There seems to be a lot of investment vehicles coming up recently attracting investors to park their money with. Not long ago, we have the structured UOB and revised OCBC deposit, then the Singapore Savings Bond (SSB) and more recently the FCL Retail Bonds offering attractive rates at 3.65% for a maturity period of 7 years.
Duration: 7 years
Offer period: Now till 20 May Noon Close (Retail investors can apply via ATM or iBanking)
Min Sum : $2,000 (increment of $1,000 next)
Trade date: 25th May
There has been a couple of retail corporate bonds offered in the past too by blue chip companies such as the CMA and CMT but I don’t remember it generates so much interest as the one being offered recently by FCL. I can probably attribute this to 2 factors. First, it shows how long we have been living in a low interest rate environment that when we see corporate bonds offering at a rather attractive yield, we get excited about it. Second, there’s plenty of buzz regarding the offering and people are simply subcribing to this as part of herd investing mentality. The thing that gets these people excited are the subscribing activities where they get to press ATM to subscribe the way they did for IPO. But this is vastly different products for different needs. People who usually subscribe for IPO are usually short term focused but this is a rather meant to be a long term instrument.
First of all, I must say that it’s rather confusing for some people to have so many different investment vehicle presented in front of them and having limited amount of money to invest. The traditional over the past 4-5 years has been flat Reits investment because they are structured to give pretty decent yield return to investors. When others came into the scene with products such as the OCBC 360, it suddenly attract investors to park their money there.
The thing about deciding whether you should be investing in this FCL 3.65% bonds carries a few factors such as age, career, needs, appetite for risk, etc.
Depending on your age, career stability and appetite for risk, bonds are traditionally less risk averse instrument because they provide investors a fixed amount of payout until the maturity date. Bonds are subject to interest rate risk which would decide whether the bond price goes up or down below par but if you are intending to hold until maturity, you will not be subject to this risk because it will be redeemed at par. However, the one thing that many people failed to consider is investors are subject to reinvestment risk when the product mature because you will then need to seek for another product that can yield the same if not better yield. Unlike stocks, you are investing in a business that is supposedly going to move up and accumulate increasing business moat over time so there is hardly reinvestment risk if the business model proves to be successful. Having said that, stocks have plenty of other risks that I will not discuss here.
Going back to this, my thoughts is that with interest rate going to trend up, there will be more investment vehicle or companies like FCL that would perhaps be offering such debts deal to raise money. Imagine if Capitaland or UOL were to issue the same deal with higher yields at 4%. The investor who are invested earlier will be subject to these opportunity loss. Also, because of the rising interest rate trend in the next few years, chances are that the market value are likely to trade below the par value in order to make the Yield to Maturity (YTM) more attractive to potential investors. Note that I mention opportunity loss and not an actual loss because remember if you are holding this long term until maturity, then you are almost guaranteed to redeem your capital back at par value.
I suspect there’s too many hasty investors out there who blindly subscribed to this retail bonds offering without really thinking all the possible consequences. If SCI were to go down to $3.80 in the next few weeks for instance and you have no warchest, I’m pretty sure there’s a lot of investors who would be trading out of this retail bonds in order to catch SCI by then. If you are doing so, then you are only thinking short term and not what bonds as an asset are supposed to work for you in your portfolio allocation.
In conclusion, the correct approach to go about doing this is to consider your own needs based on criterias such as age, career stability, yield returns and time horizon. Once those factors are considered, you will have a better idea of whether you will need this product or not.
Again, there’s no right or wrong in this but one certainly needs to think through before rushing to subscribe when the excitement is still high.
Will you be subscribing to this retail bonds offered by FCL? What’s your reason for doing so?