By now, everyone knows the standard recipe for a safe portfolio: Buy some Treasurys, hunker down and pray for daylight. But a growing number of more adventurous investors are now seeking safety by buying bonds from a tiny, affluent nation 9,500 miles away. With a population about the size of Alabama's, Singapore boasts one of the world's highest savings rates and biggest trade surpluses -- along with a AAA credit rating, which many developed nations, including the U.S., no longer possess.
Singapore has long been a major port and a significant player in Asia's financial-services industry, but its bond markets have only recently started drawing more attention from global money pros. The country sold a record $14 billion in bonds in 2011, and the price of Singapore's three-year government bonds rose more than 9.5 percent last year. Its steady economy has also been a draw for currency traders, who last summer drove the value of the Singaporean dollar to its highest level against the U.S. dollar since 1992. "Singapore has a stable banking system and delivers a stable government," says Axel Merk, whose Merk Asian Currency fund has increased its stake in Singapore to one-fifth of its $100 million portfolio. (For more on currencies, see "The Currency Conundrum" on page 78.)
That said, many investors aren't yet willing to label Singapore a haven. For starters, its economy is export-driven, which some money managers say leaves it vulnerable to a slowdown in China and a recession in Europe. The fact that its economy and bond market are so small can also mean bigger price swings during times of economic bad news. Investors in its bonds don't exactly get paid to wait, either: The 1.6 percent yield on 10-year government bonds is even less generous than the roughly 2 percent payout on 10-year Treasurys.
Still, many bond managers are convinced that Singapore deserves a place in their portfolios. Teresa Kong, a portfolio manager at Matthews Asia Strategic Income fund, which has a big investment in Singapore, thinks the nation will keep its interest rates low, and that, in turn, will keep bond prices stable. The country's AAA rating also gives it more room to handle future financial crises. Adds Kong, "That makes Singapore look like a shining star."