Singapore Airlines’ bonds

Following my previous post about inflation, I was surprised to see that Singapore Airline’s bond public offering was such a big success that they decided to increase allocation. The bonds offer a fixed 2.15% yield with a 5 year maturity.

Are people right to snap up these bonds? Let’s just focus on inflation. MAS latest report tells us that in July 2010 inflation was at over 3% year-on-year. Over the past 30 years, inflation has fluctuated from -1.4% to 8.5%, with an average of 2.07% per year. The offered 2.15% doesn’t sounds so great from that point of view – basically it is likely to just prevent investors from not loosing money.

Of course the rates situation is a bit special in Singapore: 5 year Singapore Government Securities (SGS, the government bonds) now pay below 1%, which means negative real interest rates (i.e.: below 0% once inflation is deducted). SGS are technically safer than SIA’s bonds, but maybe not so much considering Temasek Holdings, Singapore’s sovereign fund, is its majority shareholder. From that point of view, the 2.15% doesn’t look so bad anymore as risk isn’t so much higher while yield certainly is.

My personal take however is that any investment which involves risks, even small ones, should at least offer some reward, and a better one than barely beating inflation. This is especially a concern here because the local economy is strong and is likely to push inflation up rather than down. Buying bonds also means dealing with their fluctuating value, or having to wait for them to be repayed at maturity.
So I’ll pass.