MBH/A35 alternatives

[s0crates]

You need realize what SGS market is for and then you will understand that it is very unlikely that there is ever going to be active secondary market. The expectation is held-to-maturity. What you want does not exist in this market.

I know it doesn't exist. That's also why sg fixed income market is really limited and we should exercise caution.

Zero coupon bonds... Inflation hedged bonds... So many things we can only hope for but too bad we are in a tiny market with unsophisticated players relative to US and European markets.

 

[fr33d0m]

I know it doesn't exist. That's also why sg fixed income market is really limited and we should exercise caution.

Zero coupon bonds... Inflation hedged bonds... So many things we can only hope for but too bad we are in a tiny market with unsophisticated players relative to US and European markets.

There is only one active bond market. That's the US market. Euro bonds are jokes.

The bond ETFs are close enough for yield purpose in SGX. They rise/fall with the yield.

The USD is losing its lure and the FED is crowding out other buyers. The US treasury market is no longer the same.

 

[turtle2018]

MBH

Based on recent closing prices of around $0.94, and the 2023 dividend announced (per SGX website: $0.0145+$0.0155=$0.03), the current Yield is around 3.19% p.a.

According to the April 2023 Factsheet of MBH, the Weightage Average Yield to Maturity (“WA YTM”) of the ETF is 4.21%. WA YTM is defined in the footnote as…”average yield calculated by weighting each security…with capitalization & duration”.

My questions are:

(1) What is the relevance of WA YTM for investors’ decision? The higher the better?

(2) Does it mean that since current Yield is 3.19% p.a. whilst the WA YTM is higher at 4.21% p.a., there is a potential for Yield to move towards 4.xx% p.a. in future, assuming current interest rates ( which are used in current valuation of long dated bonds) remain more or less constant?

Any comments or views?

 

[s0crates]

MBH

Based on recent closing prices of around $0.94, and the 2023 dividend announced (per SGX website: $0.0145+$0.0155=$0.03), the current Yield is around 3.19% p.a.

According to the April 2023 Factsheet of MBH, the Weightage Average Yield to Maturity (“WA YTM”) of the ETF is 4.21%. WA YTM is defined in the footnote as…”average yield calculated by weighting each security…with capitalization & duration”.

My questions are:

(1) What is the relevance of WA YTM for investors’ decision? The higher the better?

(2) Does it mean that since current Yield is 3.19% p.a. whilst the WA YTM is higher at 4.21% p.a., there is a potential for Yield to move towards 4.xx% p.a. in future, assuming current interest rates ( which are used in current valuation of long dated bonds) remain more or less constant?

Any comments or views?

1 - WA YTM is a forward looking figure. The higher the better. If it's too high it's a red flag, as the underlying holdings might be distressed.

2 - No. Current yield is based off historical distribution. It is not indicative of future returns.

 

[s0crates]

What SSB tries to do is to achieve parity with 10-year SGS. If you want to liquidate earlier, that's NOT the right instrument for you.

correction: NOT

Buy a 10 year bond then? Would you say we should do a monthly 10 year bond issuance?

Honestly I don't know what's the point of SSB, other than it being more liquid. The government is definitely benefiting from providing this liquidity when they are buying back <10 year maturity bonds with higher than 10 year coupons, at par, rather than at a premium.

What an absolutely bad product!

It is only beneficial for us if we have the option to hold it maturity and are happy to utilise the option to redeem at par when a 10 year sgs will sell at a discount. That only happens when interest rates have increased.

I have the pleasure to advise my friend to redeem his poor yielding ssb for higher yielding ones. But the chap wasn't convince that the option to redeem at par is not as valuable in a much higher IR.

 

[reddevil0728]

Buy a 10 year bond then? Would you say we should do a monthly 10 year bond issuance?

Honestly I don't know what's the point of SSB, other than it being more liquid. The government is definitely benefiting from providing this liquidity when they are buying back <10 year maturity bonds with higher than 10 year coupons, at par, rather than at a premium.

What an absolutely bad product!

hmmm people who asking for higher cap than 200k will definitely not complain that it is a bad product.

i think you are looking from the lens of a more sophisticated investor. hence it might be a bad product yo you, but not to others who have just been looking at FD

 

[fr33d0m]

Buy a 10 year bond then? Would you say we should do a monthly 10 year bond issuance?

