Locking in the high interest rate on long term bond before it goes back down
I'm doubtful that we will remain in a high interest rate environment for a very long time. The fed's dot plot had shown that interest rate will drop in the long term, and now with the $SVB Financial (SIVB.US)$ debacle, some are speculating that the fed will pivot sooner than later. So I'm eyeing out for safe long term high interest investment grade (preferably government backed or linked) bond to lock in the high yield now.
Temasek linked bond such as $Astrea7A1 4.125%320527# (V7AB.SG)$ is now giving >4% yield ![]()
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Another Temasek linked bond $Astrea VI3%B310318# (6AZB.SG)$ is giving a 3.9% yield given its price (if held till maturity).
Many rightly pointed out that existing bond price will drop when interest rate rises, but it will rise when interest rate drops. This is so that the existing lower yield bond's yield will rise to match that of the newer higher yield bonds. That is because who would want to buy at 3% yield bond when they can get a better 4% yield bond, so the 3% bond will have to give discount.
The amazing thing about bond now is that the price of the bond falling doesn't matter unless we are thinking of selling them away (due to risk of default or just for trading purposes). If we hold till maturity, we will get back the face value of the bond and we would also have had collected all the coupons (a.k.a. interest payment or "dividend") along the way.
So for investors who are looking to trade, the good news is that when the interest rate drops, we will earn from the increasing price of the bond itself, on top of the bond coupon. But for investors who are looking to build a passive income stream, the yield and the coupon is more important. This determines how much "dividend" we get to collect yearly. So yes, I love bonds now.
I do have new plans for bond investment in this current market condition. In the past investment in bond have very low returns that make it unattractive compared to the other investment vehicles. Right now, bond investment is getting more and more sensible.
Since all these bond will be held to maturity, it doesn't matter if the bond price continues to fall when interest rate get hiked up again, or if the bond price start to rise if fed starts cutting interest rate. At maturity, we will get back the face value of the bond, while enjoying the interest payout every few months.
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