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santaklauz90

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Now this is a great question. If interest rates are going to go up - and they will - why would you want to own bonds?

There are a couple of reasons.

1) You'll still make money if you hold to maturity.
2) You'll still get the portfolio diversification bonus. Stocks aren't going to go up in a straight line; and when they dip, you'll want to have some ammo to rebalance and buy more stocks. Your bond holdings are that ammo.
2a) "But," I hear you ask, "if you want that, why not keep your portfolio in cash?". Because bonds give you a yield pickup over cash - and normally I make fun of people for being yield whores, but moving from cash to high-quality bonds is a perfectly legit way of getting some extra yield on cash that you don't need immediately.

There are a few other peripheral reasons. Short-dated bonds are a great investment in a rising rate environment, because as your bonds mature you can reinvest them at the juicy higher interest rates. Some bonds are better insulated from rising rates - the US municipal bond market is quite a good place to pick up some extra (tax-free!) yield, though it's not quite as good as it was last year during the Puerto Rico panic.

In the Singapore context, though, those peripheral reasons are pretty irrelevant. You're a bit limited in what you can invest in - there are no good SGD-denominated short-dated bond funds, no good high-yield funds, and no good SGD corporate bond funds. So - go with what you've got. Stick to A35.


Pardon if this sounds like a stupid question. As we know ABF consists of bonds like Singapore Government, HDB, and LTA with different maturity dates that range from 2018,2020 up till 2050. So when you were saying "hold to maturity", what does it exactly mean
 

sgdividends

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Pardon if this sounds like a stupid question. As we know ABF consists of bonds like Singapore Government, HDB, and LTA with different maturity dates that range from 2018,2020 up till 2050. So when you were saying "hold to maturity", what does it exactly mean

Hi Santaklauz,

ABF has no maturity as you correctly stated that it is a basket of bonds. And they do buy new bonds as they sell old bonds ( usually near maturity dates).

Think "hold to maturity" refers to a single bond.
 

blurblur123

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They're the same thing underneath - exactly the same. They're both funds that own the STI component shares, in the same proportions, and they should perform exactly the same give or take fees. There's no more or less "growth potential" in either one of them.

You want to use ES3 if you can afford it (the lot size is $3k, as against $300-ish for a round lot of G3B), because the spread is a bit tighter, so it's a bit less expensive to get in and out. Once SGX cuts the maximum lot size to 100 shares next year, there'll be no reason to use anything other than ES3.

I see... Thank you! I wonder if the drop in lot size will affect the price since now more ppl can invest?
 

blurblur123

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Pardon if this sounds like a stupid question. As we know ABF consists of bonds like Singapore Government, HDB, and LTA with different maturity dates that range from 2018,2020 up till 2050. So when you were saying "hold to maturity", what does it exactly mean

U need to understand how bonds work...

When u buy a bond, u r buying it at a discounted rate... Let say it is 990... Then when it matures, the price is 1000 lor...
 

Inediblebulk

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How about sgx:ql3 ishares high yield bonds etf?

Granted some defaults can be expected but the higher yield would be able to compensate it over a long period?
 

sgdividends

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Hi,

DOes anyone know if the keystone XL pipeline that is bringing oil from Cananda directly to the Gulf be any good for WTI oil price?

I read that oil price is depressed partly due to glut in Cushing as refinery's there are fully utilised, so will the diversion of oil to the Gulf from Canada instead of oil from canada to Cushing (and being stuck there) solve this problem?
 

SpeedingBullet

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Hi,

DOes anyone know if the keystone XL pipeline that is bringing oil from Cananda directly to the Gulf be any good for WTI oil price?

I read that oil price is depressed partly due to glut in Cushing as refinery's there are fully utilised, so will the diversion of oil to the Gulf from Canada instead of oil from canada to Cushing (and being stuck there) solve this problem?

Just got blocked by the Senate. Buffett and his railroads win again :s12:
 

sakura_formidable

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Bad news unfortunately mate - years of hands-on experience is the only way. Getting a business degree - with a major in economics or financial markets, not something fuzzy like management - is a good starting point, though.

imho engineering ftw, as you actually learn stuff that you can apply to other fields.

if u wish to take up academic studies in finance and related stuff, enroll for the CFA level 1 instead - you will get very good & thorough reading material (the cost comes only at a fraction compared to the cost of a degree!).

i studied economics and some finance in school, i thank my lucky stars that i wasn't fully brainwashed by academia.
 

Shiny Things

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DOes anyone know if the keystone XL pipeline that is bringing oil from Cananda directly to the Gulf be any good for WTI oil price?

I read that oil price is depressed partly due to glut in Cushing as refinery's there are fully utilised, so will the diversion of oil to the Gulf from Canada instead of oil from canada to Cushing (and being stuck there) solve this problem?

