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Should You Apply for the 3.04% 50-Year Green SGS Bond?

For the first time, the Singapore government will issue a 50-year sovereign green bond to institutional, accredited, and individual investors.

So as a retail investor, you can subscribe to the bond if you wish to.

But should you subscribe?

What is the Aug-72 Green SGS Bond?

The government will issue a green bond with a tenor of 50 years. The Singapore government have not issued a bond of this tenor before.

The previous longest tenor was 30 years.

The government deliberated whether to issue a thirty-year or a fifty-year bond and decided upon a fifty-year bond.

  • The bond will be priced with a 3.04% yield.
  • Each bond has a principle value of $100, but the price you will get is $98.976, and it comes with a coupon of $3.00 a year, which is paid semi-annually. Since the price you will get is at a slight discount to the $100 par value and the coupon is 3%, this works out to a yield of 3.04%.
  • S$2.35 billion of the bond will be issued to institutional and accredited investors.
  • S$50 million will be available to individual investors like yourself.
  • Since each bond is $100 and the minimum unit that you will need to apply is ten units, the minimum amount to invest is $1,000.

This bond is raised as a green bond. The capital raised from green bonds is meant more for new investments in new and existing projects with environmental benefits.

How to Apply for the 50-Year Green SGS Bonds

The bond is available for applicable from 9 AM on 5th August to 12 PM on 10th August.

The bond can be applied like any Electronic Securities Application (ESA) or Initial Public Offer (IPO) application. You can apply it via your DBS, OCBC and UOB bank’s ATM.

If you make one application unit, you are applying for $100 of the 50-year SGS bonds. If you make one thousand application units, then it’s $100 x 1000 = $100,000.

Why Does the Government Issue an Green SGS Bond with such a long Tenor?

An institution issues debt for a few reasons:

  1. To refinance existing debts that are maturing.
  2. To fund new or anticipated projects.
  3. After their assessment of historical yields and environment going forward, current yields are seen as low. So they would lock in to borrow at what they deemed as attractive rates.
  4. To seed the debt market.

In the case of the Singapore government, I suspect it’s a mixture of numbers 2 to 4.

We can never know the true intention, but we can only guess.

Institutions and Governments in the Past Have Issued Long Tenor Bonds

This may be a first for Singapore, but this is not a new concept.

In the 18th and 19th centuries, the British government issued “Consols” which carry no maturity date. This means that the principal need never to be repaid.

U.S companies with great credit ratings such as Coca-Cola and Disney also issued similar bonds in the 1990s.

More recently, the Austrian government sold 3.5 billion Euros worth of 100-year bond yielding 2.1% in Sep 2017 which will mature in 2117! In Jun 2020, the Austrian government seek another $2 billion Euros at a yield of 0.88%. They received $16 billion Euros worth of orders!

Where Will the Bonds Be Traded, and How is the Liquidity?

Some may wonder whether it is possible to sell (or even buy) the 50-year SGS bond if you need to. The answer is a bit mixed.

You can eventually buy and sell these SGS bonds on the secondary market through your local stockbroker.

SGS lists a summary of the SGS bonds being traded here.

You should also be able to trade the bonds on iFAST’s Bondsupermart.

However, if you review the trading volume, the volume is very low.

This does not mean it is difficult to sell or buy 50-year SGS bonds. The institutional investors will have their trades to unload or get a bunch of these SGS bonds if they want it.

However, I fear that for retail investors, it may be difficult for you to sell if you need to sell your SGS bonds for some reason because you do not have access to the same facilities.

You could try selling at a discount of, say 5% to the prevailing yield and with such a big discount, you could tempt people to buy the bonds from you.

This is an area that you need to ascertain before buying. Different readers would have different degrees of trading facility access.

Be Aware of How Bond Prices React to Market Interest Rate Changes

Like all bonds, the value of SGS bonds will change based on the changes in the interest rate in the market:

  1. When the interest rate in the market goes up, bond prices go down.
  2. When the interest rate in the market goes down, bond prices go up.

In 2022, we experienced a rise in market interest rate like no other time in the past 50 years, and so the value of bonds has fallen.

The degree of the fall will depend on the tenor of the bond.

A good rule of thumb to use is for 1 year more left on the bond’s tenor, a 1% change in market interest rate will cause a 1% change in the value of the bond.

For example, for a bond with one year left, a market interest rate increase of 3% would lead to a 3% fall in the value of the bond. A bond with forty years left would correspondingly have 40% of its value shaved off!

This is what we call Term Risk, or the risk of holding a longer tenor bond.

