Bonds can be important risk diversifiers in portfolios consisting mainly of equities, properties and bank deposits. DANIEL BUENAS reports, Published March 26, 2007

LAST week, we took a look at short selling stock. This week, we look at an asset group which has often been seen as having an inverse relationship with equities, namely bonds.

Specifically, we take a look at bonds and T-bills that are sold on the Singapore Government Securities (SGS) market, which has grown considerably over the last few years in line with the government's efforts to develop Singapore's capital market.

The SGS market has become a huge one, worth over $60 billion, although not many Singaporeans are familiar or invest in it.

'For portfolios that consist mainly of equities, properties and bank deposits, fixed income instruments such as SGS can be an important risk diversifier,' the Monetary Authority of Singapore (MAS) notes on its website.

SGS are debt instruments - which is any document that represents a loan such as a bill note, bond or commercial paper - issued and guaranteed by the Singapore government.

There are two types of SGS: T-bills and bonds.

T-BILLS

These are short-term securities that mature in one year or less from their issue date. They are bought and sold at a price less than their face (par) value and the government will pay the holder of the T-bill the face value of the bond when they mature.

BONDS

SGS bonds have tenures of up to 15 years. They pay interest every half a year in the form of a coupon payment and return the face value of the bond at maturity. For example, if an SGS bond has a coupon rate of 3.8 per cent, for every $1,000 face value, the investor will get $38 each year in the form of two coupon payments of $19 every six months until the SGS bond matures. At maturity, the investor will receive the $1,000 face value.

According to the MAS, SGS have a few advantages over bond funds and other investment instruments such as structured deposits and guaranteed funds.

First, they allow a person to lock in a fixed rate of return over the tenure of the bond, which can range from a few months up to 15 years. Second, coupon payments from SGS bonds generate periodic cash flows before the SGS matures.

'This is attractive to investors who are saving for future outlays such as education or retirement, but who also want some periodic income stream in the interim,' the MAS says. ''Interest income from SGS is also tax exempt.'

Measuring the returns of a bond investment is slightly different from that of a stock.

Unlike stocks, bonds have a maturity date at which the face or par value of the bond is paid to the investor. In addition, the investor will also receive a fixed payment periodically as specified by the coupon rate of the bond.

As the MAS explains: 'If an investor holds a bond till maturity, his return is approximately the bond's yield to maturity. This measure takes into account all the future cash flows such as the coupon payments, income from reinvestment of coupon payment, and par value that the investor will get from the bond, as well as the price paid for the bond.

'If the price is exactly equal to the par value, the yield to maturity equals the coupon rate. The higher the price, the lower the yield.'

Investors may buy SGS in the primary market through MAS auctions or in the secondary market through a primary dealer bank.

In September each year, MAS publishes on the SGS website an issuance calendar specifying the bonds that would be auctioned the following year and the dates of the auction.

In addition, MAS auctions a three-month T-bill every Monday. Notices announcing the bond auctions are published both on the SGS website and also advertised in the newspapers.

If you wish to participate in the auction, you need to open accounts with - and submit your bids through - a primary dealer or through any secondary dealers who will in turn submit bids to the primary dealers on your behalf.

To purchase SGS in the secondary market, investors also need to open an SGS trading account with a primary dealer bank. With this account, investors can then purchase SGS over the counter with these banks.

Information for this article was taken from the MAS website. For more information, check out www.sgs.gov.sg or www.mas.gov.sg .