Floating Rate Bonds

[Tesla8]

I recently heard about Floating Rate Bonds like FLOT, FLRN & FLTR. Anyone has opinion/experience regarding these bonds? Is it advisable to invest?

Thanks.

 

[BBCWatcher]

Is it advisable to invest?

The most common and widely held floating rate bonds are U.S. Treasury Inflation-Protected Securities (TIPS). Those are quite useful for certain purposes, and they're also quite safe. Their rates (coupons) vary according to the U.S. Consumer Price Index (CPI), i.e. the U.S. dollar inflation rate. Their retail investor counterparts, Series I Savings Bonds, are even better in certain ways, although those are harder for non-U.S. persons to access.

U.S. government housing-related agencies issue floating rate bonds, too, and those are fairly widely held and relatively easy to hold via GNMA funds, for example. I believe those funds hold a mix of floating rate and non-floating rate bonds.

These examples are high quality bonds and bond funds, all investment grade (high investment grade, in fact). There are then junk floating rate bonds, and those are not so interesting to me.

 

[Tesla8]

The most common and widely held floating rate bonds are U.S. Treasury Inflation-Protected Securities (TIPS). Those are quite useful for certain purposes, and they're also quite safe. Their rates (coupons) vary according to the U.S. Consumer Price Index (CPI), i.e. the U.S. dollar inflation rate. Their retail investor counterparts, Series I Savings Bonds, are even better in certain ways, although those are harder for non-U.S. persons to access.

U.S. government housing-related agencies issue floating rate bonds, too, and those are fairly widely held and relatively easy to hold via GNMA funds, for example. I believe those funds hold a mix of floating rate and non-floating rate bonds.

These examples are high quality bonds and bond funds, all investment grade (high investment grade, in fact). There are then junk floating rate bonds, and those are not so interesting to me.

Based on Vanguard website, GNMA fund price will go down when interest rate rises. Seems that it will better to put USD in Fixed Deposit @ 2.5% ?

 

[BBCWatcher]

Seems that it will better to put USD in Fixed Deposit @ 2.5% ?

"Better" for what? What are your goals?

 

[Tesla8]

"Better" for what? What are your goals?

My goal is for capital preservation and it is for quite a big amount.

 

[BBCWatcher]

My goal is for capital preservation and it is for quite a big amount.

Well, there are a few high quality inflation-adjusted bonds (a type of floating rate bond) that do a rather good job preserving capital in other currencies. Singapore doesn't seem to offer them, sadly. I've mentioned before that it'd be awfully nice if MAS could auction a medium-term inflation-adjusted bond once per year, let's say.

Let me take a quick look at U.S. bank and credit union Certificate of Deposit (CD) rates to see if I can "reverse engineer" what you have in mind....

OK, at this instant (as I write this) TriState Capital Bank in the U.S. is offering 2.7% APY on a 1 year CD, minimum US$100,000. ableBanking (an online bank) and Connexus Credit Union are offering 2.5% if you're looking to place less than that, also for 1 year. You can lock in higher rates if you want to pick a longer term CD. The U.S. deposit insurance limit is US$250,000, please bear in mind, and deposit insurance does not assure that the remainder of an attractive CD term will be honored. Deposit insurance only guarantees your principal plus accrued interest to that point, the point of bank failure. There are a couple ways to multiply the US$250,000 limit at the same financial institution that may work for you. These are pre-tax interest rates (cannot remember offhand if bank/credit union interest is taxable for non-U.S. persons), and a U.S. financial institution is under no particular obligation to accept a deposit from a non-U.S. person.

There is no deposit insurance in Singapore on non-Singapore dollar deposits. You won't get any U.S. dollar capital preservation in Singapore, I'm afraid -- not in any legitimate sense of the term, anyway.

One option you may wish to consider is to create a CD or a U.S. Treasury bond "ladder." Let's suppose for example that you have US$400,000 to place. You could divide that up into equal chunks and buy 3, 6, 9, and 12 month CDs, for example. When each CD matures, roll it into a 12 month CD (best available at the time). Loop, repeat. Or, use U.S. Treasuries, which are easier for non-U.S. persons to obtain at auction. They're also U.S. tax advantaged for non-U.S. persons. A 1 year Treasury is running about 2.35% at the moment (as I write this).

 

[Tesla8]

Well, there are a few high quality inflation-adjusted bonds (a type of floating rate bond) that do a rather good job preserving capital in other currencies. Singapore doesn't seem to offer them, sadly. I've mentioned before that it'd be awfully nice if MAS could auction a medium-term inflation-adjusted bond once per year, let's say.

