● 卢业月 By Amy Low The inter-bank market - where banks bor-row from or lend to each other- is flushed with money at the moment, due to aflood of for-eign funds and the continued fall in interest rates. This means that banks here have more mo-ney than they needand are motivated to lend out such "idle money". Hence, the low housing loan rates, for example. This contrasts with thesituation at the height of the Asian economic crisis when there was a liquidity crunch, and interbank rates, which arethe rates at which banks borrow from or lend to each other, hit as high as 12%. Also, interest rates have fallen significantly over the last few months, a phenomenon that would stimulate economic growth as lower borrowing costs and savings rates will en-courage businesses to invest and households to consume. In such a low interest-rate environment, it may still be good for investors to consider in-vesting some money in bonds because they will be able to achieve a higher return than cash deposits. For example, in Singapore, current short-term fixed deposit rates are now about 1%, compared with 3% for a 5-year Singapore government bond and 3.6% for a 5-year HDB bond. In other words, relative to short-term de-posit rates, onecan pick up 2% more by hold-ing the bond for 5 years. Interest rates aside, the retail investor should pay heed to a more fundamental principle a-bout investing in bonds: it does not matter whether interest rates are high or low-bonds play an essential part in a person's investment portfolio. Investors may find this statement hard to swallow, given the current stock market rally. No doubt, the Singapore stockmarket has risen by about 55%over the last six months and is the best performing asset class now; yet, it is important to note that the stockmarkethad also fallen substantially by about 37% in the first 9 months of 1998 alone. Therefore, investors should be mindful of the volatility of the stockmarket. Bonds, measured by the UOB Government Bond Index, are lessvolatile although the probability of earning higher returns than equities is lower. Cash deposits, measured by the three-month Singapore Inter-Bank Offer Rate, are the least volatile but this is offset by the fact that returns are the lowest. In a nutshell, an investor should consider investing in bonds as an alternative asset class for the purpose of diversification and in consi-deration of his overall investment objectives. These objectives include whether there is a greater need for capital gains or regular in-come. Other considerations such as liquidity needs and time horizon also determine an in-vestor's appetite to assume risks and, accord-ingly, his choice of asset class to invest in. As a bond pays a regular coupon, or interest rate, it may be suitable for investors, for exam-ple, retirees, who require a regular income over a specific time horizon. The higher need for certainty of income would mean a lowertolerance for volatility. Although cash deposits may earn interest, however, due to their shorter tenors, or time-frames, an investor may face the risk of roll-ing over, or reinvesting his money, at lower interest rates whenthe deposit matures. For example, in early 1998, when inter-bank rates were as high as 12%, investors who locked in their funds at high deposit rates of about 6% for a year would have had to roll o-ver at much lower interest rates 12 months la-ter when their deposits matured and rates had fallen to about 1%. Secondly, if an investor has excess cash which he intends to use at a later date, it may be advisable to invest his excess cash in less volatile instruments to preserve his savings as well as enhance his returns. Therefore, bonds, like stocks or any other asset class, can fulfil certain investment ob-jectives. How does one invest in the bond market? Currently, retail investors can buy Singapore government bonds over the banking counter. The minimum investment for government bonds is S$1,000 and treasury bills is S$10,0000. Investors can buy and sell on a daily basis. The cost of transaction is usually the differ-ence between the purchase price and sale price of the bond, and may vary from bank to bank. They can also buy bonds as and when new issues are launched. For example, HDB and JTC bonds were offered to theretail market during their primary launches. Alternatively, investors can consider invest-ing in fixed income unit trusts. The benefits of unit trusts are that investors are able to invest in smaller denominations with typical invest-ments of S$1,000.
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