Honestly I don't know what's the point of SSB, other than it being more liquid. The government is definitely benefiting from providing this liquidity when they are buying back <10 year maturity bonds with higher than 10 year coupons, at par, rather than at a premium.

What an absolutely bad product!

It is only beneficial for us if we have the option to hold it maturity and are happy to utilise the option to redeem at par when a 10 year sgs will sell at a discount. That only happens when interest rates have increased.

I have the pleasure to advise my friend to redeem his poor yielding ssb for higher yielding ones. But the chap wasn't convince that the option to redeem at par is not as valuable in a much higher IR.

At minimum, SSB for general public is a much better product than a lot of fixed deposits as well as demand deposits.

Savers don’t have to contend with near 0 interest rate as you can easily get 1-year rate and redeem at 1 month notice. If the savers don’t redeem, they will get higher interest rate.

 

[Shiny Things]

What SSB tries to do is to achieve parity with 10-year SGS. If you want to liquidate earlier, that's NOT the right instrument for you.

Slight nitpick here. SSBs are potentially great if you want to liquidate early, because of the embedded put option. If rates have gone up, you can sell them back at par, when an equivalent SGS's price would be much lower. (If you own pre-2022 SSBs, it might be worth comparing the yields against what you can get from a fresh 10-year SGS.)

[...]

(1) What is the relevance of WA YTM for investors’ decision? The higher the better?

Not really, because a higher YTM almost always comes with some sort of tradeoff - whether that's duration risk, credit risk, reinvestment risk, whatever.

The YTM is "if you held the bonds in this portfolio to maturity, this is the yield you'd get. Some of it comes from coupons, some of it comes from 'pull-to-par' (the price of the bond itself moving toward 100)". More coming up just below...

(2) Does it mean that since current Yield is 3.19% p.a. whilst the WA YTM is higher at 4.21% p.a., there is a potential for Yield to move towards 4.xx% p.a. in future, assuming current interest rates ( which are used in current valuation of long dated bonds) remain more or less constant?

Nope. Because interest rates have gone up, a lot of the bonds in the portfolio are trading at a discount to their face value - maybe 85 or 90 cents on the dollar. (This is completely normal; it doesn't reflect a change in credit risk, just a change in interest rates.)

The YTM of a bond comes partly from the coupon payments and partly from the price drifting toward 100 cents on the dollar. The yield should increase a little over time as older lower-coupon bonds mature and are replaced by newer, higher-coupon bonds; but a decent chunk of the performance of the portfolio will come from those bonds drifting back from 80-90 cents on the dollar to 100 cents on the dollar, over a period of years.

The "yield" is just the coupons; the YTM is the coupons plus the pull-to-par.

 

[Ceschfab]

I have a question on YTM.

This is not a figure we can calculate ourselves right? How often is this figure being published by MBH and where do we get this figure?

 

[s0crates]

I have a question on YTM.

This is not a figure we can calculate ourselves right? How often is this figure being published by MBH and where do we get this figure?

If you dig out all the underlying fixed income holdings and their respective weightage and YTM you can do a sumproduct of the YTM lo.

I am describing it simplistically.

Go look at the fund fact sheet of MBH and you would get the figure. AFAIK it is refreshed monthly

 

[Ceschfab]

If you dig out all the underlying fixed income holdings and their respective weightage and YTM you can do a sumproduct of the YTM lo.

I am describing it simplistically.

Go look at the fund fact sheet of MBH and you would get the figure. AFAIK it is refreshed monthly

I see.
Ok found that. YTM is 4.20% as of June 2023

 

[johndoe29]

Currently undecided between the Endowus Amundi Index Global Agg 500m Fund and AGGU for the 10% bond fund in my 3 fund allocation. I know that AGGU is exposed to currency risk, but the TER for Amundi is 0.4%, which is much higher than 0.1% of AGGU.

Would like to hear some opinions on the 2 funds.

 

[s0crates]

Currently undecided between the Endowus Amundi Index Global Agg 500m Fund and AGGU for the 10% bond fund in my 3 fund allocation. I know that AGGU is exposed to currency risk, but the TER for Amundi is 0.4%, which is much higher than 0.1% of AGGU.

Would like to hear some opinions on the 2 funds.