Let me take a quick look at U.S. bank and credit union Certificate of Deposit (CD) rates to see if I can "reverse engineer" what you have in mind....

OK, at this instant (as I write this) TriState Capital Bank in the U.S. is offering 2.7% APY on a 1 year CD, minimum US$100,000. ableBanking (an online bank) and Connexus Credit Union are offering 2.5% if you're looking to place less than that, also for 1 year. You can lock in higher rates if you want to pick a longer term CD. The U.S. deposit insurance limit is US$250,000, please bear in mind, and deposit insurance does not assure that the remainder of an attractive CD term will be honored. Deposit insurance only guarantees your principal plus accrued interest to that point, the point of bank failure. There are a couple ways to multiply the US$250,000 limit at the same financial institution that may work for you. These are pre-tax interest rates (cannot remember offhand if bank/credit union interest is taxable for non-U.S. persons), and a U.S. financial institution is under no particular obligation to accept a deposit from a non-U.S. person.

There is no deposit insurance in Singapore on non-Singapore dollar deposits. You won't get any U.S. dollar capital preservation in Singapore, I'm afraid -- not in any legitimate sense of the term, anyway.

One option you may wish to consider is to create a CD or a U.S. Treasury bond "ladder." Let's suppose for example that you have US$400,000 to place. You could divide that up into equal chunks and buy 3, 6, 9, and 12 month CDs, for example. When each CD matures, roll it into a 12 month CD (best available at the time). Loop, repeat. Or, use U.S. Treasuries, which are easier for non-U.S. persons to obtain at auction. They're also U.S. tax advantaged for non-U.S. persons. A 1 year Treasury is running about 2.35% at the moment (as I write this).

Thanks, BBCWatcher.

I am looking for something like "FLOT" and "FLRN" which can be bought/invest through IBKR. But I am not sure what are the interest rate/dividends for these two. Maybe I shouldn't touch it at all!

What you mentioned may not be easily available to people like me who are not in the USA.

 

[BBCWatcher]

What you mentioned may not be easily available to people like me who are not in the USA.

U.S. Treasuries are very easily available through (as notable examples) Interactive Brokers and Charles Schwab Singapore.

The 52-week T-Bill isn't auctioned all that often, so you might choose the 26-week T-Bill as your longest ladder rung since that one is auctioned every week, practically. Currently the 26-week T-Bill is yielding about 2.1%/year. Or you could go with the 2 year note which is auctioned every month toward the end of the month. The 2 year is yielding around 2.6% right now.

If you're unsure what to do and just need more time to decide, park all your U.S. dollar parkable funds in a 4-week T-Bill at ~1.8% currently. There's a 4-week T-Bill auctioning tomorrow (U.S. time) that you might be able to grab if you act quickly: CUSIP 912796MK2. But if you miss that one there are most probably going to be two 4-week T-Bill auctions next week (announced on June 25 and June 28, 2018). I don't have CUSIP numbers for those auctions yet since the U.S. Treasury announces the CUSIPs when the auctions are officially announced, but they've got those dates on the tentative calendar.

U.S. Treasury bills, notes, and bonds are general U.S. federal government debt obligations, backed by the full faith and credit of the United States federal government. They are the very safest U.S. dollar denominated assets.

For T-bills you buy below par value, the bills pay no coupons, and you get par value (face value) back at maturity if held to maturity. U.S. Treasuries have a very active and liquid secondary market, so if you want to sell your bill, note, or bond before maturity you can. (Exception: U.S. Savings Bonds, which are not secondary market traded but which are generally redeemable directly with the U.S. Treasury before maturity. But Savings Bonds are mostly a product for U.S. residents, or at least also for ex-residents who were able to set up Treasury Direct accounts while they were residents.)

Schwab lets you buy U.S. Treasuries at initial auction for zero charge, absolutely no fee. And there's no charge if held to maturity either. Zero, zip, nada. The only charges are your currency conversions (if applicable) in and out, but those are pretty respectable. Interactive Brokers does charge a small commission, but they have lower currency exchange costs. If you already have U.S. dollars, especially in a U.S. bank or U.S. credit union account, then Schwab is likely going to be your best bet for U.S. Treasury purchases.

To my knowledge, U.S. Treasuries are U.S. income and estate tax exempt for non-U.S. persons. However, cash (in all currencies) held at a U.S. broker is not U.S. estate tax exempt. The estate tax exemption only applies while the funds are in the form of U.S. Treasuries (and other exempt assets, such as U.S. bank and U.S. credit union deposits).

