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Investing in high yield Asian bonds.

Friday, November 24, 2017

Reader says...
I am in my early 40s, and do active investing on my own.

Recently I was contacted by an agent, who shared about investing in high yield Asian bonds.




I was initially sceptical but it seems that these are very different from mini bonds, and the failure rate has been historically low.

I am thinking of investing about 10% of what I usually invest in the stock market in these bonds.

The main catch is that the investment commitment is over 10 years (i.e. cannot sell for the first 10 years), which seems fine to me, and after that, I am able to decide whether to continue investing or not.


Would you be so kind to share your thoughts please? 

Many thanks.



AK says...
High yield bonds are a nice way of saying junk bonds.

They are junk bonds for a reason and you should be wary of the financial strength of the issuers.

It depends on how much risk you are comfortable with taking and if you think the potential returns justify the risk.




I wouldn't buy these myself and also because there is a strange thing here about not being able to get out of this for 10 years.

Whether regular bonds or bond funds, we are allowed to get out whenever we want, accepting whatever price Mr. Market should offer at that point in time.

10 years is a very long time and with no escape clause, it is either we swim or sink with the issuer.




Another thing is that with interest rates rising, if the issuer does not default, these bonds could be worth much less 10 years later assuming that interest rates become elevated then.

So, in such a scenario, if you do decide to sell the bonds, you might get back less than your initial investment.

Of course, the decision is yours.






You might want to read the blogs listed below and I hope they are helpful to you:
1. Why have bonds in our portfolio?
2. Nobody cares more about our money.

6 comments:

Matthew Seah said...

Hi AK,

Someone asked me about such 10 year asian bond fund too. Not sure if it's the same, the fund I helped review was only returning 1.xx% p.a. (bid to offer) since inception. Singapore Savings Bond also 10 years but has a higher return than that fund.

p.s. I'm lazy to write a guest blog for this..

Regards,
Matthew

AK71 said...

On my FB wall...

Raymond Ng:
High yield bond ~ junk bond. High risk high return?
Why jump over 7 foot bar if you can walk over 1 foot bar?

Matthew Seah:
Manulife Income Series – Asian High Yield Bond Fund.
Benchmark is NON-INVESTMENT GRADE index
And the fund OUTPERFORMED the junk bond = the fund is filled with junkier bonds.

Laurence said...

With the SG economy finally booming again, it looks like wolves in sheep's clothing are out in force and on the prowl for succulent, tasty lambs. They just need the lambs to voluntarily jump into the prepared barbecue pits.

Laurence said...

Banks and Post Offices could well be stepping up the campaign as well.
So remind your mummies and grannies of the fairy-tale Little Red Riding Hood when they visit their friendly neighborhood banks and post offices:

Little Red Riding Hood With Grandma

AK71 said...

Jake Gan says...
But bond funds churn their bonds too right? So in a rising interest rate environment their bonds mature and they can buy higher yielding ones. Or is there something wrong with my understanding?

AK says...
Bonds are considered "safer" if they have a maturity date and you get back your capital at some point in time.

The problem with a bond fund is that the fund doesn't ever mature (even if the underlying bonds do) and if you want your money back, you will have to accept whatever unit price Mr. Market offers.

When you buy a bond fund, you have to take this into consideration because you might want to or need to make a redemption in future. So, it matters.

AK71 said...

Reader says...
There is always a place in portfolios for bonds.
There are government bonds (of different grades), corporate bonds, bonds of different durations, junk bonds (high yield bonds) and inflation indexed bonds.
They all serve some purpose in a well diversified portfolio ( personally, I would exclude junk bonds from this).

AK says...
Unfortunately, many bond funds are in junk bonds in order to offer higher returns (and to attract unquestioning investors). :p

Reader says...
Yes, too many people get duped by the apparent high yields with realizing the risk associated with them.
IMHO, junk bond yields are not worth the risk at the moment not to mention that they correlate highly with equities especially during market crashes.
This makes them unsuitable as an instrument of diversification in most portfolios. 😅

AK says...
I like CPF. :p

Reader says...
Unfortunately cpf has got limits 😢

AK says...
I not so rich. CPF enough for me liao.

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