On the Changes to the OCBC 360 Account

OCBC announced on 1st April 2015 in what turns out to NOT have been an April Fool's joke that it will be tightening the terms on it's 360 account, which offers up to 3.05% in interests annually on deposits up to S$50,000. This is the highest rates on a savings account available in the market at the moment.

To help you better understand the changes to the account terms, I have provided a summary table as well as embedded an analysis tool which you can use to determine how much interests you will receive on the OCBC 360 account, pre and post 1st May 2015.
Summary of Changes

OCBC 360 Account Analysis Tool

L.A.M.

OCBC 360 Account Analyser: Download Link

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On the Singapore Savings Bond and What it is about in Layman's Terms

The Singapore Government has recently announced the launching of its savings bond (SSB) program in the second half of 2015. 

The savings bond will possess the following characteristics:

A) Principal-guaranteed

This means that the issuer of the bond (i.e. the Government of Singapore), guarantees that the value of the bond, will not fall below the value of the principal. E.g. If you bought the bond for $500, you will receive at minimum $500 at maturity, provided that the Government of Singapore does not go bankrupt or into default. (The chance of this is very low).

B) Redeemable at any time with no penalty

This means that you can redeem the bond at any time without any penalty fees. This is unlike Fixed/Time Deposits where they cannot be redeemed before maturity or may incur penalty costs for redemption before maturity. Furthermore, not only will there be no penalty, any accrued interest will be paid to the investor of the bond upon redemption.

Furthermore, unlike an FD, the investor need not decide upfront how long he wants to invest in the bond.

C) Stepped up interest rates linked to the return on Singapore Government Securities (SGS)

Another characteristic of the Singapore Savings Bond, is that the average interest investors will receive over the period will match that of a SGS bond of equivalent tenure.

This means that if you hold your Savings Bond for the full 10-year term, the average interest per year on your investment will match the return if you had invested in a 10-year SGS bond. Similarly, if you hold the bond for only 1 year, you should receive the average interest on a 1-year SGS bond.

Shown below are the benchmark yields of the SGS 10-Year Bonds from Mar 2014 - Mar 2015. 

As you can see, the average yields range from 1.88-2.49%. If you were to hold the bonds till full maturity (10 years), you should receive rates equal/similar to a current issue of the 10-year SGS bond. As interest rates are expected to rise due to appreciation of the USD against the SGD as well as the upcoming raising of the Fed Funds Target Rate (US Central Bank Benchmark Rate) later in the year, we could see the returns on the Singapore Savings Bond increase. 

D) Non-Tradable and only individuals will be allowed to buy them

Unlike stocks/bonds listed on SGX or catalist, The Singapore Savings Bonds will not be tradable. This means that you cannot buy or sell the bonds on the secondary market. You will only be able to purchase them from the Singapore government and to sell them to the Singapore government. It can only be bought by individuals and thus are not available to institutions. The bonds will be sold in denominations of S$500, and there will be a cap (not set yet) to how much an individual can buy. Furthermore as the bonds are issued by the Singapore governement, they will bear the country's credit quality, which currently stands at AAA for S&P and Fitch and Aaa for Moody's. This is the highest credit rating score possible. 

The FAQ that you really wanted to ask but were too embarrassed to ask:

Q: How much can I earn from the bond?

A: The interest received will depend on how long you hold the bond for. If you hold the bond till maturity, you will receive the 10 year SGS Bond Rate 2-3%. If you hold the bond for 2 years, you should receive a rate similar to the 2 year SGS Bond Rate.

Q: Can use CPF to buy or not?

A: No, it is cash only. Furthermore it would be unwise to use your CPF to buy SSBs, since you are currently earning between 2.5-4% in your CPF account.

Q: If I buy already and then I vote for opposition in the upcoming election and then the PAP lose the election, will I lose my money? 

A: No, there is a distinction between the ruling party and the government. You should not "lose" your money, in the event that the PAP loses the general election. However, this is not an encouragement for you to vote for the opposition. You should vote wisely. (This also does not mean that you should vote for a party that names itself as "wisely").

Q: Why is the government doing this? Is there something wrong with our CPF or our economy that they need to borrow money from citizens?

A: The Government of Singapore does not issue bonds for the purpose of fiscal borrowing or to cover budget deficit. The SGS bonds are issued to develop a bond market and to provide the market a market derived benchmark rate for long term fixed incomes securities. For the SSB bond issue, it is likely a response to HKMA's issuance of inflation protected bonds and to provide retail investors an alternative investment option. 

Q: Is this like CPF 2.0 where halfway through the gahmen can raise the minimum sum or change to an annuity or whatever?

A: No this is a bond not a pension scheme. If the characteristics of the bond are changed in anyway, or the coupons are not paid or the principal not allowed to be redeemed, it will be deemed as a default and may affect our AAA/Aaa sovereign rating.

Q: How do I buy this bond? Will the government give me a piece of paper like an IOU which I have to keep under my mattress or in a safe?

A: It is highly unlikely that you will receive a physical paper which is susceptible to theft or fire. You will need to open a CDP account to hold the bond. Information on how/what medium you can purchase the bond from is not available yet but you can likely purchase it through similar channels for primary auction of SGS as well as through ATM (probably).

Q: Should I put my money in OCBC 360 or this?

