Wednesday, September 22, 2010

SIA Bonds and SGS Bonds

I read today's news article that SIA was issuing $300 million of 5 years bonds with $50 million to be placed out to retail investors. The minimum subscription is $10,000 with coupon rate of 2.15% per annum.

Yet in the same newspapers, I also saw a notice by MAS on the Singapore Government issuing Singapore Gvt Bonds at a minimum subscription of $1000 with a coupon rate of 2.875% per annum.

What is interesting is that the Singapore Government Bond is actually paying a higher coupon rate than the SIA bond. In addition, the minimum subscription amount is also less at $1000 compared to SIA's $10,000. From the investor's point of view, it seems to make more sense to invest in SGS bonds over the SIA bond since the coupon rate is higher.

Another interesting thing that blew my mind away was the coupon rate. From what I gather ( I could be mistaken), I always thought that governments (not Singapore in particular) are able to acquire debt more cheaply than private entities. This is because a Government can simply raise taxes or print more money to pay back its investors. As such, a government when compared to a private entity should be able to issue bonds at a LOWER coupon rate than a private entity. It makes sense since the institutional investors will view government bonds as being less risky than bonds that are being issued by private entities.

However, for the case here of 2 similar 5 year bonds, what I observe is that the private entity (SIA) is actually able to borrow money (through the issuing of bonds) at a cheaper rate than the Government! That is 2.15% coupon rate versus SGS bond's 2.875%! That is a pretty significant difference!

How a private entity can actually borrow money at a cheaper rate than the Singapore Government (which has an excellent credit rating) totally baffles me. I don't understand.. Maybe there is something I don't understand about bonds yet. Or maybe I could be badly mistaken. Can someone correct me on where I have gone wrong in my thinking?
[After note (23 Sept): In this post, I compared SIA bonds and SGS bonds and was wondering how could a private entity offer coupon rate that was lower than the Government. I asked readers to correct me on where I have gone wrong in my thinking. After all, I was utterly baffled from my supposed assumption that this was a scenario where a private entity was able to borrow at a cheaper rate than the government.

Thankfully, a reader (named Sen) corrected my mistake. The SGS bond had a coupon rate of 2.875% but that did not translate into yield as the pricing of the bond was still not known. That means the yield of the SGS bond will most probably end up being lower than the yield of SIA’s equivalent 5 year bond.

Morale of the story: When you think that you have found an anomaly, it is most probably not an anomaly.]

10 comments:

  1. Hi sgfinancialfreedom,

    I am sorry, is there a mistake in your comparison?

    https://secure.sgs.gov.sg/apps/goto/?app=dailyPrices

    From SGS website above, the bond yielding 2.85% annual coupon is the 20-year bond. The 5-year SGS bond yields 1.375% which is lower than SIA's 2.15%.

    This is reasonable as the government bonds are of the highest credit due to their powers of taxation and money-printing as you have already mentioned.

    ReplyDelete
  2. Hi hyom,

    Thanks for the prompt response.

    I am looking at this:
    http://www.sgs.gov.sg/announce/bond-announce2.html

    ReplyDelete
  3. I think i need to educate you a bit on Bond
    Coupon is not equivalent to yield. 2.875% coupon but the SGS is being auctioned and might be sold at 110? so imagined receiving 2.875% of 100 notional, but SGD Bond is being sold at 110.. would that still be 2.875% yield? The answer is no

    In fact, you can use the Bond Calculator link on the https://secure.sgs.gov.sg/calculator/bond.aspx

    At a price of 110, the bond yield would be 0.738%

    Only when the Bond is sold at 100 (par), the coupon is the same as yield. NOte that coupon stay the same until the maturity, but Bond price might not.... I think you can do read up in SGS Bond for education wise :)

    ReplyDelete
  4. Hi send

    Thanks!! I finally understand Where I went wrong in my comparison. And to think that kept me busy the whole day wondering how this anomaly cold happen.

    ReplyDelete
  5. When looking at bond yield, you should be using YTM (yield to maturity).

    Anyway, both bonds are really for the very very very risk averse. People who only want to do fixed deposits can consider this a good alternative.

    If you are more adventurous, you can get other investment-grade corporate bonds at >4%. And even more adventurours, high-yielding non-investment grade bonds at >8%.

    For people who are already invested in shares, it is a lousy bet on SIA bonds as SIA shares yields a >3% dividend yield with potential capital appreciation(definitely if you are going to hold it for the equivalent duration of the SIA Bonds - 5years?). An SIA Bond gives you a fixed 2+% yield with little upside (unless you think interest rate can go lower than it is now at).

    ReplyDelete
  6. Is it a lousy bet depends on your view if it will be a bull or bear in the near future, and your appetite for risk. If the govts fail to prop up the global economny, den airlines industry will be severely hit. If SIA shares dropped to half its value, at least you are still preserving the value of your bond investment and generating that paltry interest.

    ReplyDelete
  7. Yes. There is a difference between SIA bonds and the shares itself. The bonds are safer and less risky. Your gains are also limited in that sense.

    ReplyDelete
  8. It's APALLING that this BLOG on 'FINANCAIL FREEDOM' and the author do not even really understand how to compare bond!

    That's the danger of internet... many other reader will be blindly follow this totally wrong comparison (u look at the implied yield, i.e. YTM, and not just simply on coupon, unless both are at par)!!

    I would advice this blog owner to have more social responsiblity but posting correct information...

    ReplyDelete
  9. Hi anonymous,

    Thanks for your frank comments.

    I am disgusted at my lack of knowledge too.

    Thank you.

    Cheers,
    FF

    ReplyDelete
  10. Hi FF,

    There is absolutely no need to apologize. In the last sentence of your post, you wrote "Or maybe I could be badly mistaken. Can someone correct me on where I have gone wrong in my thinking?" You have already humbly admitted the possibility that you may be wrong.

    Besides, readers of your blog do not pay you a single cent for your financial commentaries. The onus is on them to check out themselves when an anomaly is raised.

    I thank you for your efforts in contributing to financial literacy in Singapore. Well done! Don't be discouraged by harsh comments.

    ReplyDelete

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