📜 Bonds & Fixed Income

🔰 What Are Bonds?

A Bond is a loan agreement between the Issuer and the Investor, where the issuer promises to:

• Pay interest (Coupon) — at a specified rate, paid periodically (typically every 6 or 12 months)
• Repay the principal (Face Value / Par Value) — on the Maturity Date

Key Bond Components:

• Face Value (Par) — The stated value, typically 1,000 units (1,000 THB or $1,000)
• Coupon Rate — The interest rate paid (% of Face Value per year)
• Maturity — The time until the bond matures (1-30 years or more)
• Price vs Yield — Price and Yield are inversely related! If bond price rises, Yield falls (and vice versa)

📋 Types of Bonds

• Government Bonds:
  — Treasury Bills (T-Bill): Maturity ≤ 1 year, no interest (Zero-Coupon), sold at a discount
  — Government Bonds: Maturity 2-50 years (LB22DA, LB26DA, LB36DA), interest paid every 6 months
  — BAAC Bonds: Fundraising for agriculture, higher interest than general government bonds
  — Savings Bonds: Issued by the Ministry of Finance, sold to the general public, step-up interest rates
• Corporate Bonds:
  — Companies raise funds by issuing corporate bonds, offering higher interest than government bonds due to higher risk
  — Investment Grade: Credit Rating BBB- and above (investment-worthy)
  — High Yield / Junk Bond: Credit Rating BB+ and below (high interest, high Default risk)
• Foreign Bonds (US Treasury):
  — T-Bill: ≤ 1 year | T-Note: 2-10 years | T-Bond: 20-30 years
  — US 10-Year Yield (UST 10Y): The world's benchmark interest rate — every asset worldwide (stocks, real estate, corporate bonds, REITs) is discounted using UST 10Y

Yield Curve — The Most Powerful Curve in Finance

The Yield Curve shows the interest rates of government bonds with different maturities (typically using US Treasury 1M-30Y) — the shape of the curve reveals a great deal:

• Normal Yield Curve: Long-term rates > Short-term rates — Normal economy, markets expect growth
• Flat Yield Curve: Long-term rates ≈ Short-term rates — Market uncertainty, signaling a transition
• Inverted Yield Curve: Short-term rates > Long-term rates — Recession Warning Signal! Highly accurate, has inverted before every recession in the past 50 years (predicts recession 6-18 months ahead)
• Steep Yield Curve: Long-term rates >> Short-term rates — Economic recovery, markets expect strong Growth

Popular Indicator: 10Y-2Y Spread (UST 10Y − UST 2Y) — if negative = Inverted = Recession Signal

⭐ Credit Rating — Trustworthiness Grade

Credit Rating is a score of the bond issuer's ability to repay debt, assigned by Credit Rating Agencies (CRAs):

Thailand's Credit Rating: S&P gives BBB+ / Moody's gives Baa1 — Lowest Investment Grade

⏱️ Duration — Measuring Interest Rate Sensitivity

• Macaulay Duration — The weighted average time to receive cash flows (unit: years)
• Modified Duration — The % change in bond price when interest rates change by 1%:
  → Modified Duration = 5 → If rates rise 1%, price falls ~5%
  → Modified Duration = 10 → If rates rise 1%, price falls ~10%
• Duration Rules:
  — The longer the maturity, the higher the Duration (more sensitive to interest rates)
  — The lower the Coupon, the higher the Duration
  — Zero-Coupon Bonds have Duration = Bond maturity

🎯 Bond Investment Strategies

• Barbell Strategy: Invest in short-term (1-3 years) + long-term (10-30 years) bonds — earn short-term interest + Capital Gain from long-term bonds when rates fall
• Bullet Strategy: Invest in bonds that all mature around the same time (e.g., all in 5 years) — simple and easy to manage
• Ladder Strategy: Spread bond maturities evenly (1, 2, 3, 4, 5 years) — when the shortest matures, reinvest in the longest (Rolling), maintaining an average steady yield
• Inflation-Linked Bond: TIPS (US Treasury Inflation-Protected Securities) — adjusts principal based on CPI, preserving purchasing power. The Thai government does not yet offer this product.