Complete Guide to Bond Investment in Singapore

What is a bond

A bond is a debt security, essentially a form of borrowing. Governments, companies, and other entities issue bonds to raise funds. When you invest in a bond, you're lending money to the issuer for a specified period. In return, the issuer agrees to pay interest, typically at a fixed rate, and return the principal amount at the bond's maturity date. 

Bonds are used by corporations, municipalities, and governments to finance various projects and operations. As the bondholder, you are considered a creditor of the issuer.

Types of bonds available in Singapore

Government bonds - Singapore Government Securities (SGS) and Singapore Savings Bonds (SSBs)

In Singapore, investors have access to two highly secure bond options: Singapore Government Securities (SGS) and Singapore Savings Bonds (SSBs). Both are fully backed by the Singapore Government, which holds an exceptional "AAA" credit rating from international agencies, making these bonds some of the safest investment instruments available. 

This government backing guarantees that your principal and interest payments are protected, providing peace of mind for risk-averse investors seeking stable returns. Here are some key differences between two government bonds:

Corporate bonds

Corporate bonds are debt securities issued by companies, allowing them to borrow money from investors. In return, companies pay periodic interest to bondholders and repay the principal upon maturity. 

The interest rate, or coupon, is typically higher for corporate bonds than for government bonds due to the increased risk of default. Generally, larger, more stable companies offer lower interest rates, while smaller or riskier companies must offer higher interest rates to attract investors.

Corporate bonds in Singapore usually make semi-annual interest payments, and the full principal is repaid at the end of the bond's term. Companies use the funds raised from issuing bonds for various purposes, such as paying off existing debts, acquiring assets, or financing new projects.

Retail bonds vs Wholesale bonds

In Singapore, bonds are traded through two primary channels: wholesale and retail. Wholesale bonds are generally targeted at institutional investors due to their larger denominations, while retail bonds are more accessible to individual investors with smaller investment sizes. 

Risk and rewards of corporate bonds

Corporate bonds generally offer higher returns than government bonds or fixed deposits due to the increased risk, including the risk of default. Investors must weigh the potential for higher yields against the possibility of losing part or all of their investment. 

Credit risk, interest rate risk, and market liquidity are all factors to consider when deciding whether corporate bonds are a suitable addition to your portfolio.

Where to buy corporate bonds

#1 Through Banks and Brokerage Firms

Many banks and brokerages in Singapore, such as FSMOne, iFAST Global Markets, and iFAST Global Prestige, offer corporate bonds to individual investors.

#2 Online Trading Platforms

Platforms like POEMS (Phillip Securities) allow investors to trade corporate bonds conveniently online.

#3 Through SGX

Some corporate bonds are listed on SGX and can be traded like stocks. These are known as retail bonds.

#4 Bond ETFs

Investors can buy bond ETFs listed on SGX, such as the Nikko AM Investment Grade Corporate Bond ETF, to gain exposure to corporate bonds.

#5 Unit Trusts/Mutual Funds

Unit trusts and mutual funds in Singapore often invest in corporate bonds, providing indirect exposure through diversified portfolios.

#6 Over-the-Counter (OTC) Markets

Institutional investors and high-net-worth individuals can access a wider range of corporate bonds through OTC markets.

Bond funds

If you’ve decided to invest in fixed income, your next decision is whether to invest directly in individual bonds or to opt for a managed bond fund. While individual bonds are issued by governments, companies, or public bodies and can be purchased directly, there are several considerations to keep in mind. 

Alternatively, bond funds offer a professionally-managed portfolio of bonds, where fund managers trade the bonds to generate returns for investors.

Why bond funds

Investing in individual bonds requires extensive research on issuers, monitoring market conditions, and understanding complex factors like yield curves and bond duration. This can be time-consuming, and concentrating your investment in a few bonds increases the risk of losses if one defaults. Additionally, accessing individual bonds can be challenging, often requiring brokers and large capital outlays.

Bond funds, on the other hand, offer convenience and diversification through a single investment. Managed by professionals, these funds handle the bond selection process, reducing the need for extensive research. 

They also spread risk across a portfolio of bonds, minimizing the impact of any single issuer defaulting. For most investors, bond funds provide a hassle-free and professionally managed way to invest in bonds, without the complexities of managing individual bonds.

Advantages of investing in bond funds

Investing in bond funds offers several advantages over purchasing individual bonds, especially for those who may lack the time or expertise to analyze bonds directly.

• Convenience = Bond funds offer easy access to a diversified portfolio of bonds with just one transaction, eliminating the need for in-depth research or monitoring.
• Professional Management = Managed by expert portfolio managers, bond funds benefit from detailed analysis and risk management to optimize returns.
  
• Reduced Administration = Tracking a single unit price simplifies management, reducing the paperwork involved compared to managing multiple individual bonds.
• Flexible Income = Bond funds often provide regular distributions, offering more frequent income than individual bonds' fixed semi-annual payments.
  

Things to take note

When investing in bond funds, it's important to consider several key factors. First, assess the total returns, which include both income from interest payments and capital gains or losses, to understand the fund’s overall performance. 

