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Quick Thought Of The Week: Temasek

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Temasek could not have picked a better time to launch its retail bond. At a time of high stock-market volatility, its five-year bond with a coupon of 2.7% was eight times oversubscribed.

The global investment company headquartered in Singapore only wanted to raise $200 million from retail investors. But valid applications for those triple-A rated loan notes totalled almost $1.68 billion. It scaled up the size of the issue to $300 million.

Clearly, many investors quite like the idea of receiving $27 a year for every $1,000 of bonds bought. It certainly beats leaving money in the bank, where every $1,000 could earn around 50 cents after 12 months.

Complacency

But that got me thinking. Have we become so used to low interest rates that we are scrapping with each other to get a slice of a 2.7% return a year, for five years?

Do we honestly think that the inflation rate in Singapore will remain below 2% for the next half decade? If so, then, of course, any return that can beat that rate of inflation could be a sensible investment.

But I do worry about inflation and rising interest rates.

It may not be readily apparent at the moment. The headline inflation rate in September was a paltry 0.7%. But there are early signs that inflation is bubbling under the surface.

Crude oil prices have climbed to around US$80 a barrel. Unemployment levels have fallen in most major economies. Eventually, wages will have to rise.

Tariffs

And let’s not forget the inflationary repercussions of the Trump tariffs. Caterpillar (NYSE: CAT) said the tariffs are raising costs and eroding profits. United Technologies has warned that the tariffs are costing twice its earlier estimates.

3M, Honeywell, Ford (NYSE: F) and Toyota have said that the tariffs could jack up cost by hundreds of millions of dollars.

Those, and other companies, are unlikely to absorb the increased costs at the expense of profits. Shareholders are not going to stand for it.

So, consumers will have to pay more. We will have to pay more. That is how the spiral of inflation begins. I’m not sure that a 2.7% return in five years’ time will be enough for me, though.

A version of this article first appeared in Stock Advisor Gold and Stock Advisor Singapore.

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