BONDS are often seen as boring and unsexy, but lately they have been looking decidedly appealing to frazzled investors.
As stock markets continue their woeful run and commodities take a severe beating in the global downturn, the prices of many bonds have been soaring.
Demand has been buoyant as investors see these instruments as a safe place to park their cash during times of turmoil.
Especially popular in this classic flight to safety are bonds issued by the governments of major industrialised countries. Government or sovereign bonds are typically seen as the safest type of bonds.
Bonds are a means to raise money. A government or company sells bonds to investors to hold for a set period - say five or 10 years - and they are paid a set rate of interest. They can be traded.
Investors savvy enough to have shifted their cash into bonds earlier this year are now likely to be invested in the best-performing investment category of the turbulent second half of this year.
Unit trust distributor Fundsupermart reports that some of its most sought-after fund categories last year - India, China, Global Emerging Markets, Commodities, and Global Equities - are now among its worst performers.
Funds invested in commodities and resources lost about 48.8 per cent during the last six months, while funds invested in global emerging markets plunged by about 38.1 per cent over the same period.
It has also been a sobering time for equities all over the globe in the wake of the US sub-prime mortgage crisis and the resulting credit crunch. Overall, funds invested in global equities tanked about 34.1 per cent from June 30 to Dec 12.
Global bond funds fared considerably better, dipping by only about 6.5 per cent over the same period.
Best of all, some global bond funds are actually returning double-digit gains, Fundsupermart said.
For instance, from June 30 to Dec 12, the SGAM Total Return Bond Fund rose 17.6 per cent while the FTIF-Templeton Global Bond A Fund was up 13.1 per cent.
In contrast, even the best-performing global equity fund, UOB United Global Capital Fund, was down by 12.5 per cent, Fundsupermart's analysis showed.
Not all bond funds did well, however. The worst performers suffered 30 per cent to 40 per cent falls, comparable to other funds, in the second half.
Fund manager Lion Capital's chief executive Daniel Chan explained: 'Bond funds that invest more in corporate credits would have done relatively poorly if compared with those that can or only chose to invest in sovereign risks.'
Investors could have chalked up equally stellar gains if they had invested directly in Singapore bonds rather than buying managed bond funds. For example, the price of 10-year Singapore Government bonds has shot up by more than 15 per cent since June.
Yields on these instruments are down to about 2 per cent, from about 3.9 per cent over the same period.
As a bond's price rises, its yield naturally drops - since the fixed rate of interest is a smaller percentage of the larger value. But investors are making it up as bond prices climb higher and higher.
Singapore Government bonds of all maturities are included under the CPF Investment Scheme. The minimum denomination for such bonds is $1,000.
The rapid decline in Singapore Government bond yields is a trend also seen in many other sovereign bonds, such as those linked to some of the world's largest economies, like the United States.
The 30-year US Treasury bond, for example, has risen in value by nearly 30 per cent this year, with 15.6 per cent of that gain chalked up last month alone.
'Government bonds have been extremely strong performers as we have seen rates decline and high demand driving prices up to the point that short-dated yields in US treasuries are now around 0 per cent,' said Mr Gregor Carle of Fidelity International.
Analysts say investors seem content to sell stocks and park their remaining cash in bonds for now, as they fear the global economy will get worse next year.
Other factors which make bonds more popular among investors include worries about deflation, or falling prices, and a slide in interest rates, which move in the opposite direction of bond prices.
Mr Thomas Kaegi, senior economist at UBS Wealth Management Research, said that while bond yields in Singapore are 'very unlikely' to drop to zero, it is easy to imagine yields dropping further.
'A further disruption of market confidence could trigger a further rush into government bonds,' he said.
Fund- supermart analyst Wong Weiyi said Singapore government bond prices are very high now and yields are low. Investors would soon be looking for better-yielding alternatives, possibly corporate bonds with high credit ratings, he said.
This article was first published in The Straits Times on December 19, 2008.
