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Difficulty: Moderate

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Reason 1: Higher Leverage

Reason 2: Much lower minimum of S$50K versus S$250K

Reason 3: No Forex Spread

Bond CFDs vs. Buying Bonds Directly

How to get started on Bond CFDs + Link for up to S$450 in Credits

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What are Bond CFDs?

Bond CFDs are financial instruments offered by brokerage firms. Each Bond CFD uses a particular bond as its reference asset. CFDs stand for “Contract for Difference” as the capital return of the instrument is the difference in the open and closing prices of the reference bond. This difference is settled in cash and there is no physical delivery of any bonds when trading CFDs.

Bond CFDs are tied to the returns of the reference bond in two major ways.

• First, the difference in the reference bond price when you buy versus sell the CFD
• Second, the coupons that the reference bond is paying

These are terms that are offered by the brokerage firm. To offer this product, the broker hedges its position by holding the bond directly. In this way, coupons paid by the bond to the broker can be “fractionalized” and paid out to their Bond CFD holders.

Why should you care about Bond CFDs? We’ll cover the most exciting aspects of Bond CFDs in the following sections, as well as some of the things to take note of.

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Reason 1:

Higher Leverage, Higher Yields

Margin requirements for Bond CFDs can be as low as 20%, which make it attractive to investors keen on using leverage to invest. This means that if you buy S$100k notional of Bond CFDs, you will only need to put up $20k of cash. In comparison, direct bond purchases typically have higher margin requirements – this is especially so for SGD bonds, which are usually unrated. Margin requirements of 20% are not unheard of for direct bond purchases, but it is usually limited to investment grade bonds of large issue size.

A Bond CFD’s in-built leverage makes it possible to achieve relatively high yields. Leveraged yields are often in the high single to double-digit percentages. For example, suppose you bought $50,000 notional of a Bond CFD at par, you are required to put up a cash margin of 20% ($10,000 equivalent). If the reference bond has an annual coupon rate of 5%, a CFD financing cost of 2% per annum, and the reference bond’s price remains constant over the course of the year, the one-year return would be $1,500 on your $10,000 of initial cash margin, translating to a leveraged yield of 15% (the table below shows how this is computed).

Leverage amplifies gains or losses, which may be a boon or bane to the investor. When using leverage, it would be prudent to set aside spare savings for emergency uses or for potential account top-ups if and when required.

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Reason 2:

Much lower minimum of S$50K versus S$250K

For direct purchases, most corporate bonds trade with minimum denominations of S$250k or US$200k. In our view, a diversified bond portfolio should comprise at least 20 to 30 bonds, which works out to a portfolio size of S$5m to S$7.5m. For investors who are keen to participate tactically in attractively priced new bond issues, an even larger portfolio size may be warranted.  

In comparison, Bond CFDs trade in sizes from S$50k, which is a much more accessible amount. It follows that – if one uses Bond CFDs – a diversified bond portfolio of 20-30 bonds may be achieved with only S$1m to S$1.5m of Bond CFD exposure. In this way, the low minimum denomination for Bond CFDs allows for greater diversification. Investors may also participate in new bond issues via CFDs, at the smaller minimum trade size.

Note that the minimum denominations above refer to the trade size of the bond. The trade size is different from the margin requirement (the cash that is required in the account).

We have listed the minimum cash needed for the various categories in the chart below, assuming an investor is keen to trade using margin. We strongly stress that it is important to have spare cash above this minimum, as bond prices may fluctuate and there may be circumstances where you have to top-up cash for the margin requirement.

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Reason 3:

No Forex Spread

Bond CFD purchases are “executed on margin”.

A benefit of this is that the investor is able to buy Bond CFDs denominated in a different currency from the currency that is being used for margin requirements. No actual FX conversion is required during Bond CFD purchases, so the investor does not incur the cost of FX spreads. Just to be very clear, spot FX rates will be used to compute the updated margin requirements in the investor’s trading account but no actual FX conversion will take place.

For example, let’s assume you have S$50k cash margin available in the Bond CFD account and subsequently decide to buy US$50k of a Bond CFD. If the USD/SGD FX rate is 1.35, the margin needed for the trade is (S$50k * 20% * 1.35) = S$13.5k. This S$13.5k can be deducted from the S$50k margin available, with no requirement to convert it into USD. Since there is no forex conversion required, investors can transact without a forex spread.

For investors who have other currencies (e.g. EURO, JPY, AUD), these currencies can also be used for cash margin requirements without the need to pay a forex spread when purchasing SGD-denominated and USD-denominated Bond CFDs.

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Bond CFDs vs. Buying Bonds Directly

As mentioned above, the main advantages of Bond CFDs are: 1) leverage makes it possible to achieve higher yields, 2) much lower investment minimums and 3) no need for actual forex conversion. 

These are the few shortcomings: 1) Bond CFDs have no voting rights, 2) there’s a degree of counterparty risk (regarding solvency of the broker), 3) potentially higher interest costs.

Check out the table below for the differences between buying bonds directly vs. buying a Bond CFD.   

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How to get started on Bond CFDs

+ Link for up to S$450 in Credits

Only CGS-CIMB offers Bond CFDs

In Singapore, CGS-CIMB Securities is the only broker offering Bond CFDs. CGS-CIMB Securities was formed as a 50/50 joint venture between China Galaxy International (a wholly owned subsidiary of China Galaxy Securities) and CIMB Group.

We believe that they are a relatively safe broker, given their access to capital markets and strong shareholder backing.

• China Galaxy Securities has the largest securities distribution network in China, and is 51% state-owned. The company is listed on both the Hong Kong Stock Exchange and Shanghai Stock Exchange with a current market cap of US$14bn.
• CIMB Group is the second largest financial services firm in Malaysia behind Maybank, and is 62% owned by Malaysian government-linked entities (the largest shareholder being Khazanah). The company is listed on the Kuala Lumpur Stock Exchange with a current market cap of US$7.5bn.

CGS-CIMB Securities curates a list of bond picks, which they offer in a CFD format. This list will typically include bonds that the broker has a positive view on and possesses good trading liquidity.

Up to S$450 of Commission Credit

If you’re keen to set up a CGS-CIMB Securities Bond CFD account, applying via our link below entitles you to a commission credit on your first Bond CFD trade (credit is capped at S$450). For instance, if you set up an account with CGS-CIMB and trade S$50K worth of Bond CFDs, the broker commission of S$100 (0.2% of S$50K) will be credited back to your account – if you follow the steps below.

Signing Up for Commission Credit

Here are the steps:

1. Click on the sign-up link: CGS-CIMB (itradecimb.com.sg) and press “Sign Up”. Follow the instructions.
2. Under Preferred Trading Representative,
   • For “Do you have a preferred trading representative?”, select “Yes”
   • For TR code, put “XD”

Note: Accounts opened using the above link may generate an affiliate commission that supports the running of the site.

Disclaimer: Any examples shown are for illustration purposes. This article does not constitute an offer or solicitation to buy or sell any security or instrument, or an invitation or a recommendation to enter into any transaction. All capital market products contain risks and may not be suitable for everyone. Please refer to the Risk Disclosure Statement in the General Terms and Conditions of CGS-CIMB Securities (Singapore) Pte. Ltd. (Co. Reg 198701621D) for more details.