Building bond ladder with FSM

In the portfolio activity in April this year, I kept the fresh fund for Singapore fixed income in FSM cash fund, instead of building the SGS bond ladder that I have planned. It was because the yield of 5-year SGS bond was low and I was really busy to go to bank to bid for it. But I have overlooked a quick and convenient way to build SGS bond ladder — the SGS bonds offered by fundsupermart (FSM). FSM charges 0.1% of nominal value as initial processing fee and 0.1% of nominal value deducted from coupon payment as annual custody fee.

How much do the fees reduce the yield? To do this comparison, I use the data in SGS web site as the yield before fee; and FSM Bond Factsheet to calculate the yield after fees. For the latter, I point my browser to FSM Bond Factsheet, then select a SGS bond, enter 1000 as the amount to buy, enter indicative price + $0.10 (to simulate the 0.1% processing fee on $1000 nominal value) as maximum price to buy, and finally hit the Submit button the get the net yield to maturity. My assumption is that the net yield from the calculation above includes the fees charged by FSM and the bid-ask spread.

The bonds that I have compared are as follow, with the yield to maturity from SGS web site and FSM calculator respectively. Data are extracted on 1 August 2008.

  1. NX01100H; Coupon 3.625%; Maturity 01/07/2011; Years to Maturity: 2.92 (years), 1.36%, 1.10%
  2. NX02100S; Coupon 3.500%; Maturity 01/07/2012; Years to Maturity: 3.91 (years), 1.84%, 1.63%
  3. NX04100F; Coupon 3.625%; Maturity 01/07/2014; Years to Maturity: 5.91 (years), 2.47%, 2.29%

The fees and spread reduce the yield of the above bonds by 0.18% ~ 0.26%. Compare this with a bond ladder built by bidding SGS bonds at zero cost, this method has the advantage of building a bond ladder faster and saving the trip to banks.

Thanks to this post in sgfunds.com for the information on FSM SGS bonds.

Advertisements

8 responses to “Building bond ladder with FSM

  1. I notice your bond ladder is made up oly bonds from 3,4 and 6 years of maturity. I saw indexfundfan’s post on “How to build a bond ladder” in sgfunds website to comprise of 1,2,3,4,5,6,7,8,9,10 years of maturity bonds in order to get better yield. What is your view? Thanks.

  2. Hi panther,

    The 3-, 4- and 6- year bonds were under consideration. I want to build a 5-year bond ladder comprising 1,2,3,4,5-year bonds. Since 6-year bond yield is 0.2% more than 5-year bond, I decided to extend the bond ladder to 6 years.

    In the end, with my limited fund, I bought 4-yr and 6-yr bond from FSM, and 5-yr bond from SGS bond auction. So, the ladder now has 4,5,6- year bonds.

    Next year, the bonds in the ladder will have maturity of 3,4,5 years. So I will add 6-yr bond, or 5-yr bond if yield of 6-yr bond is not worth extending. As the bond maturity comes down the ladder and as I add new bonds over the years, the ladder will eventually comprise bonds of 1,2,3,4,5 year to maturity.

  3. Hi Choozm,
    Thanks for your feedback. I find the yield of bonds below 8yr bond bit too low. 8yr bond and above can get yield of more than 3%. Hence, I believe I’ll get 1,2,3,4,5,6,7,8,9,10 bond ladder. I am getting rid of DBS enhance Income due to huge drop due to Lehman Bro and replace it with SGS bond ladder. Thank you very much for your post. If not, I will not venture into SGS bonds.

  4. Hi panther,

    Long term bonds give higher return but come with greater interest rate risk. The reason I go for 5-yr ladder is given in this post on SGS yield spread.

  5. Hi choozm,
    Thanks for your feedback. I thought SGS bond always give fix coupon every 6 months until it matures. Thus, could you feedback what you mean by “greater interest rate risk”?

    Thanks.

  6. Hi panther,

    As interest rates rise, bond prices fall and yield increase. Existing long bond holders will miss the higher yield of new bond issues, unless they sell their bonds at falling price at a loss and switch to the new bond with higher yield.

    Longer maturity bond is more sensitive to interest rate change. This volatility should be avoided since the fixed income is used to reduce overall portfolio volatility.

    You can google for more details, or pick up Larry Swedroe’s book “The Only Guide to a Winning Bond Strategy You’ll Ever Need”. Hope this helps.

  7. There is migration exercise of migrating SGS bonds to CDP until June 2010 (no transfee fees until June 2010). I have asked CDP, and they allow transfering of FSM SGS bonds to CDP as well. I asked FSM and they say form is available in FSM for the transfer. Currently, platform fees does not apply to SGS bonds (confirmed by FSM). FSM say no increase in custodian fees at this moment. I have no idea whether FSM may consider increasing the custodian fees in future since they have already added the ridiculous platform fees. I am thinking of transfering my SGS bonds in FSM to CDP now (CDP say 3 years no custodian fees) to avoid any future increase in custodian fees in FSM or some other fees, if any. What do you think? Thanks.

    • Hi panther,

      Thanks for pointing this out. I have SGS in UOB and planned to transfer it to CDP but didn’t know you can do the same for SGS in FSM.

      If the fee structure in CDP and FSM remains the same (i.e. no fee waiver, no fee hike), then for SGS issue with 1000-3000 units, it is cheaper to keep it in FSM. For SGS issue with 4000 units or above, it is cheaper to keep it in CDP. See my post HERE.

      Since CDP has fee waiver for 3 years and the transfer is free now, and if your SGS is maturing within 3 years, then it is a good idea to transfer them to CDP. But if the SGS is of longer term and of low quantity, then you would want to consider the trade-off (of course the fear of FSM raising custodian fee is not entirely invalid).

      What I may do, is to transfer SGS that will mature within 3 years to CDP. For new SGS that I may be purchasing, since my purchase quantity is usually low (1000), I may still use FSM. For 1000 unit of SGS, CDP annual fee is $3.22 vs. $1.00 from FSM.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s