Thursday, April 30, 2009

Moving cash to bonds

Over the last 12 months or so, I have built up a level of cash on deposit which, at its peak, was the equivalent of almost five years of living expenses for our family. The build up was due to a combination of saving money from month to month and what amounted to a long service payment when I left my previous job.

The problem is that cash in the bank pays almost no interest at all in Hong Kong and I have been looking for ways to invest. Since November, 2008 I have added to my investments in the Hong Kong listed ETFs for Hong Kong (2800), India (2810 and 2836), Commodities (2809) and Russia (2831). I have also entered into some structured deposits against the Hong Kong Tracker Fund (2800) and the USD/NZD. The structured deposits are still effectively cash in the bank unless and until the underlying options are exercised against me.

Today, I invested some of the cash into bonds:

(i) HSBC USD due June 2038 with a yield to maturity of 7.23% pa. Credit rating is A+/A1;

(ii) Export Import Bank of China RMB due September 2011 with a yield to maturity of 2.3% pa. Credit rating is A1/A. 2.3% pa is unattractive - but better than 0% pa which is what RMB deposits earn in the bank.

In addition to credit risk, I am taking currency risk on both bonds and, with the HSBC bond, a considerable amount of interest rate risk as well.

As a retail investor, the two practical issues I have found with investing directly in bonds are:

(i) the range of bonds available to Hong Kong retail investors that offer reasonable yields is very limited. I can access a wider range of bonds if I am prepared to invest a minimum of USD250,000 in each purchase (this is too much for me);

(ii) the bid-offer spread in the market is much larger than for shares. This reflects the fact that the longer term bond market in Hong Kong is relatively limited. In effect, if I want to sell the bonds back to the market it will be expensive.

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