The application period for the Astrea 7 PE bonds opens on Friday (20 May 2022) and closes at 12pm on Wednesday (25 May 2022). So far, I have seen a couple of glowing reviews about this new class of bonds for retail investors and folks who want to subscribe. However, I will be staying far far away from this particular Astrea 7 series. I have to give a thumbs down for those who keep insisting that bonds are relatively less risky than holding equities. It is all about the market trending and macro-probability. In the face of super inflationary pressure and US Federal Reserve putting an all out stop to combat rising inflation, buying bonds now is just suicidal for me. I only have one thing to say about the issuance of this current tranche, that is, Temasek's Azalea could not have picked a worst time for this particular fund raising exercise.
1. Rising interest rate environment leads to butchering of the face value of Astrea 7 PE Bonds
Well this is basic economics 101: Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises, bond prices usually fall. With an all out fight to stop hyper-inflation, the US Federal Reserve is hell-bent on raising borrowing rates. Although there are indeed some signs of green shots sprouting on the taming of inflation, I think it is just too early to conclude that the war has been won. Safe to say, I expect interest rates to continue rising aggressively.
Simply put, there may come a time when the fixed deposit offered by banks reached over 4%. If this scenario materializes, then we can imagine the opportunity cost of holding on to the PE bonds. The risk and reward does not seemed adequate currently. Chances are that the market value of the Astrea bonds will drop upon listing in the next 6 months is quite high.
2. Portfolio asset class diversification?
On the need for diversification of asset classes, I certainly do agree with it. Nevertheless, another way I look at this is that our Central Provident Fund ("CPF") special account already provided some good diversification and is the closet thing to a government risk free bond. Why do we want to buy into PE bonds that most certainly will encounter high chance of declining price (as alluded to point 1 above) and also faces the possibility of some valuation impairment for unlisted businesses?
For me personally, now maybe the time to gradually invest more into businesses listed on the various stock exchanges. The S&P 500 is down about 20%. This is definitely a bear market. Again, the strange thing is that many retail investors tend to sell or stay away from equities during bear market and buy more during a bull market rally.
3. Singapore Saving Bonds ("SSB") is more liquid than Astrea 7
Furtherance to the topic of asset class diversification, as a small retail investor, I would rather put my money into SSB as one can do early redemption without any penalty or loss in value. So it would be easier to do switching or re-allocation to equities later on if there are good opportunities.
For Astrea 7, you can only sell if off in the secondary market on SGX after being allocated the bond issuance- bad news here is that the trading liquidity portion can be a challenge at certain period based on historical issued Astrea series.
Parting thoughts
Anyway, the above are just my own personal train of thoughts at this juncture based on my own long term investment objectives. For those who wanted to buy into Astrea 7 PE bonds and are willing to hold on till the redemption, I guess this would still be better than putting everything into the bank.
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