What to look for in fixed income investments
Bonds play an important role in a well-diversified investment portfolio – but with so many different strategies available to new and current bond investors, where should you start?
"Bonds are a defensive asset class, but they can potentially offer higher yields despite the low interest rate environment," explains Citibank Investment Strategist Simson Sanaphay. "Essentially, they are a form of debt: the issuer raises capital through bonds, and pays an agreed coupon rate to the investor on a regular basis, typically semi-annually. The face value of the bond is returned on maturity."
This makes bonds a relatively safe investment when equity markets are volatile – and provides predictable recurring income. But issuer credit strength and macroeconomic factors will still impact your net return.
Choosing a provider with proven global capabilities and fixed income expertise can make all the difference to the success of your bond portfolio.
1. Diverse global and local opportunities
"As a global bank, Citibank can provide broad access to domestic and international fixed income, including emerging markets and multiple currencies," says Sanaphay.
For example, let’s say a local client sells their UK property and receives the proceeds in pounds sterling.
"Given the low interest rate in Britain, GBP bonds may offer income stability with higher returns," explains Sanaphay. "They can continue to generate income of their assets in sterling, and if the currency movement becomes more favourable choose to sell their bond holding and transfer their sterling to another currency."
Citibank consistently ranks highly in global fixed income league tables and is currently second1 for all international bonds. It also topped the Debt Capital Markets league table2 in Australia this year.
2. Transparent pricing
Unlike term deposits, bonds are liquid and can be traded on the secondary market – as the investor may choose to do in the above scenario. "But if you’re investing in bonds that are not exchange traded, you should look for transparency," warns Sanaphay. "Citibank’s global footprint means we can deal through multiple counterparties and contributors around the world, so our clients can essentially access a broad market of buyers and sellers."
3. A range of maturity profiles
Because Citibank can offer bonds from one year to 10 years, its clients can choose different maturity profiles depending on their need for cash.
"Staggering maturity profiles is part of a broader strategy to consider," Sanaphay explains.
For example, you could build a bond portfolio with 3, 5, 7 and 10 year bonds. As each bond matures, the issuer will return its face value to you.
"Avoid locking your funds into a single maturity profile or a single issuer," he suggests. "You can then choose whether to reinvest back into newer issue bonds, or bonds on the secondary market with attractive valuations."
Or, you may need to release cash at predictable periods for personal reasons, such as purchasing property, travel plans or education costs.
"If you’re investing in bonds that are not exchange traded, you should look for transparency… Citibank’s global footprint means we can deal through multiple counterparties and contributors around the world." Simson Sanaphay.
4. A holistic approach to your strategy
"Citibank helps its clients implement a broad range of bond investment strategies to complement their overall investment portfolio, reducing the volatility in returns," explains Sanaphay.
A sound starting point for investors is a Blue Chip bond investment strategy. "These focus on defensive corporates, with a global reputation for quality, reliability and the ability to maintain profitability through market cycles," he says. They pay a reasonable yield, and provide a solid platform for regular, stable income.
Sanaphay warns not to focus solely on coupon rates – because, as with any investment, higher returns typically imply higher risk.
"You may not realise it, but you could potentially be investing in lower graded entities, or you may fall lower in the ranking of claims – which means in the event of a default, your bond value may not be fully repaid."
Citibank currently supports clients with a range of other strategic opportunities, including:
- Tactical strategy – be opportunistic about trading, such as looking for recent credit rating upgrades, or switching existing bond holdings for better risk-reward bonds.
- Thematic strategy – focus on specific macro-economic or industry themes, an approach supported by Citi research.
- Secondary market issues – sometimes new issue bonds are released to the secondary market, providing better liquidity and the potential for price appreciation on the new issue premium.
"Wholesale investors should be taking a serious look at bonds in today’s market," concludes Sanaphay. "Our product specialists can help you tailor a strategy that can achieve recurring income as well as higher returns than term deposits."
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