4 Different Types of Bonds | Alpha Edge GM Singapore

4 Different
Types of Bonds

Usually refer to government-issued bonds from countries which have high levels of economic stability
These bonds are usually accorded some of the highest credit ratings from the three main credit ratings agencies (S&P, Moody’s and Fitch Ratings)
Examples include US Treasuries, Singapore Government Securities, Hong Kong Government Bonds
Their bond yields form the basis for Risk-free rates for investors in their respective countries

Lowest yields, compared to other bond segments
US 10-year Treasury yield was around 2% while the 5-year Singapore Government Bond had a yield in the region of about 1.5% (data as of 16 Feb 15)

Generally free from default/credit risk, but interest rate risk is still an issue for longer-maturity securities
Suitable for investors who want lowest risk bonds as fixed deposit alternatives which can provide a source of stable income

“Quasi-sovereign” entities are those which have the support of the government, like government agencies for example
The different levels of implied government support can result in differing yields for quasi-sovereign bonds, even for those of similar maturities ; credit ratings agencies tend to take this into account when assigning credit ratings to quasi-sovereign entities
Examples of quasi-sovereign issuers could include Singapore’s Housing Development Board (HDB), one of the country’s sovereign wealth funds (Temasek Holdings), or Hong Kong’s Kowloon Canton Railway Corp

The segment is generally characterised by low yields, similar to their sovereign counterparts
As an example, Hong Kong’s Kowloon Canton Railway Corp’s AAA-rated 5.125% May 2019 USD notes had a yield of about 1.9% at the time of writing

Generally free from default/credit risk, but implied government assistance is rarely tested; interest rate risk is still an issue for longer-dated securities
Suitable for investors who want lower risk bonds which can offer marginally higher yields compared to government bonds

These are bond which are issued by companies which have superior financial standing, which implies a better ability to service debt
They have ratings from AAA to BBB- (S&P rating scale), or Aaa to Baa3 (Moody’s)

Differing levels of yields, depending on whether the corporate bond is closer to AAA (highest possible rating) or BBB- (just one notch away from “junk”, or “non-investment grade”)
As an example, Nestle’s AA rated Oct 2017 AUD bonds had a yield of just 2.05%, while BBB- rated Far East Horizon’s Dec 2016 USD bonds yielded between 4.74/5.14% (as of 16 Feb 15)

As opposed to Sovereign bonds (or even quasi-sovereign bonds), credit risk is an issue – there is the risk that an issuer could default leading to an impairment on the bond investment
Investors have to be mindful of interest rate risk, which can affect the performance of longer-maturity securities
Investors can usually find a good mix of lower and higher-yielding names in the investment-grade corporate space, which can offer differing risk-reward profiles
Suitable for investors who want to take on some credit risk in exchange for higher yields

These are issued by corporations which are less credit-worthy, usually by smaller companies as opposed to industry bellwether corporations
These bonds are accorded credit ratings of BB+ or lower (S&P), or Ba1 or lower (Moody’s)
Sometimes known as “high yield bonds” or “junk bonds”

Highest yields, compared to other bond segments; returns may sometimes be described as “equity-like”
As of 4 Mar 15, US High Yield bonds sported a yield of 6.35%, while Asian real estate bonds (dominated by non-investment grade issuers) had a yield of 7%; specific securities like Evergrande’s 2020s currently sport a yield-to-maturity in the region of 12%

Default/credit risk is the main issue, given the lower-quality nature of the issuers; for troubled companies, default may be avoided via a restructuring, which may see bond investors take a write-down on their investment
Bond price volatility can be fairly high
Interest rate risk is less of an issue, since non-investment grade corporate issuance is usually of a shorter maturity
A large amount of non-investment grade corporate issuance tends to be in USD; investors who do not use the USD as a functional currency may be exposed to potential currency risk
Suitable for investors who are looking for some of the strongest potential returns in the fixed income space, and are willing to accept a higher level of risk in their investments