Temasek’s T2023 five-year retail bonds: Are they a buy?

Hot on the tails of the recent Astrea IV private equity bonds, comes the latest Temasek T2023 5 year Retail Bonds with a 2.7% coupon. In my recent Astrea article, I advanced the argument that Temasek (and Ho Ching) are trying to open up the retail bond scene, and I hate to say I told you so, but you know… I did write it a few months back. But let’s not take anything away from them, huge kudos to them for taking this upon themself.

Basics: T2023-S$ Temasek Bond Offer

These bonds are not the most complex things on earth. They’re issued by a subsidiary of Temasek (which is fairly standard corporate structuring). They’re backed by the Temasek parent, and they pay a fixed rate of 2.70% per year, bi-annually. They will be redeemed by Temasek after 5 years. The bonds will be listed on the SGX-ST so you can sell them on the open market, but apart from that there is no way to exit your investment before the 5 years.

I’ve extracted some further information below, as well as some excerpts from Temasek:

What was the coupon rate for the August bond?
The coupon rate for the T2028-US$ Bond was 3.625%.

How is this different from Astrea Bond?
The Astrea IV PE Bonds are asset-backed securities that are backed by cash flows from a diversified portfolio of private equity funds, which offers potential for higher returns but also comes with higher risks. Conversely, The T2023-S$ Temasek Bond is a type of plain vanilla corporate bond that is reliant on Temasek’s own credit quality. It is fully guaranteed by Temasek, a triple-A rated issuer, with significantly lower risks than a private equity-linked product, but with a lower return profile.

How did you decide on the T2023-S$ interest rate?
The T2023-S$ Temasek Bond interest rate was determined via a book building process, based on demand from institutional and other specified investors. These investors could have considered credit quality, risk, market interest rates, outlook, and other factors in their bids. Bid results of this market-based price discovery were then used to determine the bond interest rate. This is how we have always set the rate on our bonds.

Retail investors are offered the same interest rate as institutional, accredited and other specified investors.

Can I use Central Provident Fund (“CPF”) funds or Supplementary Retirement Scheme (“SRS”) funds to apply for the Temasek Bond in the Public Offer?
The T2023-S$ Temasek Bond is eligible for inclusion under the CPF Investment Scheme – Ordinary Account. You can use up to 35% of their investible savings in your CPF Ordinary Account to apply for the T2023-S$ Temasek Bond in the Public Offer.

You cannot use your SRS Funds to apply for the Public Offer. You should consult your stockbroker and the relevant bank in which you hold your SRS account if you wish to use your SRS Funds to purchase the Temasek Bond from the secondary market after the completion of the offer, and the listing of the Temasek Bond on the Main Board of the SGX-ST.

Default Risk

On to the juicy stuff. Default risk. There’s a fancy chart below that shows you the financial coverage ratios for Temasek. But frankly, we all know that we’re wasting time here. Temasek is not going to default in the next 5 years. As a sovereign wealth fund, Temasek in some ways is a proxy to the credit rating of the Singapore government, and a bellweather of the Singapore economy. The global perception of a Temasek default would be catastrophic for Singapore as a country. I’d even go so far as to say that if Temasek defaults, we as Singaporeans have bigger problems than worrying about a bunch of retail bonds.

Long story short, these bonds are risk free. I’m prepared to stake my reputation as a financial blogger on them, that’s how confident I am.

Yield

The most natural comparison for these Temasek Retail bonds,will be the Singapore Savings Bond (SSB), the Singapore Government Securities (SGS), and Fixed deposits.

I’ve extracted the full yields below, but broadly, they are:

1. SSB: 2.22% (if you hold for 5 years)
2. SGS 5 year: 2.3%
3. Fixed Deposit: 1.8%

For reference, Temasek actually recently issued 10 year USD bonds at 3.625%, but that was USD, so it’s not really an apples to apples consideration (USD borrowing costs are higher that SGD).

