Sunday, October 21, 2018

New Temasek 2.7% bond for retail investors - Should you invest in it?

It has been awhile since I blog as I've been quite busy with my new job as well as other things in life. I didn't really have much time to look at investments lately and have not made any new investment decisions for the past 1 month. However, there are new developments in the investment world which I thought is a good time for me to write about this new bond in the market which will surely be quite popular.

Temasek has just launched a new bond which offers 2.7% fixed interest and matures in 5 years. This is fairly attractive as Temasek is known to be rated AAA where the default risk is low. When buying bonds, it is always important to evaluate the risk even though in this case the risk is low. I will evaluate who can consider and who should not be buying this bond in this article.
Who can consider to buy this bond?

This bond is guaranteed by Temasek which in a way we can safely say it is default free. Just imagine if Temasek is not able to pay back the bond when it matures, then I think Singapore as a nation is also suffering a lot by that time so it is very unlikely that the bond defaults.

The interest offered is 2.7% which is not too much and not too little also. For those who have lower investment risk appetite and willing to invest in the bond till it matures in 5 years, then I would say you can safely invest in this bond with a peace of mind. Bond price will rise and fall according to market conditions but when it matures, the face value of the bond will be paid back. This means that you will definitely get back your initial invested capital at the end of 5 years (the mature date of this bond) as long as Temasek does not go bankrupt.

Let's say if you invest $20,000 into this bond, you will be able to get $540/year in interest payment and will get back $20,000 at the end of 5 years when it matures. This is good for those who can hold the bond all the way.

Who should not buy this bond?

Even though the risk of default is low for this Temasek bond, for those who are not intending to hold the bond all the way till it matures in 5 years should reconsider before investing in the bond. Bond price rise and fall according to market conditions and bond price and interest rates has an inverse relationship. This means when interest rates goes up in the general economy, bond price will normally fall as well. Temasek has said they only guarantee the interest rate and not the price of the bond.

Interest rates has been rising and I would think will continue going up. For those of us who can't hold the bond till the end of 5 years, its not a very wise choice to invest in bonds now. When the bond price drop and we need the money, we will most likely have to sell it as a lower price resulting in a loss. This is not what we want.

How it is different from the Singapore savings bond (SSB)?

I think there is some confusion on the Singapore savings bond which I will address this as well. What exactly is the difference between the SSB and the new Temasek Bond?

While both the SSB and the Temasek bond offers guaranteed fixed interest rates, Temasek's bond price are not guaranteed while the SSB price is guaranteed. We can sell the Temasek bond anytime but the price may be lower than when we first invested in it and therefore we suffer a loss while for the SSB, we can sell it every month and we will always get back the initial capital which we invested in. In essence, the price of the Temasek bond will change while the price of the SSB will not change at all.

For those who are looking at shorter term low risk investment of less than 5 years, the SSB is still a good choice to consider. This months SSB has interest of 1.80% for first year and 1.94% for second year. It still offers quite good interest for zero risk investment. You can refer to SSB rates here.

For the new Temasek bond, you can find out more about it here. The offer has already started and will end on Tue 23 Oct 2018. You can apply through ATM, internet banking or through mobile apps of certain banks.

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  1. QUOTE: "This is fairly attractive as Temasek is known to be a AAA rating agency where the default risk is low."

    Hmm. I think it would be grossly inaccurate to say that Temasek is a rating agency. It's actually an investment company. I think you probably meant that it is rated AAA by rating agency?

    1. Hi,

      Oh yes, made a mistake in my semtence there. Thanks for pointing out!