Um. The Keystone XL pipeline is designed to get the oil to Cushing from the oil sands of Canada - the disputed leg of the pipeline runs from Alberta to Nebraska, and that leg will feed the already-running pipeline from Nebraska to Oklahoma (where Cushing is).

So I'd say a Keystone XL approval would have been bad for WTI at the margin, but it'll take a couple of years to build KXL, so any effect on the price of WTI would be a long time coming.

The vote was shot down in the Senate today, but it's going to come back as soon as the Republicans take over the Senate in January. This vote was really just a piece of grandstanding; it shouldn't really have had any effect on oil prices.

Fun fact: apparently KXL will really put the hurt on Venezuelan crude rather than WTI. The Alberta oil-sands crude is horrible, heavy stuff - basically it's like digging up the road out the front of your house and stuffing it in your car's fuel tank. WTI, on the other hand, is light and sweet, and produces a lot of high-value light products when it's refined.

So WTI and Albertan crude aren't very good substitutes. But Albertan oil-sands crude is a very good substitute for Venezuela's crude, which is also horrible, heavy stuff. But the real kicker: because the US has been a massive net importer of crude oil for the last half-century, a trend that's only turned around in the last couple of years, most of the refineries on the Gulf Coast where most of this stuff gets done have been set up to use imported heavy crude rather than local light crude. And if there's suddenly a huge pipeline of heavy crude from Alberta straight to those refineries, they'll quite happily take that crude instead of the Venezuelan stuff.

So if KXL is approved, it's going to hurt WTI a bit, but it's going to hurt Venezuela a lot.

(Any oil markets specialists want to comment on the above? If I got anything wrong, feel free to jump in and correct me.)

How about sgx:ql3 ishares high yield bonds etf?

Granted some defaults can be expected but the higher yield would be able to compensate it over a long period?

I know it exists, and I'm not averse to owning some high-yield (I've got 3% of my portfolio in it), but small investors don't need exposure to high-yield bonds. They're different from regular bonds; they're riskier, and more volatile. Stick to regular bonds if you're small; you don't need to start looking at high-yield ETFs unless you've got mid six figures or so.

And also high-yield bonds aren't particularly good value at the moment. Because interest rates are so low, the outright yields in the high-yield space aren't going to be enough to compensate you if defaults return to their historical norms. I've seen a few "top trades for 2015" pieces going around saying that high-yield stuff isn't particularly good value, especially the really junky companies down in the CCC-and-lower space.

U need to understand how bonds work...

When u buy a bond, u r buying it at a discounted rate... Let say it is 990... Then when it matures, the price is 1000 lor...

That only applies to discount bonds (zero-coupon bonds, or short-dated bills). Coupon-paying bonds are different.

I see... Thank you! I wonder if the drop in lot size will affect the price since now more ppl can invest?

Nah - the price of ES3 is driven by the price of the underlying shares. The increased demand will only have a miniscule effect.
 

Inediblebulk

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I know it exists, and I'm not averse to owning some high-yield (I've got 3% of my portfolio in it), but small investors don't need exposure to high-yield bonds. They're different from regular bonds; they're riskier, and more volatile. Stick to regular bonds if you're small; you don't need to start looking at high-yield ETFs unless you've got mid six figures or so.

And also high-yield bonds aren't particularly good value at the moment. Because interest rates are so low, the outright yields in the high-yield space aren't going to be enough to compensate you if defaults return to their historical norms. I've seen a few "top trades for 2015" pieces going around saying that high-yield stuff isn't particularly good value, especially the really junky companies down in the CCC-and-lower space.

What would be the historical norms for defaults? 3-4%?

It's abt 50% B2 and above. Around 30% unrated bonds.
 

Shiny Things

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What would be the historical norms for defaults? 3-4%?

It's abt 50% B2 and above. Around 30% unrated bonds.

Great question. Some kind person has put S&P's entire corporate credit defaults study for 2013 on line, so let's go to the source.

Table 4 on page 10 (and chart 1 on page 5) has the numbers you want. The one-year default probability for companies rated investment grade (BBB- or above) is vanishingly small; less than one-tenth of one percent. For junk bonds (the bonds that are in your high-yield fund), it's much higher, but also a lot more volatile: it's either 2-4% (in the good times) or 10% (in the bad times).

So your high yield bond fund that's yielding 5% might be OK (assuming you have some decent recoveries on the defaulted bonds), but it's really not leaving a lot of room for error.

But that's just one year - what about the long term default probabilities?