Currency volatility is a form of risk that doesn't gives additional return. Its a zero sum game.

Buying a hedged bond fund lowers the volatility of your sgd returns. There is some implicit cost from hedging that is not necessarily reflected in the TER, but I don't think this is high for liquid currencies like sgd/USD.

You have to weigh the benefits of lower volatility against higher cost, and whether you think sgd will appreciate more than what the market is pricing it.

Of course, consider how much you invest and the frequency. Small amounts will make unit trust investing more appealing, larger amounts, AGGU.

 

[BBCWatcher]

Currency volatility is a form of risk that doesn't gives additional return. Its a zero sum game.

That’s not actually true. Dollar cost averaging into an unhedged international bond fund would boost long-term returns even if the exchange rate(s) randomly or pseudo-randomly wobble around a +/-0% trajectory to the Singapore dollar. It’s one of the advantages of dollar cost averaging.

Buying a hedged bond fund lowers the volatility of your sgd returns.

And may lower long-term returns, period, even if the hedging were costless (it’s not). Some volatility is a good thing if you’re dollar cost averaging over a long enough period.

 

[s0crates]

That’s not actually true. Dollar cost averaging into an unhedged international bond fund would boost long-term returns even if the exchange rate(s) randomly or pseudo-randomly wobble around a +/-0% trajectory to the Singapore dollar. It’s one of the advantages of dollar cost averaging.

And may lower long-term returns, period, even if the hedging were costless (it’s not). Some volatility is a good thing if you’re dollar cost averaging over a long enough period.

Mathematically, yes, but how to quantify it IRL? Also factoring transaction cost?

 

[BBCWatcher]

Mathematically, yes, but how to quantify it IRL? Also factoring transaction cost?

You could run a simulation.

My general suggestion is that currency hedging (a) isn't free, and (b) can be harmful (oddly enough!) if you're a dollar cost averaging long-term investor. Part (b) seems counterintuitive, but it's easily illustrated with a simple example comparing a more volatile security versus a less volatile one when Singapore dollar cost averaging.

I also think you should give some thought to the "black swan" events that could impact the Singapore dollar. I don't think they're likely, but I can't rule them out entirely. That is to say that if you're a long-term investor, even a conservative one, holding a diverse investment grade bond portfolio with bonds denominated in a variety of currencies is not a bad thing at all. It has to be safer (in long-term investment terms) than a single currency bond fund, even if that single currency is the one you usually use to buy goods and services. So why would you reduce that form of safety with currency hedging? If you're making a short-term bet I guess I could understand that, but I don't think you should make short-term bets.

 

[s0crates]

You could run a simulation.

My general suggestion is that currency hedging (a) isn't free, and (b) can be harmful (oddly enough!) if you're a dollar cost averaging long-term investor. Part (b) seems counterintuitive, but it's easily illustrated with a simple example comparing a more volatile security versus a less volatile one when Singapore dollar cost averaging.

I also think you should give some thought to the "black swan" events that could impact the Singapore dollar. I don't think they're likely, but I can't rule them out entirely. That is to say that if you're a long-term investor, even a conservative one, holding a diverse investment grade bond portfolio with bonds denominated in a variety of currencies is not a bad thing at all. It has to be safer (in long-term investment terms) than a single currency bond fund, even if that single currency is the one you usually use to buy goods and services. So why would you reduce that form of safety with currency hedging? If you're making a short-term bet I guess I could understand that, but I don't think you should make short-term bets.

On closer thought your logic doesn't make sense. Our spending is in sgd, and eventually when we sell the returns are in sgd terms.

When usd/sgd fluctuates, sure you are buying USD assets expensive/cheaper, but you are still buying the same sgd terms no? Where's the dollar cost averaging?

 

[BBCWatcher]

On closer thought your logic doesn't make sense. Our spending is in sgd, and eventually when we sell the returns are in sgd terms.

Yes...

When usd/sgd fluctuates, sure you are buying USD assets expensive/cheaper, but you are still buying the same sgd terms no? Where's the dollar cost averaging?

Let's keep it simple for this illustration and assume you're buying an unhedged bond fund consisting of U.S. dollar denominated bonds. (It's only slightly more complicated if you're buying a multi-currency bond fund.) There are two "legs" to your Singapore dollar cost averaging:

1. When bond interest rates are high (bond prices are low) then you tend to buy more shares of the bond fund each month you Singapore dollar cost average. And vice versa.