 

[Tesla8]

U.S. Treasuries are very easily available through (as notable examples) Interactive Brokers and Charles Schwab Singapore.

The 52-week T-Bill isn't auctioned all that often, so you might choose the 26-week T-Bill as your longest ladder rung since that one is auctioned every week, practically. Currently the 26-week T-Bill is yielding about 2.1%/year. Or you could go with the 2 year note which is auctioned every month toward the end of the month. The 2 year is yielding around 2.6% right now.

If you're unsure what to do and just need more time to decide, park all your U.S. dollar parkable funds in a 4-week T-Bill at ~1.8% currently. There's a 4-week T-Bill auctioning tomorrow (U.S. time) that you might be able to grab if you act quickly: CUSIP 912796MK2. But if you miss that one there are most probably going to be two 4-week T-Bill auctions next week (announced on June 25 and June 28, 2018). I don't have CUSIP numbers for those auctions yet since the U.S. Treasury announces the CUSIPs when the auctions are officially announced, but they've got those dates on the tentative calendar.

U.S. Treasury bills, notes, and bonds are general U.S. federal government debt obligations, backed by the full faith and credit of the United States federal government. They are the very safest U.S. dollar denominated assets.

For T-bills you buy below par value, the bills pay no coupons, and you get par value (face value) back at maturity if held to maturity. U.S. Treasuries have a very active and liquid secondary market, so if you want to sell your bill, note, or bond before maturity you can. (Exception: U.S. Savings Bonds, which are not secondary market traded but which are generally redeemable directly with the U.S. Treasury before maturity. But Savings Bonds are mostly a product for U.S. residents, or at least also for ex-residents who were able to set up Treasury Direct accounts while they were residents.)

Schwab lets you buy U.S. Treasuries at initial auction for zero charge, absolutely no fee. And there's no charge if held to maturity either. Zero, zip, nada. The only charges are your currency conversions (if applicable) in and out, but those are pretty respectable. Interactive Brokers does charge a small commission, but they have lower currency exchange costs. If you already have U.S. dollars, especially in a U.S. bank or U.S. credit union account, then Schwab is likely going to be your best bet for U.S. Treasury purchases.

To my knowledge, U.S. Treasuries are U.S. income and estate tax exempt for non-U.S. persons. However, cash (in all currencies) held at a U.S. broker is not U.S. estate tax exempt. The estate tax exemption only applies while the funds are in the form of U.S. Treasuries (and other exempt assets, such as U.S. bank and U.S. credit union deposits).

Thanks, BBCWatcher, for the detailed explanations.

When I back in Singapore, I will temporary park the funds at UOB/OCBC for about 1.9% for 3 months FD and StanChart 2.5% for 1 year FD.


Once again, thank you.

 

[BBCWatcher]

When I back in Singapore, I will temporary park the funds at UOB/OCBC for about 1.9% for 3 months FD and StanChart 2.5% for 1 year FD.

I don't think I would, especially if the amount is substantial. There is absolutely zero deposit insurance on anything at a bank in Singapore that's not in Singapore dollars. You can get the world's absolute best U.S. dollar safety in U.S. Treasuries and enjoy the same sort of interest rates, so that's really a no brainer. On top of that, there's a huge secondary market that allows you to sell your U.S. Treasuries before maturity if you wish, so it's like getting a free option along with the bill, note, or bond. And, if that's not enough, your U.S. dollars aren't "stranded" in a bank in the "wrong" country that can (and does) charge steep fees that can change on a whim.

Back when there was a yield gap the banks in Singapore were a bit more interesting, perhaps (pun intended), but not now.

 

[Shiny Things]

I recently heard about Floating Rate Bonds like FLOT, FLRN & FLTR. Anyone has opinion/experience regarding these bonds? Is it advisable to invest?

Thanks.

"Is it advisable to invest in xyz product" is always a tricky question. The answer might be "yes" or "no", depending on what your goals are; and starting with the investment is the wrong way to look at it. The smart thing to do is figure out what your goals are first, and then figure out what are the best tools for the job, which is what BBCW's done for you.

A couple of other things to think about, given that you've said your focus is capital preservation:

1) All of the ETFs you've listed above invest in corporate bonds, which have a higher default risk than government bonds. If you care about capital preservation, your first instinct should be to avoid the risk of losing money from defaults. BBCW's approach of investing in government bonds gives you more capital protection.

2) Also, all of these instruments are in US dollars. Am I right to assume that most of your spending is in Singapore dollars? If so, you might want to look at Singapore government bonds instead of US government bonds, so that you're not taking currency risk.

