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July 16, 2006

Foreign bond allocation for Singapore investors

Filed under: Investing — indexfundfan @ 2:50 pm

How does the case for foreign bonds apply to the case of a Singapore investor? Personally, I think the reasons that dictate a small allocation (about 20% or less of bond allocation) to foreign bonds are less convincing for the Singapore investor. This is because,

1) Singapore has a much smaller economy and is significantly more dependent on the global economy compared to the U.S. So, I think it is prudent to have a higher allocation to foreign bonds.

2) Based on historical evidence, the flight-to-safety that benefits treasury securities of the U.S. and other large industrialized nations in a crisis does not proportionally benefit SGS bonds. Therefore, for the flight-to-safety reason, a case might actually be made for an allocation to treasury securities of large industrialized nations.

Furthermore, it is not clear if SGS bonds will actually benefit from the flight-to-safety phenomenon in a severe crisis. For example, a huge terrorist act in Singapore might actually cause SGS bonds to be downgraded. A case in point: according to Larry’s latest book, during the Asian economic crisis, the credit ratings of Malaysia (originally rated AA+) and Thailand (originally rated AAA) were both sharply downgraded. This means that a Thai investor would have found out the hard way that investing in the debt securities of Thailand did not provide the safety anchor desired in the fixed income allocation.

Based on the above, I believe investment-grade foreign bonds should have a higher allocation for the Singapore investor. I think a 50:50 allocation to foreign and Singapore bonds could be an useful starting point for consideration.



  1. Today’s MarketWatch has another flight-to-safety example: Dollar enjoys safe-haven rally, but can it last?

    NEW YORK (MarketWatch) — The dollar rallied Monday to a three-month high versus the Japanese yen and to its loftiest in nearly three weeks versus the euro, the British pound and the Swiss franc, continuing to benefit from safe-haven flows amid concern about Middle East tensions.

    “As news out of the Middle East became increasingly grim, the dollar gained strength, benefiting from continued flight-to-safety flows,” said Boris Schlossberg, senior currency strategist at FXCM. “In an ever more uncertain geopolitical climate, traders flocked to the comfort and liquidity of the currency from the sole remaining superpower in the world.”

    “The forex world is enamored of North America, Australia and New Zealand this morning, for it sees in these areas safety in geography,” said Dennis Gartman of the Gartman Letter. “This is all one needs to know … to trade the forex markets: The farther removed a nation is from the Middle East, the stronger is one’s currency.”

    “At times such as these, spinning the globe and choosing a place to park one’s money simply because of a nation’s location is all one needs to know,” Gartman said. “Trade deficits; budget deficits; elections; stock market strength or weakness … all are unimportant at the moment.”

    Comment by indexfundfan — July 17, 2006 @ 11:21 am

  2. Foreign bond allocation, SGS yield spread

    I have finished reading Larry’s bond book that I bought more than a month ago. Larry wrote that currency-hedged foreign bonds provide the benefit of diversification of interest rate risk. However, no suggested allocation was given. Indexfundfan&#…

    Trackback by The Mamak Stall Investor — July 30, 2006 @ 7:37 am

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