Category Archives: Bonds

Portfolio activity, July-August 2011

With the cash built up from the delayed contribution in October 2010 and April 2011, I have finally made the purchase in July and August. The delay was because (1) I have been trying to get Saxo to offer two global bond ETFs in London Stock Exchange since October 2010, which Saxo finally added them in May 2011, and (2) I was evaluating and setting up Standard Chartered bank online trading in July 2011.

Following my asset allocation plan, I have bought the funds below (through the broker stated in brackets):

  1. iShares MSCI Europe ETF (Saxo)
  2. Lyxor Asia Pacific Ex Japan ETF (SCB)
  3. Lyxor Japan ETF (SCB)
  4. iShares Citigroup Global Government Bond ETF (Saxo)

On the other hand, I have taken the opportunity in the recent rise of bond price to sell Legg Mason Global Bond Trust, an actively managed unit trust fund. Following the sale, I do not have any actively managed fund in my portfolio, except UOB GrowPath 2040 in CPF SA. I will allocate the sale proceed to US equity, again, according to asset allocation plan.

Portfolio activity for October 2010 is delayed

My regular half-yearly investment should have already happened in October but it was delayed, due to difficulty in finding a suitable platform to buy global bond ETF—Saxo refused to add the global bond ETFs I requested because it is multiple-currency while POEMS added the ETFs but their commission is high, read my post here. The portfolio asset allocation has been within the 5% threshold from the target 75/25 stock/bond ratio since October, but within the bond portion, global bond is under-allocated and requires top-up. That’s why I am looking for global bond ETF to add. I prefer not to add to the current global bond unit trust fund in my portfolio because of the fund’s active management.

Recently, a reader left a comment that a multiple-currency ETF was added to Saxo upon his request. I have sent a request to Saxo again to add the two global bond ETFs. Will update when I have their reply.

Global bond ETF in London Stock Exchange

Update 7-Aug-2011: IGLO and IGIL are now available for trading in Saxo since mid-May 2011. The commission is charged in USD, converted from GBP at Saxo prevailing rate.

I posted HERE that I may consider bond ETF in London Stock Exchange following the reduction of Saxo commission from GBP 15 to GBP 8.  But alas, when I asked Saxo to add the following two global bond ETFs, Saxo replied that they were not able to add because these ETFs are traded in multiple currencies (GBP and USD).

When I probed further and informed Saxo that the two ETFs have different stock symbols for different currencies, Saxo replied they still could not add them because they share the same ISIN number on the same exchange.

Ok, let’s try POEMS. I emailed their tech support to add these two ETFs. And on the following day, it was added! So now you can buy the two ETFs in POEMS, just note that the ETFs are traded in GBP and their symbols are:

However, there is a catch: POEMS charges a higher commission (GBP 25) compared to Saxo. Given this, I am undecided whether to use POEMS or not.

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.

Foreign bond allocation, SGS yield spread

I have finished reading Larry’s bond book that I bought more than a month ago. Larry wrote that currency-hedged foreign bonds provide the benefit of diversification of interest rate risk. However, no suggested allocation was given. Indexfundfan’s Foreign bond allocation for Singapore investors suggests a 50:50 allocation to foreign bonds and Singapore bonds. This sounds good to me. I think I will start with this allocation.

Next, where is the “sweet spot” (the point where the yield curve is no longer upward sloping) of Singapore Government Securities (SGS) yield curve? Below is the SGS weekly yield curve for 1-year T-bill and 2, 5, 7-year bond since 1998.
SGS Weekly Yield Curve, Jan 1998 to Jun 2006

In the recent year, the yield curves of different maturity have converged, so the “sweet spot” has shifted to the shorter maturity end. Was it worth to extend the maturity of SGS bonds and take the interest rate risk in the past? Lacking any rule of thumb, I use Larry’s suggestion of 0.2% minimum incremental yield for each additional year of maturity. So the question becomes: when extending the maturity of SGS, how many occurrences since 1998 satisfied the minimum incremental yield requirement?

Below is the yield spread for extending SGS maturity from 1 to 2 years, 2 to 5 years and 5 to 7 years. The horizontal lines are the minimum incremental yield requirements for the respective extensions (as indicated by the colour). For example, the yellow line represents 0.4% (0.2%X2) minimum incremental yield requirement for extending SGS maturity from 5 to 7 years. More dots above the line means more occurrences that meet the requirement. As you can see, extending SGS maturity from 1 to 2 years and 2 to 5 years have a higher chance of meeting the requirement than extending SGS maturity from 5 to 7 years. I did not include extension from 7 to 10 and 10 to 15 years because the were negligible number of occurrences that satisfied the minimum incremental yield requirement.

SGS Weekly Yield Spread, Jan 1998 to Jun 2006

So from the historical SGS yield curve, I think it is worth to extend the maturity of individual bond to 7 years for my bond ladder, provided the minimum incremental yield requirement is met.

Two new books

Two new books I ordered on Amazon.com have arrived.

The Only Guide to a Winning Bond Strategy You’ll Ever Need : The Way Smart Money Preserves Wealth Today [Hardcover]
By: Larry E. Swedroe, Joseph H. Hempen

The Bogleheads’ Guide to Investing [Hardcover]
By: Taylor Larimore, Mel Lindauer, Michael LeBoeuf, John C. Bogle (Foreword)

Thanks to my friend who brought it back from the US, I could order it with free shipping. Local book stores sell them at about S$45++. Crazy price. I am reading Larry’s book. I am in need of some bond strategy for my portfolio.

By the way, when the tracking number from Amazon for the package arrived in my inbox, Gmail auto-generated a link at the side bar to take me directly to the UPS page, for tracking the package. I didn’t have to type the tracking number, just two mouse clicks. Cool.