4 Ways to Lose Money on Bonds

Authour: Anya

 

It would likely surprise a lot of investors to find out they could lose money investing in bonds. Their first instinct is usually to think back to all the financial advisers they have heard say bonds are safe investments. The truth is that while bonds are certainly more secure than a lot of other investment options, they are far from fail-safe.

In a effort to protect investors from any misconceptions they might have about investing in bonds, we are offering information on the following four ways investors can lose money on bond investments.

FYI: Investopedia.com defines a bond as: “a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.”

 

Losses From Bond Trading

Much like stock investing where concerns about the total stock return formula matter, investors can buy and sell bonds at will. When buying or selling a bond, the investor is subject to market forces. The pricing process is stated in terms of bid and ask pricing. In the process of buying and selling bonds, the investor is always subject to business activities that can cause a sudden change in a bond’s price. Here’s four ways that can happen:

 

Interest Rate Moves

From time to time, the US Federal Reserve will move interest rates. When interest rates head upwards, bond prices will move downwards. If an investor is trying to actively trade bonds as interest rates are heading higher, they stand the risk of getting caught paying too much for the bonds they purchase. When that happens, they are stuck with bonds that likely won’t recover in price until interest rates head back down, which could be months or years.

 

The Credit Rating Effect

The value of a bond reflects the underlying company’s creditworthiness in the eyes of investment rating companies like Moody’s or Fitch. If said rating companies see that a corporation is struggling, they will respond by lowering a corporation’s bond ratings. Investors holding those bonds could take a significant hit until the bond’s ratings go back up.

 

Corporate Business Decisions

Corporations are always subject to some kind of restructuring process. This could include mergers, selling of assets and bankruptcy filings. Any of these types of events among others could have an adverse effect on the prices of the corporation’s bonds. For the investor, the ultimate risk could be a complete loss in investment value.

 

Supply and Demand Issues

As mentioned before, markets forces will always affect a bond’s price. There is always the potential an investor will buy bonds at market prices only to encounter a situation where the bid/ask spread is unusually wide at the time they are trying to sell. If selling is mandatory for any reason, they might have to liquidate at the bid price, which could be significantly lower than the investor’s cost basis.

 

Inflationary Impact on Bonds

 

There are two ways investors can lose money when inflation starts rising. First, the Fed will usually react to inflation concerns by raising interest rates. As indicated in the section above, rising interest rates would likely have an adverse effect on bond prices.

The second way investors could be adversely affected by inflation is if the relevant inflation rate were to rise above an investor’s return on fixed income investments. In such a scenario, an investor might be earning 5% on their fixed income bond investments but could be losing purchasing power as inflation exceeds that same 5% mark. If an investor were to get hit by both of these inflationary scenarios at the same time, which is likely, they could take a significant hit.

While not as common, it’s worth noting that deflation, sudden changes in the Consumer Price Index and tax laws could also create losses for bond investors.

 

Investing in Bond Funds

Instead of investing in individual bond securities, investors could choose to invest in bond funds. If you are wondering what is bond fund then let me tell you it is a fund that “sells shares in the fund to investors and uses the money it raises to invest in a portfolio of bonds to meet its investment objective — typically to provide regular income.”

When an investor invests in a bond fund, they give up the ability to make buying and selling decisions other than to get in or out of the fund. The management of the fund’s portfolio falls on the shoulders of fund managers. In such cases, the investor is at the mercy of the fund manager’s investing skills.

There’s two primary scenarios that could drive a funds value down. First, a large redemption request from a large investor or group of investors could force the fund manager to “fire sell” positions to cover the redemption amount. Under the second scenario, plain and simple poor management could hurt the fund’s valuation.

 

Investing in Municipal Bonds

 

Some investors prefer to invest in municipal bonds (Munis) under the guise they trust government agencies more than they trust corporate managers. If someone invests in municipal bonds, there are two primary scenarios that can hurt a bond’s value.

