Are foreign bonds a good investment? Emerging Markets give a solid 4-6% returns and its better than the returns offered by SSBs? - Seedly
 

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Asked by Anonymous

Asked on 12 Mar 2019

Are foreign bonds a good investment? Emerging Markets give a solid 4-6% returns and its better than the returns offered by SSBs?

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Luke Ho
Luke Ho
Level 6. Master
Answered on 13 Mar 2019

Individual foreign bonds are tricky. A foreign bond fund might be better, and they provide said returns with greater diversification, a higher range of credit ratings and its cheaper and easier for them to account for the forex risk.

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Kishor Bhagwat
Kishor Bhagwat
Level 4. Prodigy
Answered on 13 Mar 2019

Emerging market bonds are a good investment, if you can use ETFs. The main thing to consider when investing in EM bonds is currency volatility. The currency volatitlity is a problem with bonds because bonds themselves are not volatile, so currency changes can wipe out your gains. There are 2 ways to avoid/manage this: 1. Go for USD-denominated debt. It means the country is borrowing in USD, so you dont have worry about local currency. 2. Go for USD-hedged fund. The country is borrowing in local currency, but the fund is hedging the currency risk.

I prefer option 1, but sometimes you can only choose what is available in the market.

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Richard Woon Tian Jun
Richard Woon Tian Jun
Level 6. Master
Answered on 12 Mar 2019

If foreign bonds give you a better value per interest payment and after currency rate adjustments, then yes, they can be a very good investment as well! especially with regards to strong emerging economies who have a strong, steadily appreciating currency due to strong demand for their exports/ currency for investments. 1 Example in 2017 was Thailand, that was the biggest winner for emerging economies. This year, Philippines and their strengthening pesos are looking like a good investment opportunity, you could look more into that!

High interest rate % + appreciating currency/steady currency exchange = better value!

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Joseph Ong
Joseph Ong
Level 1. Freshie
Answered on 19 Mar 2019

Use N6M etf

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Serene Toh
Serene Toh
Level 5. Genius
Updated on 07 Jun 2019

(Not qualified Advisor)

I noticed that too, but don't really have enough funds, time & expertise to go into the details of foreign bonds. So last year I decided to buy a Unit Trust focusing on foreign bonds, that gaves fixed monthly dividends. The banker that sold this to me, repeatedly reminded me that this is a high risk investment. However it would be better than me putting my money in 2-3 bonds.

Agree with Luke on the advantages of a foreign bond fund. Plus it is tracked in Sing dollar, so don't feel the pain of exchange rate (doesn't mean it don't exist).

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Luke Ho
Luke Ho

on 15 Mar 2019

It was nice of him to emphasize the risk. It's not a high risk investment compared to a largely equity portfolio - for example, foreign bonds simply don't carry the same max loss and gain ratios of US equities (which are already the most efficient in the world), but its more understated than overstated. Looks like you got yourself a good banker.
Serene Toh
Serene Toh

on 20 Mar 2019

Noted on the risk. Actually he mentioned that it’s the bonds that they invest in that are risky, to get a high return. (Possibility of Hyflux type of bonds) but the risk is mitigated as the investment is spread over a large range of bonds, largest only 3-4% of the fund.
Gabriel Tham
Gabriel Tham, Kenichi Tag Team Member at Tag Team
Level 8. Wizard
Answered on 12 Mar 2019

You have to consider 2 way exchange rates fluctuations too, unless you intend to use the foreign currency in future.

You change SGD to foreign currency, you lose some in fees or exchange rates.

Then you change back to SGD, you also lose some in fees or exchange rates.

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