News – BT
Uphill climb for SGX in retail bond trading
‘I HEARD about it but didn’t know it was tomorrow’ and ‘no client has asked about it’. That was what one remisier said yesterday when told about today’s launch of bond trading for retail clients by the Singapore Exchange (SGX).
To be fair, he did know that Singapore Airlines is offering $50 million worth of bonds for small investors to coincide with the SGX’s promotion of bond trading for retail investors. The retail tranche is part of a five-year $300 million SIA bond issuance with interest rate of 2.15 per cent payable semi-annually.
Bonds have been listed on the SGX for many years but there is little trading mainly because overwhelmingly they were sold to institutions, at minimum lots of $250,000.
But that is about to change with a concerted effort by the SGX to get corporates to issue bonds at retail size.
In August, the SGX said that the Central Depository has been a custodian of individual investors’ Singapore Government Securities (SGS) holdings since April 1, 2010.
A total of 1,229 bonds are currently listed on SGX. In FY2010, 200 bonds were listed involving programmes to raise over $100 billion.
Still, the remisier was pretty dismissive about the potential interest from retail clients for bond trading which he put down to their lack of sophistication.
Which is another way of saying not many understand how fixed income securities work. Fixed income securities include preference shares and government bonds, according to the SGX.
These securities are preferred by investors seeking fixed, regular income that could either substitute or add to their earnings.
Fixed income refers to securities that pay a specific interest rate, such as bonds and preference shares. Governments issue government bonds while companies issue corporate bonds or preference shares.
The Singapore Government Securities which are currently sold by banks will be listed on the SGX by the first quarter of next year.
In the case of bonds, at maturity, the principal is returned to the investor and the bond is delisted. Most preference shares have no stated maturity, thus they are sometimes referred to as a ‘perpetuity’.
‘When OCBC pref shares traded below $100, they didn’t buy it, saying the mother share was bengkok (spoiled),’ the remisier said. He was harking back to the 2008/9 financial crisis when equities and bond prices plunged.
What the small investors didn’t understand was that the yield on the preference shares rose inversely with the fall in the price, he said.
In addition, for those which have a callable date like the OCBC 5.1 per cent pref share callable 29/07/2013, the holder would be paid back 100 per cent of the principal.
Typically, for pref shares with callable dates, if the issuer does not redeem them, it would have to pay an even higher interest rate.
All this is information that a retail investor would have to find out. So it would entail some work.
It’s true that many small investors are not interested in poring over prospectuses.
SIA’s latest bond prospectus was 113 pages long! This, for a plain vanilla bond.
One could be sceptical about the SGX’s latest effort to promote retail bond trading given the behaviour of retail investors in Singapore.
Many small investors are cheapskates, and it is not because they do not have the funds. Many too treat the SGX as a casino, and a short term mentality is not uncommon.
‘So no penny stocks then’ was the comment from one observer. She was referring to the minimum board lot for retail bonds at 1,000 units or $1,000 in value.
Others wonder at the SGX’s timing to promote bond trading for retail investors when interest rates are at all-time lows.
They fear that retail investors might rush into bonds and when interest rates rally, bond prices could fall, sparking the inevitable outcry.
But this is also the time when corporates are drawn to issue more bonds, precisely when interest rates are low.
Without enough supply, the SGX would be hard put to promote bond trading.
The SGX does have its work cut out for it but it is an exchange for all investors. There are retail investors out there who will do the sensible thing and study before taking the leap.
Remisiers too will have to make sure their clients understand what they are getting into. Reminding them that a bond could turn into a long term hold would be a good way to start. Another reminder should be that bond issuers, unless they are the government or government guaranteed, can go bust and their bonds become worthless.