2. When the U.S. dollar is weak relative to the Singapore dollar then you tend to buy more shares of the bond fund each month you Singapore dollar cost average. And vice versa.

Both parts of your Singapore dollar cost averaging are helpful in achieving a long-term investment goal. When you add a currency hedge you actually take away (or reduce) Part 2 of your Singapore dollar cost averaging. And that can be unhelpful when trying to achieve a long-term investment goal. (DCA'ing is powerful over a long enough period, or longer.) For a short-term goal, different story perhaps.

If the bond fund invests in bonds denominated in multiple currencies then there will probably be less foreign exchange-related volatility (since the Singapore dollar itself is effectively currency basket pegged), but there will still be some. And that's not a bad thing.

And actually what you're really trying to do is buy real goods and services in the future (retirement), and those real goods and services could be much more expensive in Singapore dollar terms if the Singapore dollar either doesn't exist or has been significantly devalued (through inflation and/or exchange rates). Most of the food you buy, for example, is imported. So you should think about this. For long-term financial security you don't actually want all your wealth pegged to the Singapore dollar. I'd be nervous about having only a collection of Singapore dollar denominated bonds, for example. One of the unlikely but possible scenarios you should plan for is what happens if the Singapore dollar can't buy (or buy well) what you want to consume in the future.

 

[s0crates]

Yes...

Let's keep it simple for this illustration and assume you're buying an unhedged bond fund consisting of U.S. dollar denominated bonds. (It's only slightly more complicated if you're buying a multi-currency bond fund.) There are two "legs" to your Singapore dollar cost averaging:

1. When bond interest rates are high (bond prices are low) then you tend to buy more shares of the bond fund each month you Singapore dollar cost average. And vice versa.

2. When the U.S. dollar is weak relative to the Singapore dollar then you tend to buy more shares of the bond fund each month you Singapore dollar cost average. And vice versa.

Both parts of your Singapore dollar cost averaging are helpful in achieving a long-term investment goal. When you add a currency hedge you actually take away (or reduce) Part 2 of your Singapore dollar cost averaging. And that can be unhelpful when trying to achieve a long-term investment goal. (DCA'ing is powerful over a long enough period, or longer.) For a short-term goal, different story perhaps.

If the bond fund invests in bonds denominated in multiple currencies then there will probably be less foreign exchange-related volatility (since the Singapore dollar itself is effectively currency basket pegged), but there will still be some. And that's not a bad thing.

And actually what you're really trying to do is buy real goods and services in the future (retirement), and those real goods and services could be much more expensive in Singapore dollar terms if the Singapore dollar either doesn't exist or has been significantly devalued (through inflation and/or exchange rates). Most of the food you buy, for example, is imported. So you should think about this. For long-term financial security you don't actually want all your wealth pegged to the Singapore dollar. I'd be nervous about having only a collection of Singapore dollar denominated bonds, for example. One of the unlikely but possible scenarios you should plan for is what happens if the Singapore dollar can't buy (or buy well) what you want to consume in the future.

You are assuming that the bond price and interest rate doesn't adjust accordingly when fx change. It would, I believe you are overthinking it.

The concept of imported inflation is well understood, but again, that's assuming that the markets have not priced it in.

 

[BBCWatcher]

You are assuming that the bond price and interest rate doesn't adjust accordingly when fx change. It would, I believe you are overthinking it.

Over a long-term purchase trajectory, probably.

The concept of imported inflation is well understood, but again, that's assuming that the markets have not priced it in.

But that doesn’t help if you’re holding bags full of Singapore dollars (SGD denominated bonds) exclusively or predominantly and starting retirement. Which is why you shouldn’t do that. You’re not actually trying to achieve a Singapore dollar goal. You’re trying to achieve a real lifestyle goal. And there is a difference between those two goals, even in Singapore. The future real purchasing power of Singapore dollars ranges somewhere between zero (unlikely but not altogether impossible) and a little below today’s real purchasing power (if we have a sustained period of negligible inflation perhaps mixed with some bits of deflation). A robust, reliable retirement financial plan can handle any part of that range. Perhaps not terrifically well in the zero/black swan event, but well enough.