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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