Depending on your risk profile and investing objective, you may prefer having bonds as the backbone of your investment portfolio. Bonds provide stability and regular income. For those of you residing in Singapore, good news! You have access to a unique form of bond called Singapore Savings Bonds, which you can utilize to build a long-term bond portfolio. In this article, we would like to dive into the topic of investing in bonds for income.
Bond Portfolio Construction
Bonds are a fixed-income product in which you lock in your money for a fixed amount of time and, in return, will receive an interest payout (usually upon maturity). There are many types of bonds, such as government, blue-chip, and junk corporate bonds. The focus of this bond portfolio construction is to provide stability and regular income; therefore, we will only consider the safest among all, which is the government bond.
Materials
You can access different government bonds in Singapore, such as SGS Bonds, T-Bills, and Singapore Savings Bonds (SSB). Each has its characteristics. In our portfolio, we want to benefit from their different characteristics by incorporating both T-Bills and SSB. We skip SGS Bonds because both SSB and SGS are long-term bonds, and we use SSB as they provide more benefits to investors. However, SSB has a maximum investment of $200,000; therefore, if you plan to build a bond portfolio exceeding that amount, you can incorporate SGS into the mix.
Bond Ladder Strategy
Because we are investing in bonds for income, we will adopt the bond laddering strategy. In summary, bond laddering is a strategy of buying bonds that mature at staggered maturity dates. In our case, we will focus more on ensuring we have staggered interest payout dates to ensure we receive a regular payout every month.
The Strategy
Buying SSBs for six consecutive months is one of the easiest ways to achieve a regular monthly income. Because SSB pays every six months, this strategy will ensure you get a monthly interest payout from those six different SSBs.
For example, you want to build a $90,000 bond portfolio. You can split the amount into six equal chunks and invest them separately into SSB for six consecutive months.
In this strategy, we will spread our investment into six equal purchases:
- $15,000 for SSB January issuance
- $15,000 for SSB February issuance
- $15,000 for SSB March issuance
- $15,000 for SSB April issuance
- $15,000 for SSB May issuance
- $15,000 for SSB June issuance (now we have invested a total of $90,000, which is the full amount)
- July: we should start getting our first interest payout from the January SSB.
- August: we will get the interest payout from the February SSB.
- September: we will get the interest payout from the March SSB.
- And so on
Voila! You just build a long-term bond portfolio with a regular monthly payout. Investing in bonds for income can be as easy as the above strategy.
The other benefit of this strategy is having relatively liquid access to your money because SSB allows monthly withdrawals. The flexibility is available if you need to use your capital for other purposes.
When The Yield Curve is Inverted
If you are reading this article during a time of uncertainty, there is a good chance that the short-term bond yield is higher than the long-term bond yield. We usually call it an inverted yield curve. When the yield curve inverts, the T-Bills yield is higher than the SSB yield. In this case, we may want to incorporate the T-Bills into our bond portfolio to enjoy the higher rate. This strategy is also suitable if you expect the interest rate to rise.
In this strategy, we mix both T-Bills and SSBs to benefit from the higher rate from short-term T-Bills while locking a relatively high rate from long-term SSBs.
- January:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the interest payout from your T-Bills January purchase immediately. Remember, T-Bills pays you at the start.
- February:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the T-Bills interest payout from the February purchase.
- March:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the T-Bills interest payout from the March purchase.
- April:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the T-Bills interest payout from the April purchase.
- May:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the T-Bills interest payout from the May purchase.
- June:
- $10,000 into SSB and $5,000 into T-Bills.
- You will get the T-Bills interest payout from the June purchase.
- July:
- You will get the interest payout from the January SSB
- Your January T-Bill has matured. You can reinvest into the July T-Bills offering and receive the interest payout immediately.
- August:
- You will get the interest payout from the February SSB
- Your February T-Bill has matured. You can reinvest into the August T-Bills offering and receive the interest payout immediately.
- Rinse and repeat!
Congratulations! You just build a bond portfolio with a monthly payout that benefits from short and long-term rates. You can adjust the ratio between the short and long-term bonds depending on your investment objective and your view on the future interest rate movement.
Investing in Bonds for Income is a Viable Strategy
Building a bond portfolio with a focus on income is a strategy that many investors may want to consider, especially if they prefer stability in their portfolios. Lucky for us residing in Singapore, we can easily make a liquid yet long-term bond portfolio with a regular monthly payout. If you are currently in a high-interest-rate environment, the timing is perfect for you to start building your bond portfolio and locking those high-interest rates. In the long term, interest rates usually converge into the inflation rate, usually targeted at around 2%. If you build your long-term bond portfolio when the interest rate is much higher than the long-term inflation rate, you can enjoy a steady monthly payout for the next ten years (assuming using SSB) without worrying about inflation.
