Monday, June 02, 2008

Higher interest rate?

Someone pointed out that the interest rate for Singapore Government bonds has increased in recent days, and is now above 3% for longer term bonds.

When interest rate increases, the prices of the bond drops. An increase of 1% in the yield can cause a drop of more than 10% in the price of the longer term bonds.

During the past 15 years, Singapore went through a period of low inflation and low interest rate. As inflation has increased this year, and may continue at a high level in the future, there is the likelihood that interest rate will increase.

If you are invested in a long term Government bond or life insurance policy with a guaratneed return, you may be locked into the low return for many years.

Try to invest for the shorter term, say up to 3 years, or into equities and REITS, which are likely to give some hedge against inflation.
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1 comment:

KYH said...

Hi Mr Tan

From your various postings, you seem not to favour Singapore Government Bonds, but you favour Preference Shares.

If I am correct, can you share your reasons? Government Bonds gives 3.87% (according to Fundsupermart on 5 Jun 08) and is virtually risk-free. OCBC gives 5.1% (less if you buy from open market), but with some risk, although minimal, I think. Both are liquid, with Preference Shares being more liquid. Is it because the reduction in interest is not commensurate with the lower risk?

Would very much like to hear your views as I invest in both as part of my portfolio.

June 05, 2008 11:04 AM

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