Is CapitaMall Trust retail bond worth a look?

When CapitaMall Trust launches its retail bond today at 3.08%, I start to wonder whether it is worth a look given that we all know interest rate will likely move up after 2015. Frankly, I am not too worried about its credit risk because of its strong issuer credit rating of 'A2' and this is a Temasek related companies. The business is sound and the management is equally strong. So, the chance of defaulting is low and you will likely get your coupon payment till maturity. The major risk that I see at the moment will be the macroeconomic environment, specifically interest rate risk. US Federal Reserve has only indicated that they will keep the federal fund rate near zero into 2015. So, the question is how much can the federal fund rate go up after that and how is it going to affect our interest rate?

The above chart is a comparison of the US Federal Fund Rate and SGD 12 month Bank Deposit Rate from 1983 to 2013. In Singapore, investors view retail bond like long term deposit. Most investors hold the bonds to maturity and there is hardly any liquidity after the bond is listed.  The maximum tenor readily available for retail fixed deposit is about 36 months. I have used 12 month deposit rate as a proxy for comparison.

As you can see, our interest rate moves very closely to US Federal Fund Rate except for the period between 2005 and 2008. In 2002, we were hit by SARS crisis and our 12 month bank deposit rate has stayed consistently below 2% since then. Between 2005 to 2007, US Federal Reserve had increased the interest rate aggressively to keep inflation under control. That explains the divergence during that period. Now, both federal fund rate and the SGD 12 month deposit rate stay close to zero. Unless there is a drastic spike in inflationary pressure in US, we are unlikely to see Fed moving the interest rate to 3% or 4% within a short to medium time frame. Even if they were to do it, I am also not sure whether we will follow suit. We should always take note that exchange rate is the main tool that MAS is using to control inflation. The last time that our 12 month SG deposit rate went above 4% was more than 15 years ago in 1998. In a way, the chance of our deposit rate staying low for the next few years is still high. 

However, no matter how small, an increase in interest rate will definitely affect the bond prices (you must always take note that bond price moves inversely to interest rate). In Singapore, the trading volume for retail bond is very low. With low trading volume, you may have difficulty in selling the bond. Unless you are able to hold the bond till maturity, you may face capital loss. Therefore, if you have excess fund that you will not use for many years and you do not mind parking money in an investment that gives low but relatively stable return, this may be an option. 

Of course, there may be more bond issues for retail investors in the near future. A short while ago, there was some news article about Temasek looking into issuing bonds for retail. So, there will always be such investment products coming your way. Do your sum and make your decision wisely.

Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.

Update on inflation

I have written a few articles a couple of years ago on the inflationary environment at that point in time and the main reasons behind this. 

Now, I am quite happy to say that this inflationary pressure has slowly come under control by several measures put in place by our government. For example, the escalating housing prices have virtually come to a stop by policies targetting at both supply and demand. This is commendable.

Though difficult, these policies are very important and necessary to maintain sustainable growth of our economy. And, we should not forget that we are still a savers' nation and high inflation will eat away our saving and cpf.

Well done.