Temasek Bond T2023 2.7%pa – Should You Buy?

Temasek Bond T2023

Temasek Bond T2023-S$ is Temasek’s first-ever SGD-denominated bonds that will be listed on SGX. This means that retail investors like you and I will finally be able to buy into such bonds, usually exclusive only to financial institutions and accredited investors.

This is also great news for risk-adverse investors who are looking for quality bonds for investment. Currently, a retail investor can only buy monthly Singapore Savings Bonds, trade exchange-listed SGS bonds and 9 corporate bonds (excluding perpetuals).

A new bond in the market is definitely welcome news, so should you be excited by this offer? How safe is this Temasek Bond T2023? Is this bond more attractive than other fixed income choices in the market? I have done some reading today and digested the bond information. In the following paragraphs I will show you what I think.

Summary of Temasek Bond T2023-S$

Here’s a quick low-down of all you need to know about Temasek Bond T2023 so that we are on the same page when discussing about these bonds.

  • Bond ID: Temasek Bond T2023-S$
  • Bond yield: 2.70% pa
  • Tenor: 5 years
  • Tranche size: S$200 million public offer, S$200 million placement (total of S$400 million can be upsized to S$500 million)
  • Issuer: Temasek Financial (IV) Private Limited
  • Guarantor: Temasek Holdings (Private) Limited
  • Option: Callable
  • Rated: Aaa (Moody’s) and AAA (S&P)

Timeline You Must Know

You can start applying for this bond through POSB/DBS, OCBC, UOB ATMs, internet and mobile banking platforms from 17 Oct 2018. Singaporeans, PRs and foreigners can apply for the Singapore Savings Bonds. You will need to be above 18 years old and possess a Central Depository (CDP) Account.

  • Deadline for public offer: 23 Oct 2018 12pm
  • Deadline for placement: 23 Oct 2018 8pm
  • Allotment results: 24 Oct 2018
  • Issue date: 25 Oct 2018
  • Start-trading date: 26 Oct 2018 9am
  • Interest payment dates: 25 Apr, 25 Oct every year
  • Maturity date: 25 Oct 2023

Temasek Bond T2023 vs SSB vs SGS Bonds

Let us first start by comparing Temasek Bond T2023 with SSB and SGS bonds as they are all bonds guaranteed by the Government of Singapore.

Temasek Bond T2023-S$SSBSGS
Liquidity riskTraded on SGXNot tradedTraded on SGX
Temasek can redeem early at higher of market value or principalInvestor can redeem early in any month
Market riskTraded on SGXNot tradedTraded on SGX
Board lot sizeBoard lot value S$1,000Multiples of S$500Board lot value S$1,000
Tenor5 years10 yearsMultiple
InterestFixed Interest
Paid every 6 months
Step up interest
Paid every 6 months
Fixed Interest
Paid every 6 months

1. Bond offers Higher Interest Rates

The most attractive part of the Temasek Bond T2023 is its interest rate. It offers an annualised interest rate of 2.70%, higher than SSB Nov 2018 that offers 2.22%. The SGS 5Y benchmark is 2.33% as of 17 Oct. You will be getting 0.48% pa more interest with Temasek Bond T2023 than SSB Nov 2018, or 0.37% pa more than SGS 5Y bonds. This means S$480 or S$370 more per year respectively for every S$100,000 investment.

Below, you will also see the 5-year interest rates offered by Temasek Bond T2023 vs Singapore Savings Bond issues and SGS Bonds traded prices over the last 6 months. The yield of Temasek Bond T2023 is indeed attractive. To know more about current and historical interest rates in Singapore, check out the section Singapore Bonds Interest Rates on this website.

Little Known Reason Why Temasek Bond T2023 offers Higher Interest Rates

Temasek Bond T2023, SSB and SGS bonds are all bonds guaranteed by the Government of Singapore, therefore the risk profiles should be similar. So why does Temasek Bond T2023 offer higher interest rates than the rest? Let’s explain this.

SSB usually offers lower annualised yield than SGS bonds of similar maturities because it can be redeemed. The issuer (Government of Singapore/Monetary Authority of Singapore) allows bond holders to redeem early and in doing so, they are compensated (pay lesser to borrow) by providing this ‘privilege’. For those of you who are interested in the pricing mechanics used, you can read more about this in my article on Singapore Savings Bonds Coupons.

By now you should be having a eureka moment (I hope I succeeded!). Temasek Bond T2023 is callable – Temasek can redeem early at higher of market value or principal. This means that the issuer (Temasek) can redeem early when interest rates fall, so that they can borrow at lower cost elsewhere. Bondholders will have to be compensated for this ‘privilege’ (pay more to borrow).

