BOND THREAD

[cbsh38584]

This is what some of the Smart High net worth investors are doing since 2010.

Purchase Universal life plan for USD 10 million cover. 1st seven years guarantee 4.3% return. Breakeven year around est 13-15 yrs with including the borrowing cost.

Let say premium at age 50 plus = US$3million
(I think @ age 40 premium is much lower @ est US$2 to 2.2 million).

Borrow USD$2.1 million @1% interest (70% of US$3m) against Universal life policy.

Borrow the remaining USD$0.9 million @1% (US$3 - 2.1) against his investment portfolio.

Borrow another US$ 1 million @1% against his investment portfolio to buy unit trust bond fund.

Total borrowing 2.1m + 0.9m + 1m = US$4 million @ 1%.
Interest US$40k per year.

The US$1 million will invest in low risk USD bond fund with return net 4% return. Annual dividend payout of US$40k will be used to pay for the US$40k USD interest he borrowed (US$4 million).

The smart high net worth investors are using the current Cheap money to leverage on investment grade bond + UL plan.


=============================================
I am not them (multi millionaire) . But I need to think like them. That why I bought UL plan US$1m cover with leveraging. But I take more risk by buying individual corporate bond , not unit trust low risk bond fund. I need to manage it actively.

[amk]

vic, i'm sure you know the risk of this leveraged UL game is that: 1) when mkt rate up, the bond fund return will not cover the borrowing cost; 2) and you need to be sure you have the capacity to continue the borrow on favorite terms for that many yrs until it breaks even. 5yrs is already very long time, when mkt turns turbulent, your fortune can turn too. this needs to be very actively managed.

good deal indeed, but not for the average investor.

actually it is better for older investor, as it gets a free life insurance as a byproduct

[cbsh38584]

vic, i'm sure you know the risk of this leveraged UL game is that: 1) when mkt rate up, the bond fund return will not cover the borrowing cost; 2) and you need to be sure you have the capacity to continue the borrow on favorite terms for that many yrs until it breaks even. 5yrs is already very long time, when mkt turns turbulent, your fortune can turn too. this needs to be very actively managed.

good deal indeed, but not for the average investor.

actually it is better for older investor, as it gets a free life insurance as a byproduct

Thank for highlighting the risk. I am well aware of the risk.

Japan has a ultra-cheap money for > 20 year. I think the borrowing cost for Japan Yen is 0.8% (has not borrowed Yen for >1 yr). I am not sure whether the next 5 year will also be low for USD rate again.

My banker through their market leading team adviser has been telling me to reduce my bond holding since 2012 to 2013 due to the rising interest rate. But the USD 10 yr treasury has not moved up to >3.

I am more concern on the big earthquake of 8 scale that may strike in LA or Tokyo. If it happened, I think I may not have the time to analysis & to cut loss in time.

Our 1st initial stage of cutting loss is very important. If we do not have the courage to cut at the initial (1st) stages. High chances we will drag it & eventually the final (3rd or 4th or 5th) decision cutting loss is extremely very painful with huge loss. I survive the lehman 08/09 crisis because I enough time & courage to cut loss fast a few months ahead. I still make mistakes now but lesser.

I am slowly reducing my emerging market Junk bond & move more to investment grade. When I see my two kids, I tell myself not to be greedy & overleverage on Junk bond especially small issue size illiquid junk bond.

Let hope I have the courage to make the INITIAL right decision again when the time come. Not dragging my feet.

[tilton]

Vic

Thanks for your sharing. I stumbled upon this website around December 2013, after about a year after dabbling in bonds through a Private Banker ... so needing to learn and educate myself, I found this thread as well as the tradehaven one which to me, were the best 2 I found in the web in the Singapore context.

From this thread, I think i've come to the same conclusion as you that whatever advice you receive, whatever news you read, whatever analysis you've made ... you still really have to position Fear as the one true friend you can have and take that perspective in your approach ... especially more so if you are leveraging.

I bought Evergrande 8.75% Bond in Oct 2013 and then read about the shocks the earlier bonds had during the financial crisis and when Muddy Waters highlighted them. Those bonds drop by 30+%! After I read this .... Fear .... I lined up to sell.

The Bond held up for the first few months and I manage to get out at a small loss at 99.5 in Jan 2014 but did earn a few months interest ......

I heard it is now below 90 after recent downgrades. So thank you man! Would be nice to buy you a cold one.

D

[cbsh38584]

Fear is your "best friend". Why ? Because everything is being manipulated.

Gold manipulated
Silver is manipulated
Oil is manipulated
Soft commodities is manipulated
Sor or sibor rate is manipulated
Currency is manipulated
Stock is manipulated. Penny stocks are the worst.
US treasury is manipulated.
Structure product (ELN, FCN etc) is manipulated.
etc etc

Even property media is manipulating the man in the street (marginal cases) to buy during the bull run in 2011/2012. Now, they have to work hard to save a big portion of the Salary to pay for their investment. Pray hope that they still have the jobs & interest rate will not shoot up to 3%.


