How does the case for foreign bonds apply to the case of a Singapore investor? Personally, I think the reasons that dictate a small allocation (about 20% or less of bond allocation) to foreign bonds are less convincing for the Singapore investor. This is because,
1) Singapore has a much smaller economy and is significantly more dependent on the global economy compared to the U.S. So, I think it is prudent to have a higher allocation to foreign bonds.
2) Based on historical evidence, the flight-to-safety that benefits treasury securities of the U.S. and other large industrialized nations in a crisis does not proportionally benefit SGS bonds. Therefore, for the flight-to-safety reason, a case might actually be made for an allocation to treasury securities of large industrialized nations.
Furthermore, it is not clear if SGS bonds will actually benefit from the flight-to-safety phenomenon in a severe crisis. For example, a huge terrorist act in Singapore might actually cause SGS bonds to be downgraded. A case in point: according to Larry’s latest book, during the Asian economic crisis, the credit ratings of Malaysia (originally rated AA+) and Thailand (originally rated AAA) were both sharply downgraded. This means that a Thai investor would have found out the hard way that investing in the debt securities of Thailand did not provide the safety anchor desired in the fixed income allocation.
Based on the above, I believe investment-grade foreign bonds should have a higher allocation for the Singapore investor. I think a 50:50 allocation to foreign and Singapore bonds could be an useful starting point for consideration.