Permanent Portfolio FAQ – Should you aim for higher Bond Yields?

By Marco Bellucci @

09 Oct Permanent Portfolio FAQ – Should you aim for higher Bond Yields?

This is another email from a reader enquiring about the bond component in the Singapore Permanent Portfolio. I will publish these emails as FAQs which I believe will be useful for other readers.


Dear Alvin,

I have attended your talk in April 2013 concerning the Singapore Permanent Portfolio.

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Would appreciate your advice concerning the following bond matter.

Concerning the Bonds portion of the portfolio, I remembered your recommendation is 30 year SGS Bonds. However I noted that the one currently available is NA12100N 420401 10 @ 2.75%. Currently this bond is selling in the market at around $95 or so and thus effective interest at most is 2.8% which is lower than the inflation rate in Singapore (inflation is around 3.5% to 4%?).

I also note that there is another bond issued by LTA which is paying 4.17% (LTAn4.17% 160510 10K. This bond is of a shorter duration (3 years) and is currently selling at a premium costing $1.09 there about. With the premium the effective interst will work out to around 3.8%. Wouldn't this bond be better than the SGS bond as this bond enables me to at least break even with inflation and thus my funds will not be “depreciated”?


My reply:

1) Permanent Portfolio is not about dividend or coupon rate

You should buy a long term bond because the price is more volatile. When the stock market crashes, you want your bonds to spike up in price to counter the loss in stocks. If you choose a short term bond, the price is less volatile, and the gain in bond price may not be sufficient to cover the losses in stocks.

2) Safety First

You should stick to government bonds because they are the safest. Permanent Portfolio is designed based on safest options. Which is “safer”? LTA bond or Singapore Government Bonds? The risk is priced into the yields of LTA bonds. That is why LTA bond yields are higher than SGS bonds. Of course, you can mix and match the bonds if you think the yield is too low for your liking. But like what I said in point 1, your returns might be affected if LTA bond price is not volatile enough.


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  • TSY
    Posted at 18:20h, 14 October Reply

    with regards to the question from your reader, wouldn’t it make more sense to point out the wrong yield % computed on the LTA bond ? it’s grossly wrong that at premium price of $1.09 , gives a yield at 3.8% ???
    instead of an “in theory” answer about safety with regards to SGS vs LTA, in this case, LTA (quazi govt type of securities), is not entirely relevant, given the yield % is computed wrongly by your reader.

    • Alvin Chow
      Posted at 07:54h, 15 October Reply

      Hi TSY, you are right the yield is wrong because bond price changes. Like it or not, even if I state a bond yield percentage, it will continue to be wrong because bond price keeps changing.

      Most importantly, the role of bond in Permanent Portfolio is capital gains and not yields. If you keep harping on yields, like the reader, you are missing the point entirely.

  • Ben
    Posted at 02:09h, 15 October Reply

    For the bond component, past articles have suggested the use of the ABF Singapore Bond Fund ETF (symbol A35), besides buying long bonds.

    I was reading thru the prospectus for A35 – apparently the index is supposed to track the returns from bonds denominated in SGD issued not just SG Govt, but also potentially regional Asian Govts. While the ETF currently holds SGov and local stat board bonds, there is no ruling out that the ETF could invest in bonds issued by other Asian govt in future –
    1) question is: does this bring in undesired risk for the purpose of permanent portfolio ?

    The db x-trackers II Markit iBoxx ABF Singapore Government UCITS ETF (symbol KV4) seems to invest in SGovt bonds only, however the prospectus shows its investment methodology is indirect replication (does this mean it uses deriatives?)
    2) What are your views on the suitability of KV4 for the SG permanent portfolio ?

  • Ben
    Posted at 10:42h, 16 November Reply

    Hi alvin, could you advise on the above queries I posted previously ?

    Buying a bond fund seems to be the more hassle-free way to implement the bond component of PP, as I don’t have to monitor or worry about the maturity dates of the underlying bonds in the bond fund (as compared to buying bonds directly).

    Another concern is liquidity, the bond fund appears to be more liquid than bond with a higher trading volume, and can facilitate easier re-balancing.

    However, what is not obvious to me is the volatility of bond fund eg. like A35. Is it volatile enough to use it in the PP ?

    • Alvin
      Posted at 07:33h, 18 November Reply

      Hi Ben, sorry for missing out the question!

      When it comes to bond selection, you have to understand what you are looking for.

      1) Bond price must be volatile – when any asset class falls hard in price, you want something else to go up in price. If bond price is to rise, you want it to rise a lot. The longer the bond duration, the higher the volatility. Hence, this is why you keep a bond that is 25 to 30 years in your permanent portfolio. The bond fund has a mixture of long and short term bonds. The concern is that it does not have the volatility to counter price drops in other asset classes.

      2) Safety – Government bonds are considered the safest, over and above corporate bonds. It is easier for a company to go bankrupt as compared to the government. The bond fund contains corporate bonds if I am not wrong. This adds unnecessary risks to Permanent Portfolio.

      3) As you mentioned correctly, there is institutional risk when buying a bond fund.

      4) the x-trackers series are synthetic ETFs. This means they do not have real bonds under their fund holdings. They are just replicating the indices by trading futures. I would advise not to use this for permanent portfolio.

  • siew lay chan
    Posted at 19:30h, 02 July Reply

    Dear Alvin

    I am unsure if my computation is correct. Could you enlighten me how much dividend I will receive for 2013 if I have 10 lots of ISHARES USD ASIA HY BOND ETFS$ (QL3). The total dividend given in 2013 = US $0.73 (approximate of S$0.90885 based on convertion rate of 1:1.245). Is it S$988.50

    • Alvin Chow
      Posted at 07:49h, 03 July Reply

      1 lot of QL3 is 100 bonds. Assuming the total coupon payment in 2013 is US$0.73 per bond, then you should receive 10 x 100 x 0.73 = US$730

      Assuming USDSGD exchange rate of 1.245, the total coupon payment should be 730 x 1.245 = S$908.85.

  • Chong Kwee Seng
    Posted at 12:37h, 06 July Reply

    Hi Alvin, After having reading your articles. I am intending to invest S50k (my retirement fund) in Bonds but find that it is very difficult look for an appropriate counter n SGX to give a net yield of 4%.
    Are you able to suggest a counter which I can invest my fund?

    • Alvin Chow
      Posted at 13:16h, 06 July Reply

      I am not able to give recommendation. Only licensed advisors can do so.

      Nonetheless, I do not think you are able to find SGS bonds with 4% yield currently. You may have to look at corporate bonds, but of course they come with greater risks.

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