Be mindful of management fees, as they can reduce your returns. Compare fee structures to ensure you're getting good value for professional management. 

Lastly, some bond funds are classified as Specified Investment Products (SIPs), which may involve complex strategies and higher risks, so make sure to understand the fund's approach and risk profile before investing.

Where to buy bond funds

There are several ways to purchase bond funds in Singapore, each catering to different investor preferences.

#1 Through SGX

You can buy bond exchange-traded funds (ETFs) listed on the Singapore Exchange (SGX). These ETFs trade like stocks and can be purchased through your brokerage account. 

Examples of popular bond ETFs include the Nikko AM SGD Investment Grade Corporate Bond ETF and the ABF Singapore Bond Index Fund. 

To invest in these, you'll need a brokerage account that supports SGX trading.

#2 Unit Trusts

Investors in Singapore have access to a broad range of unit trusts that focus on different segments of the bond market, including government bonds, investment-grade corporate bonds, and high-yield bonds. 

These unit trusts allow for diversified exposure to a wide portfolio of bonds, typically holding between 40-50 securities to help mitigate risks.

You can start investing in unit trusts with as little as SGD 1,000 for a lump sum or SGD 100 a month through regular savings plans. 

#3 Online Brokerages

Online brokerages provide access to a broader range of international bond funds and ETFs, making it easy to diversify your bond portfolio across different markets.

#4 Robo-Advisors

Platforms like StashAway include bond ETFs or funds in their portfolios. StashAway's product offerings, such as the StashAway Simple and Simple Plus, provide a straightforward way to invest in low-risk bond-based portfolios with high liquidity. 

How bonds work

Bonds generate returns primarily through regular interest payments, known as coupons. The coupon rate is typically expressed as a percentage of the bond’s face value, or par value, and remains fixed throughout the bond’s life. This means that, as an investor, you will receive a steady income stream from the bond until it reaches maturity, at which point you are repaid the bond's face value.

In addition to coupon payments, you can also earn capital gains by selling the bond before maturity if its market price has increased. Bond prices fluctuate based on factors such as interest rates, time to maturity, and the issuer’s creditworthiness. 

When evaluating a bond’s total return, it’s essential to consider both the coupon payments and any capital gains or losses from price fluctuations. The combination of these factors determines the overall profitability of your bond investment.

Differences between bonds and stocks

When investing in a company, you can either buy equity (stocks or shares) or debt (bonds). Both represent a form of investment but come with different risks, returns, and rights. Here’s a breakdown of the key differences:

Risk vs. Return

Stocks offer higher potential for capital growth but come with greater volatility and risk. If the company performs well, stock prices increase, allowing investors to sell for a profit. 

However, if the company underperforms or goes bankrupt, shareholders could lose their entire investment.

Bonds on the other hand, provide more stability by offering regular interest payments (coupons) and the return of the principal at maturity. In the event of bankruptcy, bondholders are prioritized over shareholders for repayment. 

While bonds are generally safer than stocks, their returns are more limited and are affected by interest rate changes and the risk of default, especially with high-yield or "junk" bonds.

Bond-related terms you should know

How to read a bond

When looking at bond details, the information is usually condensed into a specific format. Here's an example using a bond: HDB 3.150% 10Jul2025 Corp (SGD). Let’s break down what each part means:

Bond pricing and the inverse relationship with interest rates

Bond prices in the market are typically quoted as a percentage of the bond's face value. To quickly understand the price, simply add a zero to the quoted figure. For instance:

• If a bond is quoted at 99, it costs $990 for every $1,000 of face value, meaning it's trading at a discount.
• If quoted at 101, the price is $1,010 per $1,000 face value, indicating the bond is trading at a premium.
• When quoted at 100, the bond is trading at par, meaning it costs exactly its face value, $1,000 for every $1,000 of face value.

Most bonds are initially issued slightly below par but fluctuate in the secondary market depending on interest rates, the issuer's credit rating, and other factors. The crucial point is that bond prices and interest rates have an inverse relationship:

• When interest rates rise, bond prices fall. This happens because newly issued bonds offer higher interest rates (yields), making older bonds with lower coupon rates less appealing, so their prices drop to attract buyers.
• When interest rates fall, bond prices rise. Older bonds, with higher coupon rates, become more attractive compared to new bonds offering lower yields, pushing their prices up in the market.

In short, bond pricing reacts to shifts in interest rates. When rates go up, existing bonds tend to lose value; when rates go down, they become more desirable, often trading at a premium. Understanding this relationship is essential for navigating the bond market, especially in varying interest rate environments.

What determines a bond’s coupon rates

The coupon rates of bonds vary based on several factors, with the primary drivers being the credit quality of the issuer and the bond's credit rating. Below is a breakdown of these factors:

Credit Quality of the Issuer

Bonds issued by entities with lower credit quality tend to offer higher coupon rates. This is because investors require higher compensation for the increased risk of default. Issuers with poor financial health or uncertain future prospects need to incentivize investors by offering more attractive returns in exchange for the added risk.