Just remember that the bank need to make money before U. So they get U to invest in higher risk product so that they will earn more commission from the product. I sense my banker is under a lot of pressure to get me invest in high risk product (structure note , Hedge fund etc) which I rejected most of the time. I usually support him buy by doing dual currency which I feel comfortable like example AUS/USD drop below 0.88). I indirectly tell my bankers I do not trust their recommendation. I only trust FEAR.


Hope by 2016 , I will use the money that I make in Bond to buy another property. My idea cases will be

1) Hope to find & gather a few interested buyer (Friends , relative etc ) to combine with them to nego with the property developer. Maybe discount will be better. Not a easy task but will try.

2). Will pay full amount for the property (due to TDSR) & use it as a collateral (equity loan) to further invest in bond. But for this, it need a lot a lot a lot of patience. I will ensure the property market value is valued at a bear market price (rock bottom price or high interest loan rate >2% time).
Then buy a investment grade bond during the crisis time that will get more than the equity loan interest rate. (example investment grade Bond coupon 5%. Equity loan 3%- net off still +ve 2%).
Hopefully the property can be rented out. So I will have two income. rented income + bond income. patience and Timing is very important.


In today investment environment, we need a lot of EQ & sufficient IQ. Higher investment EQ comes from experiences. Experience comes from making many mistakes & learn from it & survive. If we dare not make any decision & learn from it. Your learning curve will be slowed.

[Werther]

Hello cbsh

Agree bankers are under great pressure to perform..my friend in big foreign banks just told me that some of their bankers colleagues got cancers due to stress level very high. Sometimes not worth it.

I like your investment style but not bold or understand what you are doing. However, hope you can huat big when time comes...:

[slee]

Hi,
I have not invested in bond b4. Reading this thread has really "opened" my eyes to the opportunities (and not forgetting the risk).
Is there any investment grade bond with gross 5% yield, after deducting leverage cost, bank margin, and other charges ..)..still can get 3.5%?
As a retail investor , the only way is to open priority bank account in order to buy bonds?
Or should I open the account first, and wait for the "golden opportunity" to buy?

Thanks

[Laguna]

I have just liquidated a very heavy portion of my equity position.

[Laguna]

2). Will pay full amount for the property (due to TDSR) & use it as a collateral (equity loan) to further invest in bond.

Hi Vic

Equity loan is also subject to TDSR.
I'm trying so hard to reprice equity loan, it is just impossible as all repricing of housing and equity loan, other than owner occupied, bought before the date of TDSR, all subject to TDSR

[Laguna]

Hi,
I have not invested in bond b4. Reading this thread has really "opened" my eyes to the opportunities (and not forgetting the risk).
Is there any investment grade bond with gross 5% yield, after deducting leverage cost, bank margin, and other charges ..)..still can get 3.5%?
As a retail investor , the only way is to open priority bank account in order to buy bonds?
Or should I open the account first, and wait for the "golden opportunity" to buy?

Thanks

There are many in the market offer 5% or more.
You should shop around to see which bank could give you the best deal.

[Laguna]

What do you all think of Allianz US High Yield? I was told that dividend is around 7%.

I have some in Allianz but not this particular one.

You need to understand how the dividend is being paid out from their income or principal and also the detail breakdown of the funds and management fee etc

[cbsh38584]

Hi Vic

Equity loan is also subject to TDSR.
I'm trying so hard to reprice equity loan, it is just impossible as all repricing of housing and equity loan, other than owner occupied, bought before the date of TDSR, all subject to TDSR

if your private property is 100% fully paid. U can pledge it with them to take a loan. I think the LTV is 70%. I believe only foreign bank private bank have it. Not sure local bank.

I am sure that U know the risk if your investment goes bad. So must be very patience & timing need to be right. I will do it when there is a crisis or high interest rate where Bond pricing is coming down. For me , only investment grade bond or SG blue chip bond.

[slee]

There are many in the market offer 5% or more.
You should shop around to see which bank could give you the best deal.

Thanks Laguna. Will check out DBS first.

[DC33_2008]

Prefer to sleep peacefully at night.

if your private property is 100% fully paid. U can pledge it with them to take a loan. I think the LTV is 70%. I believe only foreign bank private bank have it. Not sure local bank.

I am sure that U know the risk if your investment goes bad. So must be very patience & timing need to be right. I will do it when there is a crisis or high interest rate where Bond pricing is coming down. For me , only investment grade bond or SG blue chip bond.

[cbsh38584]

Prefer to sleep peacefully at night.

