Misperception Of Bonds

Many investors have the perception that when interest rate rises, bond prices will surely fall. That is true for longer term bullet bonds. Bullet bonds refer to straight bonds without step up or coupon reset feature.

There are the bonds that will still do well in a rising interest rate environment. Definition of doing well means that the bonds are more resilient in pricing and still paying decent coupons.

- Bonds with maturity shorter than 7 years
Bonds with shorter maturity like 7 years or below are less sensitive to interest rate hike.

Such bonds include:
Pershing Square 5.50% 15July2022 (USD)
Bank of America 2.503% 21Oct2022 (USD)
Credit Suisse 3.80% 15July2022 (USD)
Huarong 3.625% 22Nov2021 (USD)

- Bonds with coupon reset feature
These bonds at a certain date in future will reset their coupon according to prevailing interest rate plus a fixed rate.

Such bonds include:
ANZ 3.75% 23Mar2027 (SGD)
BPCE 4.50% 3Jun2026 (SGD)

This post shows an example of such bond: myasiaprivatebank.blogspot.sg/2016/12/sgd-bond-with-coupon-reset-feature.html?m=1

- Floater bonds
These bond will regularly (every 3 months) reset their coupon according prevailing interest rate plus a fixed rate.

- Bonds with step up feature
These bonds will raise their coupon at a certain future date.

Genting 5.125% Perpetual (SGD) is one such bond, see here: myasiaprivatebank.blogspot.sg/2016/10/genting-5125-perpetual.html?m=1

- High yield bonds that generate yield of more than 6%
Bonds with yield of more than 6% are less sensitive to interest rate hike. This is because 0.25% to 1% interest rate hike is not going to affect the opportunity cost of holding onto the bond.

(However high yield bonds generally come with greater issuer risk).