 

First, tax decreases can hurt the demand for munis. When tax rates decrease, astute investors often become more willing to invest in investments that offer a higher return. They will do that because the taxes they would have to pay on such investments would be lower. If investors are selling to move investment dollars, municipal bond prices would likely drop.

 

Second, government agencies are always subject to changes in regulations, think zoning changes. If regulation changes would adversely affect a municipal bond’s underlying project, a credit rating adjustment might be prompted. That would certainly cause a bond’s price to drop.

 

None of this information is intended to dissuade investors from investing in bonds. More specifically, the information we have provided here is intended to make sure investors have a full understanding of the risks involved with bond investing.

Singapore REIT Sectors Valuation and Gearing Comparison Feb 2020

Singapore REITs Price / NAV Range Chart base on Feb 2, 2020 Singapore REITs Table.

See last Singapore REITs Price/NAV here to see the changes.

 

Singapore REITs Gearing Ratio by Sector

Disclaimer: This chart is NOT a recommendation to buy or sell. Do NOT use it if you don’t understand how to interpret it.

 

My next Singapore REIT investing course is planned on April 18, 2020. You can register here. https://mystocksinvesting.com/course/singapore-reits-investing/

If you do not have time to learn all the basic, or you want to kick start your REIT portfolio within 1 month, I can help you to construct a REIT portfolio with a fee.  You can just sit back, relax and wait for the dividend to come it as I will be doing all the job in managing your REIT portfolio. For REIT Portfolio Consultation, please drop me an email marubozu@mystocksinvesting.com

Singapore REIT Fundamental Analysis Comparison Table 02-02-2020

Technical Analysis of FTSE ST REIT Index (FSTAS8670)

FTSE ST Real Estate Investment Trusts (FTSE ST REIT Index) broke out from the consolidation and hit historical high at 962.57.  The REIT index has changed from 926.24 to 941.99 (+1.70%). Currently the REIT index retraced back to the the previous resistance at the breakout. If this resistance is turned to support, the REIT index is expected to continue to trade higher. Probable direction for REIT index: Up. Previous chart on FTSE ST REIT index can be found in the last post Singapore REIT Fundamental Comparison Table on Jan 2, 2020.

Fundamental Analysis of 40 Singapore REITs

The following is the compilation of 40 REITs in Singapore with colour coding of the Distribution Yield, Gearing Ratio and Price to NAV Ratio. This gives investors a quick glance of which REITs are attractive enough to have an in-depth analysis. DPU Yield for Eagle Hospitality Trust, Prime US REIT and Lendlease Global Commercial REIT are projection based on the IPO prospectus.

Note: The Financial Ratio are based on past data and there are lagging indicators.

  • Price/NAV stays at 1.10 (Singapore Overall REIT sector is over value now).
  • Distribution Yield increases from 6.19%  to 6.24% (take note that this is lagging number). About 25% of Singapore REITs (9 out of 40) have Distribution Yield > 7%.
  • Gearing Ratio increases from 35.2% to 35.4%.  25 out of 40 have Gearing Ratio more than 35%. In general, Singapore REITs sector gearing ratio is healthy. Note: The current limit of gearing ratio for REITs listed in Singapore Stock Exchange is 45% but there is a consultation paper by SGX to review the potential increase to 50-55% limit.
  • The most overvalue REIT is Keppel DC REIT (Price/NAV = 1.98), followed by Parkway Life (Price/NAV = 1.86), Ascendas REIT (Price/NAV = 1.48), Mapletree Industrial Trust (Price/NAV = 1.76), Mapletree Logistic Trust (Price/NAV = 1.56) and Mapletree Commercial Trust (Price/NAV = 1.34).
  • The most undervalue (base on NAV) is Eagle Hospitality Trust (Price/NAV =0.56), followed by  Lippo Malls Indonesia Retail Trust (Price/NAV = 0.69) and Far East Hospitality Trust (Price/NAV = 0.79)
  • The Highest Distribution Yield (TTM) is Eagle Hospitality Trust (12.79%) followed by SoilBuild BizREIT (9.40%), Lippo Mall Indonesia Retail Trust (9.35%), EC World REIT (8.48%), First REIT (8.51%) and Cache Logistic Trust (8.07%).
  • The Highest Gearing Ratio are ESR REIT (41.5%), OUE Comm REIT (40.3%), Far East HTrust (39.6%), Cache Logistic Trust (40.1%) and EC World REIT (39.6%).
  • Top 5 REITs with biggest market capitalisation are Ascendas REIT ($11.39B), CapitaMall Trust ($9.29B), Capitaland Commercial Trust ($7.95B), Mapletree Commercial Trust ($7.77B) and Mapletree Logistic Trust ($6.98B)
  • The bottom 3 REITs with smallest market capitalisation are BHG Retail REIT ($333M), Sabana REIT ($490M) and iREIT Global REIT ($529M)