Of course, that is a rule of thumb and in reality its not like that:

If we plot the bond price to yield, the line is curved at the edges. This means that near the end, a rise in bond yields might not cause a proportionate fall in the value of the bonds.

The shape of the convexity of this relationship does not stay constant.

A 50-year bond like this Green SGS bond has a lot of term risk.

This can be good or bad.

Most likely, a 1% rise in market bond yield will cause a drop in the value of the bond, but if this is a peak interest rate, and the market bond yield falls to 0% again, the price of your 50-year SGS bond will shoot up.

An easy way to demonstrate this will be to observe the commentary on the 100-year Austrian bond.

Here is the price change for the 100-year Austria bond issued in 2017:

The value of a bond looks like a stock.

This same bond reached a height of more than $220 before turning around. The yield compressed massively, and now it’s opening up.

So some may wish to speculate and bet that this may be the highest bond yields will be and that the 50-year SGS bonds will be massively profitable.

Financial Planning of the 50-Year Green SGS Bond

Okay, some bond basics:

  1. A bond is an “IOU” from an institution to you. You lend the institution money, and the institution has an obligation (unlike dividends which is not an obligation) to pay you coupon payments semi-annually.
  2. At the end of maturity, the institution will return your principal in full.
  3. However, the institution can also not pay your principal or interest back. We call this a default. Different institutions have different degrees of financial standing and different risk levels.
  4. The coupon that you receive does not compound. You receive the money in your bank account and it does not earn more money for you unless you reinvest it (which is not easy).
  5. This means that if you hold a bond till maturity, you will not lose your principal (unless default). Your bond value may fluctuate wildly (explain in the previous section) but you will get back your $100 if you hold to maturity.

The main appeal of the SGS Bond is the credit rating of the Singapore government.

The Singapore government is a rare organization with a AAA credit rating. This means their default risk is very, very low.

Buying an SGS bond gives investors peace of mind.

The 50-Year Green SGS Bond is useful if you have a liability or financial goal that will come due in 50 years’ time (fxxk, I will be 92 years by then).

At the same time, you find that this 3.04% is decent enough for your financial goal.

For example, suppose Kyith want to make sure that at 92 years old, he has $50,000 to access in his old age. This $50,000 needs to preserve his purchasing power.

He anticipates that in the long run, the Singapore inflation rate will stay around 2% a year. With a 3.04% yield, it looks like a decent asset-liability match.

The 50-year Green SGS bonds may be applicable for early retirees who are planning for a 50-year retirement and look to form a 50-year bond ladder:

A person can create a bond ladder of bonds of different maturities. The person earns an average yield of the bonds. The appeal of the bond ladder is that what you earn can be adjusted to the prevailing interest rate.

Every year, a bond will mature, and you can reinvest the maturing bond into a longer duration bond at the prevailing interest rate. So if the interest rate is now higher, you get to reinvest in a new 12-year bond with a higher interest rate. The opposite is true as well.

A bond ladder hedges your inflation risk.

However, I do question how many people will need to form a 50-year bond ladder. It is also quite difficult to find bonds with a tenor of 31 years to 50 years to create a complete bond ladder.

So this is likely not going to happen.

Conclusion

For many people, there is no reason to get the 50-year Green SGS bonds.

  1. The yield may look decent, but there are a lot of term risks.
  2. It might be difficult for you as a retail investor to sell it, at a decent spread, without losing too much of your gains or capital.
  3. If you don’t have a coherent idea of what you are going to use it for, the difficulty to sell will likely make you regret applying for it next time.

This may be more applicable for those who wish to speculate but I can think of more liquid instruments out there to do it.

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Thinknotleft

Friday 5th of August 2022

A 50 year bond at 3%. Why bother? Just put money in CPF SA earning 4%. A 50 year bond has longer 'locked-in' period than CPF SA. The 50-year bond is not for individual Singaporeans who can top up their SA.

Thinknotleft

Wednesday 10th of August 2022

@Revhappy, most retail investors (including myself) do not understand how the bond market works. And bonds of different duration may react differently. E.g. A 2-year bond price may move up while a 30-yr bond may move down, depending on the market expections on the yield in short and the yield in long term.

As such, it is prudent for retail investors not to buy bonds to time/bet on rate cycle.

Revhappy

Sunday 7th of August 2022

@Thinknotleft, If you want to time the rate cycle, then this bond is very good. Imagine you buy the bond and in 1yr rates fall to 2%, you make a capital gain for around 50%! So it is a high risk high reward instrument.

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