Here’s How Average Investors Can Get Access to Bonds With This New Product
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Since the launch of the Singapore Savings Bond in 2015, the bond market has certainly grown in popularity with retail investors picking up opportunities to invest some of their cash into fixed income products.
You may recall the successful issuances of last year’s Temasek 5 year bond whose public offering to retail investors was just over 8 times subscribed based on initial size, as well as Azalea’s popular retail private equity bonds. They have showcased the retail market’s appetite and demand for bonds.
This isn’t all that surprising given today’s current market conditions. Classic asset rotation from equities to bonds in the face of a potential economic downturn is always performed by institutions or fund managers.
However, there are several challenges for individual investors to mimic them. In this article, we will introduce how bonds work and a new way of bond investment that could change the landscape of your investing journey.
What is a bond?
A bond is a fixed income investment instrument that is, in principle, a loan that is taken by a borrower, typically a corporate or governmental institution, from an investor i.e. the person buying the bond.
As a “return” for borrowing that money, the bond pays out a regular interest rate, commonly known as a coupon rate, along with the principal amount invested at a set maturity date.
Bonds typically pay a fixed coupon rate, but variable or floating interest rates are quite common these days as well. Pay-outs are set upfront at issuance and the predictable nature of the cash flow is why the product is termed as a Fixed Income asset.
Because of these mechanics, bonds are recognised as being lower in risk compared to equities. This predictability of payouts contributes to the popularity of the recent bond issuances mentioned above.
Why are bonds still relatively harder to invest in than equities?
For many investors, the main barrier to bond investment is the lack of access to the variety of bonds trading in the Over-The-Counter (OTC) market. There are two reasons for this:
First, many of the bonds in the marketplace conventionally require a significant outlay of at least $250,000. This is very different from the retail bonds traded on SGX, making it very prohibitive for most retail investors who don’t have that much investible capital.
Second, although retail bonds traded on SGX have lower minimum purchase sums of about $1000, their limited selection doesn’t offer investors much choice. Unfortunately, many corporations prefer to raise debt though the OTC market, hence the narrower selection of bonds available for retail investors on exchange.
The combination of these two reasons results in a general lack of awareness in the fixed income space, where people do not know where to begin should they wish to invest in bonds.
How can you start investing more in bonds?
Recognising this uptake in demand over the past 5 years, CGS-CIMB Securities (Singapore) Pte. Ltd. (CGS-CIMB) has developed a Bonds Contract for Difference (CFD) product that allows investors to gain access to a wider range of bonds with a lower starting capital.
How is this different from buying the actual bond? For a start, although you don’t own the underlying asset (which is the bond), you can still benefit from its performance, which is the key appeal of this product.
Essentially, it works no differently from CFDs with other underlying assets. The contract will mimic the performance of the underlying bond. Any price difference and interest coupon will be cash settled. Using CFDs can be a double-edged sword, as your profits or losses can both be magnified. Additionally, investors will also have to pay a floating financing cost.
As you are trading a contract and not the actual bond, CGS-CIMB can offer a contract denomination of 50K notional. One will receive the benefits of the underlying bond’s interest accrual and coupon payments as if one owns the bond!
You don’t need to have a CDP account in order to start, all you need is a CFD trading account with CGS-CIMB.
Why is this product good for investors?
As mentioned earlier, it is not always easy to find suitable bonds because of the overall lack of retail bond offerings, as well as the high amount of cash needed for corporate OTC bonds. With the launch of Bond CFDs by CGS-CIMB, you can now utilize a smaller cash outlay to gain exposure to the fixed income market.
This is a three-fold benefit:
1. Lower cash outlay
Bond CFDs can be bought in contract denominations of 50k notional. Furthermore as this is traded on leverage, you can initiate this Bond CFD position using only SGD 10,000 (assuming 20% initial margin for a bond selling at 100, excluding costs)
2. Up to 5-times leverage
Initial margin is essentially the cash collateral needed to initiate a CFD position. In this case, with CGS-CIMB you are able to get 5 times leverage with 20% initial margin.
This way, you can increase your bond position with a lower initial capital outlay.
3. Ability to diversify your portfolio
More importantly, the Bond CFDs that CGS-CIMB offers present an opportunity for average investors to balance their portfolio amidst general economic and political uncertainties.
With central banks taking a step back in rate hikes and extending low interest rate environments, bonds can help reduce your asset portfolio volatility. Bond prices are typically inversely correlated to interest rates, so when interest rates fall, bond prices usually go up.
Of course, as with any investment, it is important to recognise that there are risks involved. Because the underlying is a bond, you are subjected to the same investment risks of an actual bond.
In our next article, we will go into greater detail on the mechanics and pricing of bonds in the OTC market, and how this knowledge can help you understand more about bonds.
What is your perspective on investing in bonds? Share your thoughts with us here!
The information in this article is meant for informational purposes only and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided by the website to make any decision to buy, sell or hold any investment product.