Before investing, it's crucial to assess the issuer's credit risk and determine whether you have the risk tolerance for such bonds. This can be done through credit ratings or by analyzing the issuer’s financial health using credit metrics.

Credit Ratings

Bonds are often rated by agencies such as Moody’s, S&P, and Fitch. These ratings indicate the issuer’s ability to meet its financial obligations. Higher-rated bonds (investment grade) are viewed as lower risk and typically offer lower coupon rates. In contrast, lower-rated or "junk" bonds (non-investment grade) carry more risk and therefore offer higher coupon rates to compensate investors for the increased likelihood of default.

Credit ratings are divided into investment-grade (higher quality, lower risk) and non-investment-grade (speculative, higher risk) categories. For example:

• Investment Grade: AAA to BBB (S&P/Fitch) or Aaa to Baa (Moody's), offering lower coupon rates due to minimal to moderate credit risk.
• Non-Investment Grade: BB to D, offering higher yields but carrying substantial credit risk.

Unrated bonds

Not all bonds are rated by major credit agencies. Some issuers, especially smaller companies or less frequent issuers, may choose not to seek a rating to avoid the cost or because they already have an established reputation with their target market. 

In such cases, investors need to perform additional due diligence by analyzing the issuer’s financial health and market conditions to assess the risk.

Bonds variations

Bonds come in a wide range of varieties, each offering different features based on interest payments, redemption options, or additional attributes. While the core structure of bonds remains the same, their versatility allows for creative features that cater to diverse investor needs and preferences.

Why people invest in bonds

People invest in corporate bonds for the stability and regular income they provide through fixed coupon payments. Unlike stocks, which can be volatile and unpredictable, bonds offer capital preservation, with the principal typically repaid at maturity. Corporate bonds often yield higher returns than government bonds, though they carry more risk.

Bonds also help diversify portfolios, reducing overall risk. They offer liquidity, allowing investors to trade bonds before maturity in active markets. Additionally, bonds can be used to capitalize on interest rate movements, enhancing potential returns.

Risks to consider when investing in bonds

However, like all investments, bonds come with risks. Below are some of the key risks investors should be aware of:

Interest Rate Risk

Bond prices have an inverse relationship with interest rates. When interest rates rise, bond prices fall, and vice versa. If you need to sell a bond before maturity in a rising interest rate environment, you may have to sell at a loss.

Credit Risk

Also known as default risk, this occurs when the bond issuer fails to make interest payments or repay the principal. Bonds with lower credit ratings, such as high-yield or junk bonds, are more susceptible to this risk.

Inflation Risk

Inflation erodes the purchasing power of fixed-interest payments from bonds. If inflation rises significantly, the real value of the bond’s income declines, reducing your returns in real terms.

Reinvestment Risk

This risk arises when bondholders cannot reinvest their interest payments or principal at the same rate of return, especially during periods of declining interest rates. Callable bonds are particularly exposed to this risk, as issuers may repay the bond early during periods of lower interest rates, forcing investors to reinvest at lower yields.

Types of bond investment strategies

While more advanced than basic bond investing, understanding bond strategies can help explain why many retail investors prefer bond funds over managing individual bond portfolios. Below are three common bond strategies:

When a bond defaults

A bond default occurs when the issuer fails to meet the agreed-upon terms of the bond. This can happen in various situations, such as:

• Failing to make interest or principal payments by the due date.
• Violating financial covenants, such as exceeding a specified debt-to-equity ratio.

The specific events that can trigger a default are outlined in the bond's terms and conditions, which are detailed in the offer document provided to investors. If a bond defaults, you may lose some or all of your investment. 

Buying a bond

You can purchase bonds in two primary ways:

1. At Issuance: Bonds can be bought during their initial public offering at face value. This method allows investors to get in at the original terms of the bond.
2. On the Secondary Market: After issuance, bonds can be traded on the secondary market through platforms like the Singapore Exchange (SGX). When buying on the secondary market, you will pay the prevailing market price, which may be higher or lower than the bond's face value. Additionally, you’ll incur transaction fees, such as brokerage charges.

Selling a bond

You have two options when holding a bond:

• Hold to Maturity: If you hold the bond until it matures, you will receive the full principal amount, assuming the issuer does not default.
• Sell Before Maturity: You can sell the bond on the secondary market before it matures, provided there is a buyer. The price you get depends on the market conditions at the time of sale. If the bond's price has risen since you purchased it, you can make a capital gain. Conversely, you could incur a loss if the bond's market value has fallen.

Why bonds can be a safe bet for singapore investors

Bonds offer Singapore investors a combination of stability and predictable income, making them a reliable option for conservative portfolios. They provide regular interest payments (coupons) and generally return the principal investment at maturity, making them less volatile than stocks. This capital preservation feature is particularly valuable for investors seeking steady returns without exposure to significant market fluctuations.

Bonds also help diversify a portfolio, reducing overall risk, as they often behave differently from stocks during market cycles. Whether investing in government, corporate, or retail bonds, they are an effective tool for generating income while safeguarding your principal. For investors in Singapore, bonds can be an essential part of a well-rounded and balanced investment strategy.