For those of you who missed this important information out, please read all investment information thoroughly (even if it is from the Government of Singapore). I recommend you check out the Temasek Bond T2023 Pricing Supplement provided by Temasek.

2. Bond faces Downside Risk with Rising Interest Rates

Rising interest rates are a genuine concern. I am sure you would have experienced it this month with a plunging stock market. Economies around the world have strengthened and monetary stimulus have been withdrawn steadily.

For Singapore Savings Bonds, you will be able to redeem your investment plus any accrued interest whenever interest rates rise to immediately invest in higher yielding products elsewhere. There is no investment loss.

For Temasek Bond T2023, as it is exchange traded, rising interest rates will cause bond prices to fall (A quick explanation of this inverse relationship is illustrated on Page 2 of Temasek Offering Overview document). Selling your bonds will incur investment losses. The same is true for SGS bonds that are publicly traded.

3. Bond might Face Low Liquidity While Trading on SGX

The first thing you should know is the trading volume of retail bonds on SGX is not high. The snapshot below of trading day 17 Oct shows that the total bond traded value was around S$478,000, which is only 0.1% of the Temasek Bond T2023 issue size of S$400-500 million.

SGX Retail Bond Market

Source: SGX website

You might be familiar with the recent Astrea IV Private Equity A-1 bonds issued in Jun 2018 with an issue size of S$242 million. This bond had daily trading volume ranging from 2,000 to 569,000 in the last 30 days. Even at the peak volume, it is also only 0.2% of offer size.

It is also not clear if there will be market making provided by Temasek for these bonds. In the event of lack of trading volume, you will still be able to sell your bonds but at a discount.

Temasek Bond T2023 vs Other Temasek Bonds

Temasek Bond T2023-S$ marks the 17th time Temasek has issued bonds. 6 out of the 16 previous issues were SGD-denominated. The table below shows all the SGD-denominated bonds and the recently issued Series 16 T2028-US$ bond.

Bond SeriesCurrencyBillionsTenor (years)Coupon (%)Issue Date
Series 4 : T2029-S$SGD0.3204.0007-Dec-09
Series 5 : T2039-S$SGD0.3304.2007-Dec-09
Series 6 : T2020-S$SGD1103.26519-Feb-10
Series 7 : T2025-S$SGD0.5153.7855-Mar-10
Series 8 : T2035-S$SGD0.5254.0485-Mar-10
Series 11 : T2050-S$SGD1404.2002-Aug-10
Series 16 : T2028-US$USD1.35103.6251-Aug-18
Series 17 : T2023-S$SGD0.452.70025-Oct-18

Source: Temasek Holdings

Temasek Expects Short Term Rates to Rise

Temasek prefers shorter term bonds in possible anticipation of higher short term interest rates. This is not a surprise given the flattening yield curve over the past year. You will see these signs in the following observations

  1. Temasek has issued 2 bond in 2018 – T2028-US$ and T2023-S$. They have not issued bonds since 2016.
  2. Both bonds have shorter term maturity than their historical borrowings.

Temasek Credit Profile Remains Strong

One can only conclude that the borrowings from T2023-S$ and T2028-US$ are used to supplement the cash outflow from their maturing USD Bond in 2019 and SGD Bond in 2020. In both, they are replacing almost half of their borrowings with issued bonds paying lesser interest expense. First, they are borrowing less and second, they are paying less for borrowings.

  • S$2.0 billion worth of USD borrowing paying 4.3% maturing in 2019
    • Replacing with US$1.35 billion USD Bond paying 3.625% for 10 years
  • S$1.0 billion worth of SGD borrowing paying 3.265% maturing in 2020
    • Replacing with S$0.4 billion SGD Bond paying 2.70% for 5 years

Temasek Borrowing Profile

Source: Temasek Holdings

Conclusion


Temasek Holdings is a sovereign investment vehicle for the Government of Singapore. There is no doubt about its credit profile and its superb historical performance. I would love to invest in something that they are finally offering.

However, this issue Temasek Bond T2023 seems more to me as an opportunistic renewal of their borrowings at lower cost in anticipation of higher interest rates. They have tried to sweeten the deal by providing a more attractive interest rate of 0.4-0.5% pa through the option to redeem. But I am not convinced that this premium is rewarding enough given upwards-creeping interest rates.

I also find fault with the lack of bond trading liquidity on SGX. This makes bond selling more costly than brokers are already charging. This bond might eventually change my perception given the huge retail interest.

Until then, I am still attracted to Singapore Savings Bonds for their versatility. I can do with a little less interest but with the knowledge that I am nimble in a rising interest rate environment. To get higher interest rate return, I will seek out traded retail bonds such as Astrea IV that is currently yielding around 3.7% for 10 years.

Verdict: NEUTRAL

 

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