The name's bond, just bond

Taken from jantoo

For many Filipino small investors, bonds as an asset class for potential investment seems out of reach and is reserved only for big investors. This is only partly true. A bond market exists wherein bond units are bought and sold just like any other commodity. The difference from stocks is that the bond market players consist mostly of large institutional funds, hedge funds, and mutual funds.

What are bonds?

These are  indebtedness or debt instruments issued by large corporations and sovereign governments. The issuer, as the name suggests, is bound to repay the creditor at some pre-determined interest rates and schedule.

The repayment terms extend to several years, so for corporations, issuing bonds is raising funds for big projects, expansion or paying other higher interest debt, without worrying about payments in the short term. By issuing debt rather than equity or new shares, existing shareholders do not suffer from ownership dilution.

For corporate bonds, the major risk is if the issuer's business is going down the drain and it could no longer pay the payments due. The perceived risk varies across the quality of the issuers; the more stable the company issuer is, the less likely that it will default on its commitments to bondholders.


If the issuer is a sovereign government, the bonds are termed sovereign bonds, and it is supposed to be guaranteed by the issuing government, and hence, less risky than straight loans. Most of the time, bondholders enjoy their steady stream of income payments, and most mutual funds include bonds as a sizeable portion of their portfolio.

Under special circumstances, you could lose your shirt with sovereign bonds. The current financial turmoil involving Cyprus illustrates this point. Part of the rescue package imposed on the country to save its ailing banks forces big bank depositors and bondholders to take a "haircut"--the financial euphemism for taking losses.

When Argentina defaulted on its sovereign debt in 2001, the hardest hit were bondholders. Some 93% of the country's creditors accepted huge losses, rather than lose everything. The rest of the hold-outs took Argentina to court and the case has dragged on until the present.

That is why bonds are rated according to their risks by ratings agencies such as Standard and Poor, Moody's and Fitch, which have entered into public lexicon owing to the latest country upgrade to investment grade by the last mentioned agency.

While the small investor cannot  participate directly at the bond markets, he can have some exposure to bonds by buying into mutual funds.  There are mutual funds that tout themselves as bond funds obviously because the bulk of their portfolio consists of--well, bonds.

To give the reader some idea on how much returns to expect, I am listing the bond funds of the Bank of the Philippine Islands (PSE:BPI) group together with the corresponding yields for 1 yr and 3 yrs. This is shown to illustrate what to expect and does not constitute an endorsement. As the fund managers always warn, past performance does not guarantee future performance.

	Absolute Yields (as of 4/1/2013)
	1 Yr	3 Yrs
BPI Premium Bond Fund	8.41%	22.02%
ALFM Peso Bond Fund	10.12%	28.38%
Odyssey Peso Bond Fund	23.95%	60.87%
ABT Philippines Bond Index Fund	18.65%	37.73%
ALFM Dollar Bond Fund	6.91%	18.90%
Philippine Dollar Bond Index Fund	9.40%	36.20%
Odyssey Phl. Dollar Bond Fund	8.46%	35.66%
Odyssey Emerging Market Dollar Bond Fund	3.55%	9.70%

As part of diversification and as a voluntary disclosure,  I do have placements in two of the funds mentioned. I regularly shift some funds to less risky investments when stocks tend to be pricey. Bond funds are my favorite.