Disclaimer: The above table is best used for “screening and shortlisting only”. It is NOT for investing (Buy / Sell) decision. To learn how to use the table and make investing decision, Sign up next REIT Investing Workshop here to learn how to choose a fundamentally strong REIT for long term investing for passive income generation.

  • 1 month increases from 1.74833% to 1.68717%
  • 3 month increases from 1.77250% to 1.73862%
  • 6 month decreases from 1.82763% to 1.82363%
  • 12 month decreases from 1.96692% to 1.96338%

Summary

Fundamentally the whole Singapore REITs is over value now based on simple average on the Price/NAV. The big cap REITs are still quite expensive after the recent correction. Most of the DPU yield for big cap REIT is below 5% now such as CapitaCom Trust, CapitaMall Trust, Fraser Centerpoint Trust, Keppel DC REIT, Keppel REIT, Parkway Life REIT, Mapletree Com Trust, Mapletree Logistics Trust and Mapletree Industrial Trust. The distribution yield of ParkwayLife REIT, Keppel DC REIT and Mapletree Commercial Trust have dropped below 4%. However, the yield remains attractive compared to other fixed income asset classes like corporate bonds and government bonds. The yield spread between big cap and small cap REIT remains wide.

Yield spread (reference to 10 year Singapore government bond of 1.604%) has widened from 4.431%. to 4.636%. The risk premium for small cap REIT is very attractive as compared to big cap REITs. This indicates value picks only in small and medium cap REITs.

Below chart is the Year to Date (2020) comparison between  FTSE ST REIT Index, FTSE ST Financial Index and Straits Time Index (STI). STI and Financial Sectors suffered losses due to the fear of coronavirus outbreak. However, Singapore REIT is holding very well and still trading in positive gain YTD due to its defensiveness.

Current macro factors are expected to continue to support the bull run of REIT index, there are: (1) low interest rate environment (2) potential relax of gearing ratio to 50-55% limit (3) TINA (There Is No Alternative) for other high yield asset classes. The positive sentiment may entice Singapore REITs to take on more debt to grow the current portfolio. Combining the above Macro & Technical Analysis, Singapore REIT is expected to continue to do well in 2020. I was invited by OTCS (Online Traders Club Singapore) to  share my S-REIT 2020 Market outlook recently at SGX. Readers can refer to the summary page below.

 

Some photos at SGX Auditorium (Super Full House!) You can join the mailing list here if you want be informed on future events. https://mystocksinvesting.com/mailinglist/

If you want a “Sleep Well” Dividend  Paying Portfolio to make your money works harder for you, Singapore REIT is one of the asset classes you must have in your investment portfolio. Of course, you have to learn more about the fundamental of REITs, the behaviors of the REITs, and pro/cons of the REITs.

My next Singapore REIT investing course is planned on April 18, 2020. You can register here. https://mystocksinvesting.com/course/singapore-reits-investing/

If you do not have time to learn all the basic, or you want to kick start your REIT portfolio within 1 month, I can help you to construct a REIT portfolio with a fee.  You can just sit back, relax and wait for the dividend to come it as I will be doing all the job in managing your REIT portfolio. For REIT Portfolio Consultation, please drop me an email marubozu@mystocksinvesting.com