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Volatility in global financial markets in the past few weeks has prompted investors to run back to the safe-haven arms of bonds again.

The month of October has seen some of the worst crashes on Wall Street, including the worst one of all in 1929, when the stock market meltdown triggered the Great Depression, and another in 1987, when the Dow Jones Industrial Average lost 508 points or 22.6 per cent in one day.

Gyrations in stock markets this month, while of concern, are nowhere near those stomach-churning numbers, of course — but with stocks rising and falling by more than 1 per cent every few days, risk-averse investors are jumping ship to safer harbours.

Investors here have taken cover in bonds, with the Singapore Fixed Income Index (SFI) — a gauge of bond performance — outdoing stocks as measured by the benchmark Straits Times Index (STI) in the past three weeks.

The SFI gained 0.22 per cent in the week ended Oct 3, 0.29 per cent for the week ended Oct 10 and 0.75 per cent this past week, while the STI lost 1.18 per cent, 0.9 per cent and 1.7 per cent respectively.

DBS Bank’s head of fixed income, Mr Clifford Lee, noted that while bonds are not as popular as stocks here, interest in them has been rising.

The traditional holdings for retail investors would be equity, property, cash.

What’s been happening is the equity market has been volatile, cash deposits’ interest rates have been extremely low, while property prices have taken a beating, so all that is adding to bonds looking attractive as an asset class.

Bonds usually offer investors a fixed rate of return, or coupon, each year over a set period. They are also traded like stocks.

For retail investors, bonds may soon be a more viable option with regulatory moves to improve access for ordinary investors.

Eligible firms issuing bonds could be exempted from having to issue burdensome prospectuses for basic bond offers when offering them to retail investors.

Certain bonds initially sold to institutional or accredited investors that have been traded for at least six months — so-called seasoned bonds — can be re-denominated into smaller board lot sizes of 1,000 or around $1,000 per lot for retail investors.

The Sunday Times delves deeper into what you should take note of before investing in bonds.

Outlook for bonds

Interest rates are still at historic lows, thanks to the United States Federal Reserve’s near zero policy — and this has prompted a rush into the bond market for companies that can borrow at low costs.

OCBC head of capital markets Tan Kee Phong noted that the volume of Singapore dollar-denominated new bond issuances so far this year has increased to $20.8 billion from 126 deals.

That is up from $14.9 billion from 113 deals last year, and this year’s value is already above the $19.8 billion raised for all of last year.

Demand for local currency bonds has been strong amid favourable investor sentiment towards issuances, Mr Tan said.

Mr Todd Schubert, head of fixed income at the Bank of Singapore, said retail demand for bonds has been good.

Given the lack of viable alternative income-producing vehicles, we expect continued strong demand for bonds over the coming months.

With the record low interest rates, the only way rates will move is up and that would put downward pressure on bond prices, which could mean lower yields or returns and possible capital losses on bond investments if you do not hold the bond to its maturity date.

Analysts expect any rise in interest rates to take place down the track given the weak global economy.

They add that when rate rises come, any increase will be small and gradual, limiting the impact on bond investors.

Mr Schubert offers suggestions on how investors can position themselves for a higher interest-rate environment.

Investors can move down the credit curve. Bonds with lower credit rating have higher coupon rates, which in turn can cushion against the impact of rising rates.

This strategy will involve you taking more risk, however, so if you are more conservative, you may wish to wait for new bond issuances that will have to offer higher coupon rates when global interest rates eventually rise.

Bonds in a diversified portfolio

Experts stress that if retail investors buy bonds, these should form part of a diversified portfolio. They are the slow and steady component that brings you a regular stream of income.

Bonds may not bring returns as high as stocks, but they help to reduce the uncertainty or volatility.

DBS’ Mr Lee said: Look at bonds as a medium- to long-term holding asset class and not from a trading-oriented standpoint because liquidity in the bond market is not at the same level as equity markets as yet.

Mr Manpreet Gill, the head of fixed income, currencies and commodities investment strategy at Standard Chartered Bank, said retail investors should have diversified sources of income, including bonds.

There is no magic number on how much you should allocate to bonds, as it depends on your age, risk appetite and financial needs.

However, as an example, we currently allocate 35 per cent towards fixed income in a diversified allocation for an investor with a ‘moderate’ risk profile, Mr Gill said.

Mr Goh Teik Cheng, the head of research and product advisory for personal financial services at United Overseas Bank, said: An old rule of thumb that is easy for investors to use is to allocate the same percentage holding of bonds in their portfolios according to their age.

For a 30-year-old investor, 30 per cent of his portfolio should be allocated to bonds and 70 per cent to equities and/or other assets.

But, said HSBC Singapore head of retail banking and wealth management Matthew Colebrook, take note of the risks involved in bonds when balancing your portfolio.

Bondholders, in particular, are subject to issuer default risk, which could wipe out your initial investment and returns if the issuer goes belly-up.

Other risks include inflation risk where the income from the bond is eroded by higher prices, leading to lower returns, and currency risk where returns for bonds denominated in foreign currencies are affected by exchange-rate movements.