S$250,000.
S$200 million public offer to retail investors in Singapore. Min public offer of S$1,000.

moneybullandthinkingbear - Temasek Bond

Source: Temasek Bond Issue Webpage

What are the key risks of a corporate bonds

Default Risk:

The primarily for a corporate bond is default risk. i.e. If the company is unable to make the required payment to fulfill its debt obligation. As a corporate, Temasek has an overall corporate credit rating of “AAA” by S&P and “Aaa” by Moody’s. As a bond, the Temasek Bond (T2023-S$) the credit worthiness of the bond has a credit rating of “AAA” by S&P and “Aaa” by Moody’s. To understand the importance of the company’s credit worthiness and robustness of their debt management, we can take a leaf from out from the books of the recent events involving Hyflux’s 6% perpetual securities.

Interest Rate Risk:

Fluctuations in interest rates can affect the prices of the bonds in the market. Rising interest rates can cause a fall in the prices of the bonds. Firstly as interest rates rises, it makes it less attractive for investors to channel their money from cash to bonds. In the scenario that interest rates rises (i.e. 2.8% p.a.) higher than Temasek’s bond yield of 2.7% p.a., people would logically leave their money in cash than invest in bonds. Thus, rising interest rates reduce the demand for bonds.

Secondly, if a corporate wants to raise funds during the period of higher interest rates (i.e. 2.8%), they will have to issued new bonds at a higher interest rates i.e. at 3.5%. Ceteris paribus, a bond issued during a period of higher interest rates will have a higher yield than a bond issued during a period of lower interest rates. Thus, rising interest rates can cause a fall in the bond prices in the market. Conversely, when interest rates fall, prices of the bond is expect to rise. The capital gain or loss from moving market prices, due to interest rate movement, only affects investors who plan to sell off their holdings in the secondary market; prior to the maturity date.

Liquidity risk:

Liquidity risks happens when the daily volume of the bond traded in the secondary market is low. Using Astrea PE Bond as a reference, buy volume is 19 and sell volume is 100. Therefore, I am expecting the daily volume for this bond to be low. There is no guarantee that the spread will be good or the secondary market will be profitable.

Inflation risk:

To calculate the real interest rates: “Real Interest Rate = Nominal Interest Rate – (Expected or Actual) Inflation”. A unexpected rise in the interest rate could affect the real returns of the bond, as the real return on investment is being eroded by rising inflation rates. Inflation rate is a measure of the cost of rising cost of living, it is there regardless of whether the investor is holding cash or invested in stocks.

Inflation risk is being declared for Temasek bond, to highlight that the bond yields may not keep pace with inflation. Based on Statista, Singapore’s annual inflation rate is 0.7% in Aug 2018 and is projected to be 1.08% in 2022.

Comparing with other bonds and products

Let’s take a look at a comparison of the recent the ‘bond-related’ offering to retail investors in the recent years. Namely, the Singapore Savings Bonds (Sep 2015), the Astrea IV PE Bonds (Jun 2018) and Nikko AM SGD Investment Grade Corporate Bond Fund (Aug 2018). Comparing Annualized Returns

  • DBS’s 5 year fixed deposit is 1.35%.
  • Singapore Savings Bond annualized return at the end of 5 years is 2.22%.
  • Temasek Bond annualized return at 2.70%
  • Astrea IV PE Bonds annualized return is 4.35%. Callable after 5 years.
  • Nikko AM SGD Investment Grade Corporate Bond Fund. No figures available yet.

Personally, I think Temasek bond is as straightforward as it can get for a corporate bond.

Who should invest in Temasek Bond

Overall, the Temasek has very low risk. Backed by Temasek Holdings itself, it’d say it is ‘as good as risk free’. Compared to other products of similar risk, it performs better slightly better. If you are already planning to acquire more SSB bonds over the mid to long term, I’d think that the Temasek Bond may be a better investment instead.

The Temasek bond is suitable for investors who are..
* consecutive
* looking for a regular fixed income, rather than capital growth.
* prepared to hold their investments until the maturity in 5 years.
* looking de-risk your equity heavy portfolio, buy re-allocating some funds to bonds

After finding out all these…

I took a quick look at my humble 100% equity portfolio, and decided to invest just a bit amount into Temasek Bond considering that the risk of the bond is low. Keeping in mind that there is a possibility that more retail bonds with better yield that might be issued in future, I am still holding sufficient cash buy into other retail bonds to create a diversified bond portfolio. I am also separately looking to see if it make sense to get some Astrea IV into my bonds portfolio. I plan to buy a house using the CPF Ordinary Account in the near future, so I would be putting in cash instead of using my CPF.