(Side note before we go into this - rating agencies usually rate companies either A, B, C, or D (for "defaulted"). Within those, there are sub-letter-grades - AAA is above AA, which is above A, which is above BBB... all the way down to single-C, then D - and there are pluses and minuses, so AA+ is better than AA, which is better than AA-minus, which is better than A+. There's no AAA-plus or AAA-minus, though: triple-A is as good as it gets. Australia is AAA. Microsoft is AAA. The top tranches of mezzanine-ABS-CDOs are AAA, oh wait they got that one wrong didn't they.)

Chart 4 on page 8 is what you want for this one. How to read it: for a bond that starts off rated in the Cs - anywhere from CCC-plus to C-minus - there's about a 50% probability it will default sometime in the next decade. For single-Bs, that's about 25%; for double-Bs, that's about 15%. For triple-Bs and below, it's basically SFA - zero to five percent over a decade. This is why BBB-ish is the dividing line between "investment grade" and "junk".
 

sgdividends

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Shiny,

I read that many countries are bypassing the USD to change to other currency pairs and China is aggressively promoting the use of their currency .

What's the implication if US loses its reserve currency status?
 

Inediblebulk

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Thanks shiny for the enlightenment!

I'm early 30s and is thinking about putting 100k into investment after settling my flat renovation next year.

My original intention is to put 70% stocks and 30% high yield bonds. After looking possible default rates, I would put 20% sgx:ql2 and 10% sgx:ql3.

My personal opinion is that A35 yield is only slightly better than FD and not really attractive.
 

Majestic12

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The IMF's SDR is the supranational currency that is being used to replace the USD as reserve currency. SDR here being a composition of various currencies with gold taking up a certain percentage of it and the BRICS currencies (Yuan, Ruble, Rupee, Real) forming part of it as well.

Basically the world becomes less dependent on the USD - which is a good thing for non-US nations.

Shiny,

I read that many countries are bypassing the USD to change to other currency pairs and China is aggressively promoting the use of their currency .

What's the implication if US loses its reserve currency status?
 

sgdividends

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Thanks Majestic,

The IMF SDR is it being used? As in i dont see it in currency pairs like USD/SGD, USD/JPY..i read that now many countries are able to do trade without having to change to USD first before changing to another countrie's currency.

Actually i dont really know what i am looking out for honestly, im just trying to sniff out the mega trends and any other insights?
 
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Shiny Things

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Thanks shiny for the enlightenment!

My original intention is to put 70% stocks and 30% high yield bonds. After looking possible default rates, I would put 20% sgx:ql2 and 10% sgx:ql3.

I don't think this is a good idea. QL2 and QL3 are both stuffed full of non-SGD assets, so you're taking on currency risk as well as all the other risk.

30% high-yield bonds is definitely far too much, so I'm glad you've moved away from that, but you should still allocate a majority of your bonds to A35.

Singaporean yields suck; that's all there is to it; but that doesn't mean you should immediately race overseas because you're horny for the yield, otherwise you're going to get f*cked hard if SGD strengthens.
 

Shiny Things

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I read that many countries are bypassing the USD to change to other currency pairs and China is aggressively promoting the use of their currency .

The whole "bypassing the USD" thing is a furphy. China buying its oil in rubles or renminbi, or Iran buying its oil in euros, makes absolutely no difference to the value of the dollar or the demand for dollars or anything.

Here's why. Imagine a world where China is buying oil from Russia. Normally what they'd do is: a Chinese company buys US dollars; hands them to the Russian oil company in return for oil; and the Russian company sells those US dollars for rubles (or more likely doesn't, because rubles are about as popular as herpes right now).

Now if China decides to pay in rubles, all that happens is the intermediary "buy dollars" step disappears - but so does the "sell dollars" step! The net demand for dollars doesn't change. The price of a dollar doesn't change. Valuing a barrel of oil in rubles, or renminbi, or stones or shells or whatever, doesn't change the value of the dollar because in this case, the dollar is just a unit of account.

What's the implication if US loses its reserve currency status?

This is a great question, and a controversial one; there isn't a good answer. Valery Giscard d'Estaing coined the phrase "exorbitant privilege" to describe the US's reserve currency status, but that was back in the 1960s, when there really was an advantage to having reserve currency status.

These days, there are very serious economists arguing that the US reserve-currency status is an exorbitant burden, and that the US should be encouraging people to use other currencies for their reserves.

Michael Pettis writes: "When foreigner central banks intervene in their currencies -- and otherwise repress their domestic financial systems -- they automatically increase their savings rate by forcing down household consumption. As their savings rise, the excess must be exported, often in the form of central bank purchases of U.S. government bonds. [...]

"But being able to take on debt is not a privilege. When foreigners actively buy dollar assets they force down the value of their currency against the dollar. U.S. manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand -- and with it domestic employment -- by running up public or private debt. But, of course, an increase in debt is the same as a reduction in savings. If a rise in foreign savings is passed on to the United States by foreign accumulation of dollar assets, in other words, U.S. savings must decline. There is no other possibility.