 

[Tesla8]

"Is it advisable to invest in xyz product" is always a tricky question. The answer might be "yes" or "no", depending on what your goals are; and starting with the investment is the wrong way to look at it. The smart thing to do is figure out what your goals are first, and then figure out what are the best tools for the job, which is what BBCW's done for you.

A couple of other things to think about, given that you've said your focus is capital preservation:

1) All of the ETFs you've listed above invest in corporate bonds, which have a higher default risk than government bonds. If you care about capital preservation, your first instinct should be to avoid the risk of losing money from defaults. BBCW's approach of investing in government bonds gives you more capital protection.

2) Also, all of these instruments are in US dollars. Am I right to assume that most of your spending is in Singapore dollars? If so, you might want to look at Singapore government bonds instead of US government bonds, so that you're not taking currency risk.

Hi Shiny Things,

Thanks for taking your time to response.

My income are in USD and currently not living in Singapore. My spending are in USD unless when I back in Singapore.

I am thinking whether should I put it in USD fixed deposit (1.9% for 3 months or 2.5% for 1 year) in one of the banks in Singapore or something else that can generate more than the FD interest rate. I am almost 58 this year.

 

[henrylbh]

You should consider "CPF" bond that's tax free unlike deemed interest from your floating rate bond However you face exchange risk if you are quite permanently in US.

 

[BBCWatcher]

You should consider "CPF" bond that's tax free unlike deemed interest from your floating rate bond However you face exchange risk if you are quite permanently in US.

Tesla8 did not say he’s (or she’s) in the United States. He/she only said not in Singapore.

CPF is only Singapore tax free. It is not tax free in other countries. As it happens, I’m a resident of Singapore...and pay U.S. income tax on CPF, as all U.S. persons must. Here’s how that works under the U.S. tax code, if you’re curious:

(a) The employer portion of compulsory CPF contributions is treated as earned income that CANNOT be excluded via the Foreign Earned Income Exclusion/Foreign Housing Exclusion (IRS Form 2555). [But, for those U.S. persons who are otherwise entirely excluding their earned income via Form 2555, there’s a silver lining in this nonexcludability of the employer’s contributions: they are then eligible to make at least some amount of U.S. Individual Retirement Account contributions, since they have nonexcluded earned income.] This point seems strange, the nonexcludability of those employer compulsory contributions, but the IRS issued a memo on this point many years ago and hasn’t changed its views. Compulsory employer contributions to all CPF accounts are counted here, including Medisave.

(b) CPF interest is U.S. taxable.

(c) You use the dates in your CPF annual statement. So, for example, CPF interest is credited annually. The interest doesn’t actually pop up until sometime in January, but on the statement it says “December 31” (year end). You go with the latter, i.e. you report that interest income in the U.S. tax year that includes December 31. Same thing with employer contributions: the December (and even sometimes November) payroll cycle might wash into January in terms of when it appears, but you go with the payroll cycle dates. So December payroll should be reported for that tax year that includes December.

(d) CPF is most probably FinCEN Form 114 (“FBAR”) and IRS Form 8938 (“FATCA”) reportable. There’s no harm in overreporting on those forms, so even if you find some evidence I haven’t found that CPF doesn’t need to be reported, I still would.

(e) When you withdraw CPF savings, they are U.S. tax free. You’ve reported and paid all tax every year, along the way, so there’s no tax owed on withdrawals (except of course the tax on the accrued interest for that year, to the point of the withdrawal).

(f) CPF payouts may affect your U.S. Social Security retirement payout amount via the “Windfall Elimination Provision” (WEP). However, this calculation will be very complicated, there are ways to reduce or eliminate the WEP impacts, and you should make sure (with the SSA) that the calculation does not take into account any voluntary contributions (plus accrued interest) you made. That is, you’ll probably have to figure out how much of your CPF LIFE payout is attributable to voluntary versus compulsory contributions, then “WEP” only the part associated with compulsory. Really difficult (when the time comes), but there go.

You might also be able to reduce or eliminate WEP impacts by choosing particular ages to start collecting CPF LIFE and U.S. Social Security retirement benefits. CPF LIFE lets you choose age 65 to age 70 (or anywhere in between), and U.S. Social Security lets you choose age 62 to age 70 (or anywhere in between). On top of all that, there’s a decent or better chance Congress is going to change or eliminate the WEP rules anyway. And don’t forget spousal benefits (opposite or same sex — the U.S. treats all legally married couples equally), and to apply for U.S. Social Security retirement benefits if you might have enough U.S. credits combined with Social Security treaty country credits.

