Ive a question for ST..
Seeing as to how you're working in Cali, do you buy your insurance over there or in SG?
Does it make a difference?
I'm not Singaporean (I was one of those FT blow-ins) so it wouldn't really make a difference, but the answer is that I don't have any life insurance (don't need it), and I get my medical/dental/optical insurance through my employer.
How does bond fund perform in an rising rate environment? Tale a35 as example. Modified duration of 6+ years, hence when I/r rise 1%, does it mean that the price of the bond fund will fall by 1% multiply by MD of 6?
Yep.
For anyone who's not heard of "modified duration" before - all bond funds report it, and it's a good first-order approximation of how much interest rate risk is in the fund. What it means is: if interest rates have a parallel shift higher of 1% at every point in the yield curve, you'll lose {modD}%. So if the SGD yield curve moves 1% higher, and your fund has a modified duration of 6.0, you'll lose 6% of your money.
Modified durations can be large (on long-dated low-coupon bonds, and especially so on zero-coupon bonds), small (on floating rate bonds, where the rate resets every few months), or even negative (on mortgage IOs, where rising interest rates mean you get payments for a longer period of time; or if your fund has used futures or borrowing to get net short bonds).
If in the long term, I expect rates to rise up till 5-8% (historical normal levels). What would this do to my bond fund which I have bought at this ZIRP levels
It all depends on how fast those rates go up. Two things to keep in mind:
1) The A35 fund holds bonds pretty much all the way to maturity, so even if the bonds inside the fund lose some money during the move, they'll gain that money back when they converge to par;
2) You're earning interest all the way up, and that interest rate rises as rates go up (because the fund reinvests its maturing bonds into higher-coupon bonds).
Anyway - I don't have the chops or the bond analytics tools to do this myself, but I can link to people who do.
This research paper from Nuveen is a lot to wade through, but if you skip straight to page 5, you'll see how a bunch of different bond classes performed during the rising rate environments of 1994/'95, 1999/2000, and 2004-'06.
Short answer: they were pretty much flat. In most cases, the carry from interest payments and reinvestment covered the mark-to-market losses on the bonds, and those rate-hiking cycles were a lot faster (hikes at every meeting) than what everyone's expecting from the Fed this time around (hikes at every second meeting).
Rates are starting from a lower base this time around, so you've got less carry to insulate you, but also the hikes will be slower, so the mark-to-market losses will be less severe. I think the net result is going to be that US and Singaporean bonds are pretty much flat for the next few years.
