Saturday, January 14, 2012

CMA bond - the 1st day of trading

Yesterday was the first day of trading for CMA bond. For a bond, the volume was quite high. About 4000 lots changed hands. Typically bonds have a low trading volume. I extracted a snapshot of the bonds traded on SGX currently.

From the table above, you can observe that the bond prices are quite close to the par value. Bonds traded on SGX typically have a par value of $1.00. With such prices, investors find it safe to invest in bonds. Bank interest (0.05% for POSB/DBS) are much lower than bond yields.

Bank savings account replacement?
Some investors may want to place their money under bonds as bank savings account replacements. They could "withdraw" their money if they want to. However  there are some drawbacks that they need to take note.

The draw backs they are looking at are
1) The turn around time for the proceeds to be credited back to their account
2) The additional charges in the form of brokerage fees.
3) Low trading volume may mean the buy-sell price gap is wide enough to make them sell at a loss. (see F&NTrea 2.48%b160328 above)

What I would expect for CMA bond:
The bond is still quite in the limelight as it is quite new. After all the attention dies down, I would expect trading volume to go down significantly, to probably below 200 lots of trades per day. When that happens, I may want to queue at price ranges of 0.998 to try to buy below par value. However, if some seller comes in and sell 1 lot only at that price, the brokerage charges will be quite painful!

I do not expect bank savings interest rates to increase any time soon. So, bond prices should remain slightly higher than par value for now. I would advise to hold these bonds till maturity. They are still relatively safer financial instruments in Singapore

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