To sum up, we’re looking at about 40 to 50 bps premium for these Temasek Retail bonds, over prevailing SSBs and SGS. My personal take is that the 2.7% yield for 5 year SGD bonds with no default risk is by far the best you’re going to have access to in the market today as a retail investor. There really is no alternative product out there for retail investors with this kind of characteristics.

Singapore Savings Bonds

Singapore Government Securities 

Fixed Deposit (12 Month)

Liquidity

These Temasek bonds are not like SSBs. You can’t just put in an application to have them redeemed any time you want, with pro-rated interest. If you buy these things and you want to exit them before the 5 years is up, your only way out is to sell them on the SGX, where liquidity for retail bonds is “low”. And “low” is actually me being polite, because for reference, the liquidity of the Astrea IV Bonds on the SGX today is, and I kid you not, “Sell Volume 166, Buy Vol: 21”.

So if we use Astrea as an indicator of market liquidity, it’s going to be “challenging” to exit these bonds on the open market. You’re probably going to have large bid-ask spreads, so do expect to have to price them below the trading price, or to be quite patient, when exiting these bonds.

Perhaps in time the retail bond scene will deepen to the point where we see active trading of SGD bonds on the SGX. Will moves like these from Temasek, there’s actually a decent chance we may get there within the next decade. Unfortunately, as at the time of this article, I don’t think the local market has evolved to that point yet.

Rising Interest Rate environment

The other problem, is the rising interest rate environment. The US Federal Reserve is on a rate hike cycle, and this is likely to spill over to Singapore bond yields. Depending on how aggressive the Feds are, this may actually result in quite a significant rerating of yields for Singapore bonds over the next 1 to 2 years. And when yields go up, bond prices fall.

Don’t get me wrong, none of this matters if you plan to hold the bonds for 5 years. No matter how much interest rates go up, these bonds will still continue to pay a 2.7% fixed interest per year. The concern though, is how would rising yields impact the market price of these bonds, as traded on the SGX. Personally, I think over the mid to longer term, prices may get negatively impacted, as the SGS yield goes up. I could be wrong though.

The net effect of these, is that we a low liquidity bond and a rising interest rate environment. In other words, trying to exit these Temasek bonds before the 5 years is up may prove challenging.

How to play this?

The way I see it is this. These bonds are fantastic if you have money that you don’t need for 5 years, and don’t want to take any risk with them. There’s a lot of people who can fit this profile, for example:

1. You’re overexposed to equities, and you need exposure to risk free SGD fixed income.
2. You’re an older investor nearing retirement, and you want a safe investment that wouldn’t keep you awake at night, but can keep up with inflation.
3. You’re basically Singaporean Elon Musk and hugely exposed to risks in your business, so you want something safe for your personal investments.

For any of the persons above, the 2.7% yield you’re getting from these Temasek Bonds is much better than anything else you’re going to get on the market today, which will mainly be SSBs, SGS and Fixed Deposit.

Don’t forget that these Temasek Bonds can be subscribed for through CPFIS. If you have more than S$20,000 in your CPF-OA, and don’t plan to use the excess money in the next 5 years, just buy as much of these bonds as you can, you’ve basically just made that 0.2% (over the CPF-OA 2.5% yield) spread for free.

Financial Horse, are you subscribing for this?

I really like these bonds. I really like that Temasek is making efforts to open up the retail bond scene here. I really like that they offer a nice spread over comparable SSBs and SGS. Unfortunately, these Temasek bonds just don’t fit into my current portfolio strategy. As a young investor, I want huge exposure to equities and REITs, and for the remainder of my portfolio, I want them in liquid assets that I can access at a moment’s notice. And these bonds just don’t fulfil that liquidity criteria. For me, I’ll stick to savings accounts like DBS Multiplier or UOB One, or SSBs, for the fixed income portion of my portfolio. The yield is lower, but that’s the price I have to pay for better liquidity.

I will be giving these Temasek Retail Bonds a 4 financial horse rating. The yield is good, and they are risk free, but unfortunately liquidity may be a concern, so they will not be for everyone.

Financial Horse Rating –T2023-S$ Temasek Bonds

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