U should be doing fine in your investment. Not a easy decision to take the courage to buy capland treasury bond during the Euro crisis in 2011.

[Laguna]

Thanks Laguna. Will check out DBS first.

I have checked with all three local banks, their offer and products are not attractive enough. Also, being listed, much more difficult to negotiate on rates.

[cbsh38584]

Risk of investing in Bonds
1 Credit Risk
2. Interest rate risk
3.Liquidity risk
4. FX risk

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised

Moody investment grade rating
Aaa , Aa1 , Aa2 , Aa3 , A1 , A2 , A3 , Baa1 , Baa2 , Baa3

Moddy Non-investment grade
Ba1 Ba2 Na3 B1 B2 B3 Caa1 Caa2 Caa3 D

　
S&P and Fitch investment grade rating
AAA AA+ AA AA- A+ A- BBB+ BBB BBB-

S&P and Fitch Non investment grading Rating
BB+ BB BB- B+ B B- CCC+ CCC CCC- D

　

Interest rate risk
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates


Liquidity Risk
In an Liquid market, investors run the risk of either having to retain the bond till maturity or selling it before maturity at an unfavorable price
Issue size = liquidity (US$50M- 300M?) (>US$500m more liquid ?)
Establishing a fair price & price comparisons can be difficult or impossible as there are sometimes no Counterparties interested in the bond.


　
　
FX risk
Morgan Stanley 7.625% Aust dollar bond Due 2016
Aud/SGD 1.33 (1st Feb12)
Aud SGD 1.254(1st Jun12)
Aud/SGD 1.285(12th Dec12)
Aud/SGD 1.23 (16th May13)

If U borrow (due to low rate 1.55%) SGD or USD to convert to Aust to buy Aust bond. There is a FX risk which may go against you


Bond Types
Fixed Rate bond (straight bond)
Fixed maturity & fixed cash flow pattern (I.ecoupon)
Eg NOL 4.25% due 2017
Olam 4.07% due Feb 2013


Callable bond
Gives the issues the right to buy back all or some of the issues prior to maturity.

Call price : Specified price at which the bond may be repaid
Eg Hyflux 4.25% 2018. (Callable on 7 Sep15 @ 102.13)


Perpertual bond (some do come with callable term)A bond in which the issuer does not repay the principal. Rather, a perpetual bond pays the bondholder a fixed coupon as long as he/she holds it. Prices for perpetual bonds vary widely according to long-term interest rates. When interest rates rise, perpetual bonds fall and vice versa.


　
　
　
　
　
　
　
Inflating-linked bond
Pays a fixed coupon + an amt that is linked to a price index to compensate for inflation
* S’pore’s central bank is studying the feasibility of selling
Inflation-linked bonds to help citizens boost on savings amid low interest rate( Bloomberg 9th Jul 2012)


Convertible bond
* Hybrid that combines both equity & debt features
* Holders have the right to convert the bond into issers’s equity in a predominated ratio during a specified conversion period
Eg Keppel land 1.875% due 2015 convertible bond
Conversion price @ $6.72. ( Now trading @3.8)
　


Bond structure
Unsecured Bond that is not secured by a collateral.
Most bond are unsecured

Secured Bond.
Bond is backed by a Collateral
Eg OUE 3.36% due 2013.
Back by Mandarin gallery & Mandarine Orchard.
　
　
Bond seniority


bondholders are credits & therefore have a higher priority calim than equity holders in a liqudation or restructuring scenario.
Senior bond has a higher priority claim than other bonds on the assets issued by the same entity.


Subordinated (junior) bond

A class of bond that, in the event of liquidation, is prioritized lower than other classes of bonds. For example, a subordinate bond may be an unsecured bond, which has no collateral. Should the issuer be liquidated, all secured bonds and similar debts must be repaid before the subordinated bond is repaid. A subordinate bond carries higher risk, but also pays higher returns than other classes

[MGM]

Lol, opened and it turned out to be a james bond thread....

[slee]

I have checked with all three local banks, their offer and products are not attractive enough. Also, being listed, much more difficult to negotiate on rates.

I read from the thread that starry got quite a reasonable rate(fund cost and other fees) from dbs treasures. Will check out SCB too. Min for SCB priority banking is 200K vs DBS 350k. If open 2 accounts, that would means having to place deposits in both banks!!

[starrynight]

Yup, I think my lending rate is quite reasonable. The banker will quote you the expected rate, which can only be ascertained 3 days later. But unless you are in a volatile mkt, the rates shouldn't be too fluid.

I think DBS Treasures does not offer leverage. You have to be Treasures Private Client, if I'm not wrong.

DBS also quotes the secondary mkt prices on a net basis, so you don't have to worry that there are hidden fees, etc.