A: If you fulfill at least 2 out of 3 criteria required for bonus interests, you will receive 2.05% in the OCBC 360 account. At 2.05% should be better off than the SSB unless you hold it till maturity or there are big swings in interest rates. 

However do note that the bonus interest only applies for deposits up to SGD 50,000.

Update: OCBC recently announced changes to the OCBC 360 account. You can read more about the changes as well as access an analysis tool to see what are the impact of those changes on you here

Q: Wah, this bond looks very good leh. I'm going to take out all of my money from my bank account and under my mattress to invest in this.
A: There will be a cap on the amount of SSBs that an individual can purchase. The cap will be revealed on a later date. So it is unlikely that an individual can invest all of his life savings into the SSB. Furthermore, it would not be prudent to invest all of your savings into a single instrument. Depending on your risk profile, you might like to diversify your savings into other investment vehicles.

Q: The return of 2-3% is so chui, if I buy Hyflux or Capital Mall bonds, I can get 6%/3.8% respectively.
A: The SSB is effectively risk free (very very small chance of default), whereas Corporate bonds have a higher chance of default. Also the SSB is principal protected, whereas, unless you hold the corporate bond till maturity, you may end up redeeming the value, you bought it for.

Conclusion:

The SSB will provide an alternative investment for retail investors which is principal protected, provides liquidity and to some extent, inflation protected. Depending on the coupon rates, it could provide a strong alternative to the bank's FDs. In the coming months, we could see banks coming up with innovative products or more attractive rates to retain or attract liqudiity for their longer term funding needs.

If you have any other FAQs, please feel free to leave a comment and I will answer them to the best of my ability.

L.A.M

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L.A.M. on What Is The Best Investment

We are in an age where people are obsessed with money. Walk into any banking hall and you will find RMs trying to sell you the latest investment products while scaring you with inflation numbers and how your savings account only earns 0.125% annually.

Turn on the computer and you will have ads about how to improve your returns with FX derivatives or how you can make lots of money while working from home. The country landscape is littered with showrooms, where housing agents are eager to pounce on you to explain how property is the best investment because it can go no other way but up. 

Inundated by such stimuli, it is little wonder why people are obsessed with making their money work for them.

One of the most common questions I get as a banker/economist/investor is, "What is the best investment I can have right now?". Depending on the flavor of the season, the person's risk profile and return requirements, my answer would range from REITs to bonds to commodities or to property linked stocks.

However, identifying the correct segment is only a third of the story. Apart from that, you also need to identify the correct entry and exit strategy/points. 

The truth is that it takes a lot of training, discipline and luck that get all 3 points right and if you get any of the trinity wrong, you will find yourself sitting on a two legged stool, begging for a not so graceful crash.

The world of financial investments, is a cut throat one and though there is money to be made in the market, it carries a lot of risk as well. When you are making money, more often than not someone else is losing money. When you have made a good investment, someone on the other end must have made a bad one. In this zero sum game with a plethora of players, what is the probability that an average individual can consistently out smart, out wit and out buy/sell institutions with access to data before everyone else, or governments with more resources than anyone else or professional traders who have spent more time and effort than anyone else honing their skills at making money?

This brings me to the topic of comparative advantage. Comparative advantage is an economics terms which refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. In very layman terms, it is a fancy way of saying that some people are better at some things than other people.

There are some people, who either by talent, access to information and resources or training will possess a comparative advantage over others in making money from money. While for someone else, their comparative advantage could be in photography, or auditing or whatever skill sets or passion that they possess.

Many times, we are so caught up with the financial capital side of things that we forget about improving yields on human capital. There are many financial instrument out there and the ones you are more likely to have access to, also tend to have low barriers to entry. By No Arbitrage Principle, any possibility of low risk, positive returns are quickly snapped up, leaving behind an equilibrium where no supernormal profits can be made. However, when it comes to human capital, there is only one of you. You are unique, your skill set, your experiences, your talents, your resources and abilities are unique. In terms of barriers to entry, it is extremely high. In terms of supply curve, it is perfectly inelastic. What's left is to increase the market demand for that unique product which is yourself.

                                                            (Picture from Logarchism)

As seen from the curve above, When the supply curve is perfectly inelastic, the only way to increase it's value is to increase the demand for the product. When the demand curve shifts upwards from D1 to D2, the value of the product is increased. Furthermore, as there is a very high barrier to entry (no one can replicate you unless they clone you), the supply curve is likely to remain perfectly inelastic in the long run.

So how do you invest in yourself? Well for starters, identify what is your comparative advantage. What are your strengths, your talents, your passions and your abilities?  How would you go about improving them? Do you need to invest money to attend courses, get a certification, etc? Do you need to invest time to network with the right people or to get more motivated? Finally, are you investing enough in marketing yourself, your talents and your abilities?

The best salesmen, aren't the ones who can market their products well. They are the ones who can market themselves well. When we think of Apple, we think of Steve Jobs but have we really thought about how much time, money and effort, it took for Steve Jobs to improve his presentation skills, to motivate himself and to market himself?

End of the day, everyone of us have a certain comparative advantage and we are not all made out to be traders or investors. If you are good at swimming, why compete with someone else at running? Leave the marathon, join a swimming competition and compete on your own terms. The best investment you can make is on yourself.

L.A.M.


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