I met a Singaporean who worked in the U.S. for a period of time, and I pointed out to him that he most probably qualifies for U.S. Social Security retirement benefits, and his spouse, too (spousal benefits). He was shocked, but it’s absolutely true if you contribute enough into the U.S. system — and “enough” doesn’t have to be very much at all.

....Back to the original question. I *really* recommend U.S. Treasuries for Tesla8’s purposes, not U.S. dollar deposits at a bank in Singapore...or at a bank in Brazil, which would be just as relevant (i.e. not relevant at all). Schwab is probably going to be the best way to get them.

 

[henrylbh]

Tesla8 did not say he’s (or she’s) in the United States. He/she only said not in Singapore.

You not sure his status yet you go all the way to Jurong or Holland?

He could be an alien. Your case may not be his. You pay tax on CPF interest. That's arguable. You paid defined contribution or you invest in it?

 

[Tesla8]

You not sure his status yet you go all the way to Jurong or Holland?

He could be an alien. Your case may not be his. You pay tax on CPF interest. That's arguable. You paid defined contribution or you invest in it?

I did mentioned in another thread that I am based in one of the ASEAN countries and income is in USD with no CPF contribution. Am looking for best way to optimize my idle USD fund. Of course I can deposit into FD (3.5 - 5% pa) with the banks here but most of the foreign banks are locally incorporated with no deposit insurance.

 

[BBCWatcher]

I did mentioned in another thread that I am based in one of the ASEAN countries and income is in USD with no CPF contribution.

Exactly, and that's why I didn't assume facts not in evidence (or in evidence elsewhere).

Am looking for best way to optimize my idle USD fund.

U.S. Treasuries, seriously. There is no better way to preserve U.S. dollar capital. What's wrong with those?

Since your funds are already in U.S. dollars, here's the process:

(a) Open an account with Schwab, if you don't have one already. That'll be with Schwab Singapore if you live in Malaysia or Thailand (or of course if you were living in Singapore), or with Schwab U.S. (a "Schwab One International" account) if you live elsewhere in ASEAN. If the latter, be sure to apply at the same time for Schwab's fabulous debit/ATM card, most probably the world's best debit/ATM card.

(b) Wire U.S. dollar funds to Schwab, using their wire transfer instructions. Your bank will likely charge something for that, but Schwab won't. Assuming you have no other U.S. estate taxable assets I would try to keep the amounts at or below US$60,000 (if the estate tax is a concern), so wiring US$60,000 at a time, and keeping up to US$60,000 in the account in cash at a time, is fine.

(c) Buy U.S. Treasuries at initial auction. Just look at the U.S. Treasury's Web site (Treasury Direct) for their bond/note/bill announcements and tentative schedule, find the CUSIP numbers when published, and place your orders online at Schwab, making sure the match the CUSIP number with whatever bond/note/bill you want to buy.

(d) When a bond/note/bill matures, use the proceeds to buy another one. Loop, repeat.

And that's it. Schwab won't charge you even a penny for doing this. There's zero commission to buy U.S. Treasuries at initial auction at Schwab and zero cost to hold them to maturity.

When it comes time to spend your U.S. dollars, you can use your Schwab Visa debit/ATM card (if applicable) and/or you can wire U.S. dollars (and convert them to another currency in the process) to your bank account in practically any country, including Singapore. Schwab's charges and currency conversion rates are pretty good, but you'll want to check that.

So what's wrong with all that?

 

[henrylbh]

I did mentioned in another thread that I am based in one of the ASEAN countries and income is in USD with no CPF contribution. Am looking for best way to optimize my idle USD fund. Of course I can deposit into FD (3.5 - 5% pa) with the banks here but most of the foreign banks are locally incorporated with no deposit insurance.

Like that it may be better to consider 'CPF' bond if you need protection and tax free interest but that depends on your eventual residential and tax status and whether those assets are for retirement.

 

[Shiny Things]

Hi Shiny Things,

Thanks for taking your time to response.

My income are in USD and currently not living in Singapore. My spending are in USD unless when I back in Singapore.

Ahh, then BBCW's advice is bang on the money. Open a Schwab account; build a Treasury ladder. That's it.

 

[Tesla8]

Ahh, then BBCW's advice is bang on the money. Open a Schwab account; build a Treasury ladder. That's it.

Hi Shiny Things,

Just curious, why it is not advisable to put some USD(100-200k) in fixed deposit with 2.5% interest in some Banks in Singapore? If bank like DBS, UOB or OCBC failed, Singapore as country is just as good as gone?