"So where is the privilege in all this? Ask any economist to describe the greatest weaknesses in the U.S. economy, and almost certainly the list will include the gaping trade deficit, the low level of savings, and high levels of private and public debt. But it is foreign accumulation of U.S. dollar assets that, at best, permits these three conditions (which, by the way, really are manifestations of the same condition) and, at worst, causes them to deteriorate."


What that wall of text means is: basic economics says being a reserve currency has more disadvantages than advantages. Reserve currency status hurts your manufacturing sector, hurts employment, and causes a trade deficit. I'm not sure if I'd go so far as to say the French finance minister was wrong - and to be fair, economic thought has changed a lot since the 1960s - but there's certainly a lot more nuance to it than just "reserve currency is always good and the US should be proud of it, so, shut up".

The IMF's SDR is the supranational currency that is being used to replace the USD as reserve currency. SDR here being a composition of various currencies with gold taking up a certain percentage of it and the BRICS currencies (Yuan, Ruble, Rupee, Real) forming part of it as well.

Are you high? The SDR is a basket of USD, JPY, EUR and GBP. There's no gold in it, and no BRICS currencies.

China was making lots of noise about "oh why isn't the yuan included in the SDR basket", but that's not going to happen until the yuan is fully convertible. No-one would want to have a reserve currency that you can't sell when you need to.

The IMF SDR is it being used? As in i dont see it in currency pairs like USD/SGD, USD/JPY..i read that now many countries are able to do trade without having to change to USD first before changing to another countrie's currency.

Majestic kind of has the wrong idea about what an SDR is. An SDR is basically an accountancy thing - the IMF and the World Bank and a bunch of other supranationals use the SDR as their currency unit when they're doing their accounting.

Countries can also hold some of their FX reserves in SDRs - each country was given a slug of SDRs by the IMF back in 1969, and another slug in the depths of the crisis in 2009, the idea being that countries with weak foreign reserves could sell their SDRs to countries with strong foreign reserves to bolster the weak countries' currencies. So in that sense they're kind of a thing. This IMF factsheet is a really good explainer of "what an SDR is".

In currency terms, an "SDR" is a basket of four currencies - one SDR is worth about 60 US cents, plus 40 euro cents, plus 10 pence sterling, plus 12 yen.

But nobody other than central banks and supranational organisations uses SDRs. Nobody else can trade them. And if you were trying to conduct trade in SDRs, it's sort of inconvenient to have to handle piles of four different currencies to settle the trade. So SDRs are really not a thing.

One thing I forgot to add: the answer to "is it being used" is "apparently no". The biggest holders of SDRs are developed nations, who already have chunky FX reserves, so they don't really need the SDRs. As a reserve currency it's pretty much a dud.

Actually i dont really know what i am looking out for honestly, im just trying to sniff out the mega trends and any other insights?
Yep, no worries, this is an admirable goal. You just need to make sure you're not led astray by bad info on the way to those insights.
 
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Majestic12

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Shiny, I knew you would come out swinging with the historic composition of the SDR. I'm not keen to go into the intricacies of how it will evolve, so we will have to agree to disagree. Time (and the movement behind the scenes) will reveal this transition.
 

sgdividends

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Thanks Shiny,

I sort of understand everything u wrote until the Michael Pettis part where i got a headache rereading it and not understanding one bit.

My understanding (after researching) is that foreign central banks hold USD reserve currencies to manage their exchange rate as USD is highly liquid and accepted worldwide.
So if the US loses it's reserve currency status, it's power to assert its influence will be much much reduced as foreign countries dont hold as much US dollars and whatever US do, they need not be too concerned. I am still thinking of what i should invest in if i have this view given a 60 years horizon for my baby. Since its a controversial topic, i guess i better not pursue further this topic..

I have another question, unrelated.
For Utility assets or any assets for that matter, with high depreciation rates, what will happen after it has been completely depreciated? As this is an accounting concept, how is it related to real life implications?

I am sure they don't throw away the asset as the asset can still be used.
From what i understand ( may be wrong), the useful life of an asset in terms of accounting is not related to the actual life of the asset.
 

sgdividends

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ok.

Fully Depreciated Assets
It's common to see depreciation referred to as "the decline in an asset's value due to wear and tear." This description may help people wrap their heads around the concept, but it isn't actually correct. Depreciation is about allocating the cost of an asset, not putting a value on it. The book value is just an accounting device (a trick, even); it's not the same as the market value. The truck mentioned earlier may have a book value of $45,000 after one year, but if the company chose to sell it, it might get only $35,000. After nine years, the book value might be $5,000, but maybe the company could get $10,000 for it. A fully depreciated asset may have a book value of zero or a salvage value of, say, $1,000, but the company might get more if it sold the asset
 
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