OTC Bond Opportunities (July)

Since Feb 2018, bonds and reits have fallen and have not recovered to Feb highs. With interest rates rising, they have fallen out of investor’s favour. Yet recently, many SREITS are now making 20 day highs, outperforming most SGX stocks. Like wise bonds have recovered slightly after long tenor bonds were beaten down.

I sold ASTREA IV S$242M4.35%B280614 (RMRB.SI) retail bond at 1.05 last friday. Nothing wrong with this bond, in fact, I like this bond (see http://wealthlions.com/2018/06/astrea-iv-4-35-retail-bonds/). 5% is more than one year’s coupon. The money can be channeled elsewhere.

List of interesting bonds

I have compiled a list of OTC bonds that looks interesting to me. These are not my recommendations, but a list of bonds that looks interesting to reflect what is currently in the market. Note that prices are approximations.

Here are my observations on the prices and also some learnings from working with the bond desk at Maybank Kim Eng.

  • USD bonds now give much higher yield for the same issuer and tenor than SGD bonds. The banks are pricing USD bonds lower due to lower demand because of the interest rate sentiments.
  • Long dated USD bonds have been beaten down severely. Most perpetuals that have call dates longer than 5 years are most affected. It seems that no one is buying these bonds now. Market makers at the banks need to put a bid price, but are concerned that they cannot sell higher if they take in these bonds. So they price them much lower. This also increases the spread of these bonds.
  • SGD bonds have softened slightly, prices are about fair value now.
  • The banks have offer prices for LippoMalls Tr bonds, but no bid prices. This means that they are want to sell to you, but are not willing to buy from you. YTC for LippoMalls Tr bonds are about 8.3%, and after leverage, 20%. On the flip side, the banks have bid prices for First Reit bonds, but no offer prices. This means that they are want to buy from you, but are not willing to sell to you. Lippo Karawachi is the sponsor of both First Reit and LippoMalls Tr. If there are no more surprises, then LippoMalls Tr may be a good buy. What do the banks know that we dont?

Steps to decide which bond to invest in

Higher yield is the most important factor to me. Being able to sleep well at night is the most important.If I were to buy a bond today, here are the steps that I will go through:

  1. Am I willing to accept currency risk of USD of investing in USD bonds. USD bonds give the highest return now. If unwilling to, then stay with SGD bonds only.
  2. Am I willing to accept price fluctuations of long tenor bonds of QBE Insurance (7 years), or take the risks of the unknowns with LippoMalls Tr? These bonds give high returns, which comes with associated risks.
  3. Its clear for the risk averse to go for short tenor bonds.
    • Am I willing to go for perpetual bonds with a short call date and a good reset (eg. Ascott 4.68%, SCB 6.5%)?
    • Do I insist on a straight bond with fixed reset (Eg. OUE and Olam bonds).
  4. Do I want to supercharge (leverage) for high returns.

Everyone will have different choices as risk appetites and investment objectives vary.

The above spreadsheet can be found in https://docs.google.com/spreadsheets/d/1HFayHmvLKDkiar5raG8P5D9LZsOppm1-Z-N49ocJwB0/edit?usp=sharing


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