Now I sound like I am advertising for them :S

I read from the thread that starry got quite a reasonable rate(fund cost and other fees) from dbs treasures. Will check out SCB too. Min for SCB priority banking is 200K vs DBS 350k. If open 2 accounts, that would means having to place deposits in both banks!!

[Lovelle]

there is a Vallianz bond launch lately. what do you guys think ?

[tilton]

there is a Vallianz bond launch lately. what do you guys think ?

Valianz is partly owned by Swiber … Between these 2 companies, there is a lot of debt and highly leveraged so would consider this high risk

[starrynight]

Valianz is partly owned by Swiber … Between these 2 companies, there is a lot of debt and highly leveraged so would consider this high risk

there is a Vallianz bond launch lately. what do you guys think ?

Excluding the one-off gain, Swiber's results were not good. Order book lame as well. Not following Vallianz so I don't really know, but note that this bond issuance is the 2nd / 3rd one in recent months.

[stl67]

if your private property is 100% fully paid. U can pledge it with them to take a loan. I think the LTV is 70%. I believe only foreign bank private bank have it. Not sure local bank.

I am sure that U know the risk if your investment goes bad. So must be very patience & timing need to be right. I will do it when there is a crisis or high interest rate where Bond pricing is coming down. For me , only investment grade bond or SG blue chip bond.

When i pledge my property with ubs, willl tdsr apllies? thanks

[starrynight]

If your question is that you pledge your property with UBS to take a loan to buy another property, then yes, your loan from UBS is part of the debt that needs to be declared for calculating TDSR.

There was an article in last Sunday's Sunday Times touching the TDSR topic.

When i pledge my property with ubs, willl tdsr apllies? thanks

[stl67]

If your question is that you pledge your property with UBS to take a loan to buy another property, then yes, your loan from UBS is part of the debt that needs to be declared for calculating TDSR.

There was an article in last Sunday's Sunday Times touching the TDSR topic.

What if i used it to invest in bonds...or business, still tdsr rule applies?

[starrynight]

What if i used it to invest in bonds...or business, still tdsr rule applies?

TDSR is only applicable to property purchases, so if you take the loan from UBS for non-ppty purposes, there is no TSDR issue (until you decide to take a ppty loan).

I think it's not so common in Singapore during a flat / downward mkt, but in some other countries, it's fairly common for people to take a second mortgage on the ppty for business / investments. Usually disbursed as a secured term loan.

[cbsh38584]

What if i used it to invest in bonds...or business, still tdsr rule applies?

Collateral loans are used when the lender (bank) wants some assurance that they won’t lose all their money.When using a collateral loan, you give the bank the right to take your asset if you can’t repay.

If you pledge an 100% paid property as collateral, they can take the property, sell it, and get their money back in the event your investment really go bad. So Patience , timing & fear investing are very very important.


===============================================
Buddha Quote on Anger, Forgiveness, and Compassion.
“To understand everything is to forgive everything.”

To really understand fear, patience & herd investing is to profit from fear, patience & Herd investing.


===============================================
Positive thinking Quotes.
The older I get, the less I care about what people think of me. Therefore the older I get, the more I enjoy life.

So when comes to investing. The older I get, the more experience I have. So the less I trust the Analyst stock recommendations, Goldman sach , Citibank , CS , SC , Morgan , SG stock gurus , friend & colleague hearsay investment tips etc etc.

The older I get, I firmly believe that GREED investing , Herd investing, frequent trading of stocks , high leveraging in speculative derivative product (ELN , FCN , Accumulator ) , FX trading etc is a guarantee for failure in long run. So the older I get, the more I trust “FEAR investing” , INCOME investing , Patient INVESTING , BLUE CHIP investing & contrarian investing.


Experience comes from many mistakes made , learn from it & survived. Foolish mistakes, stupid (repeated) mistakes , hopeless mistakes (repeated same old mistakes many times) , "too trusting" mistakes (100% believe in Guru recommendation), Greedy (high yield as 1st priority, forgetting about the high risk) mistakes , impatience mistakes, extreme over leverage (b4 Lehman crisis) mistakes , speculative penny stock mistakes etc etc.

[Lovelle]

not easy to choose bond , risk are equally high. pRefer to go for stocks, blue chips

[NTG]

TDSR is only applicable to property purchases, so if you take the loan from UBS for non-ppty purposes, there is no TSDR issue (until you decide to take a ppty loan).

I think it's not so common in Singapore during a flat / downward mkt, but in some other countries, it's fairly common for people to take a second mortgage on the ppty for business / investments. Usually disbursed as a secured term loan.

If u pledge your property to take secured term loan, this is still equity loan subject to tdsr. This kind of secured loan is not new. If foreign pb bank can skip this then wonder if there is a loop hole.