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This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?

Senior Minister of State for Finance Josephine Teo announced a new type of bond called the Singapore Savings Bonds to help Singaporeans get a better return on their money. There are not much details revealed but what is known is:

  1. The maximum term of the bond is 10 years
  2. The minimum purchase sum is $500 and the Singaporean can purchase in denominations of $500
  3. There will be a maximum amount you can purchase
  4. Principal guaranteed by the government
  5. The ability to get his or her money back in given month with no penalty and no loss of principal
  6. Interest rate that is linked to long term SGS rates
  7. Singapore Savings Bonds will pay coupons that ‘step up’ or increase over time, providing investors with higher return the longer they hold the bonds

Not really a lot of numbers for us to work with. Honestly this thing is like a dream, got liquidity, got higher than fixed deposit returns backed by the government. How is that possible? We know that the main characteristic of a bond is different maturity periods and interest rate sensitivity.

This Savings Bonds look more like a managed fund holding different duration of government bonds. Enough short term duration ones to service withdrawals,  as well as long term bonds. I do not get how they can achieve step up coupons over time, since they would have to buy higher yielding bonds. It is possible if its a bond ladder and that the future interest rate environment is rising. However, what if it isn’t always rising, how do they service the stepping up.

At the end of Mar 2015, the SGS Bonds in the market have the following yield to maturity:

The current 10 year SGS bond yield to maturity hovers around 2.3%, up from last year’s 1.9%. How does the higher coupon occur? I have no idea but i think if you held it for 10 years you get to enjoy this 2.3%. The coupon you get at the start will be low, perhaps at a yield to maturity of 1 year. If you progress to 2nd year without selling, the saving bond gives you the amount you missed out in year 1, so on and so forth. That is my guess.

Update 31 Mar 2015: Looks like I am right about how the yield is structured. Here is the Factsheet:

 

Factsheet Singapore Savings Bonds


The best thing for this savings bond are these:

  1. Government Backed as compared to other investment assets
  2. Liquid, you can pull out rather fast, AND you don’t suffer lost of capital as that versus a typical Singapore Government Securities Bond (SGS)
  3. The 10 year returns depend on the prevailing interest rates, but likely fluctuate around 2%. If you compare to my article on past insurance saving endowments spanning 5- 20 years you will see the returns are less than the typical 2.5% for insurance endowments (read my work on some past case studies here). BUT you don’t get penalize to withdraw your money earlier.
  4. This is very good for Emergency Fund i feel (read here why you need an emergency fund)

What is the potential effects and conspiracy theories here:

  1. This will be something that insurance advisors, real estate investment trust compare against to let their customers know if this product appeals to them or not
  2. This is potentially big enough to compete with banks for their deposit, and would mean that the banks are forced to offer more attractive interest rates.
  3. SGS Bonds and Treasury Bills really hasn’t taken off, this is perhaps to slowly ease the whole population to be more comfortable with debt instruments
  4. The government does not want the money to flow to investment banks, or other wealth building products, and that they deem themselves to be the best manager of Singaporean’s money. This bond sought to ‘keep’ the money loan to the Government, just like the CPF monies.
  5. Why would the government need more money? Could they need it to plug some holes?

Not enough information from this news, so lets wait until more information comes out. Meanwhile, do let me know how you feel about this news.

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John

Thursday 16th of February 2017

Hi. Have you considered the timing of payout on the interest rate calculation?

What I mean is that for typical FD, the payout is at the end of the maturity period. For SG Bond it's paid out every 6 months.

K Tong

Thursday 14th of May 2015

Hi Kyith,

Wouldn't I be better off putting my money in promotional fixed deposit rates offered by banks frequently at, for example, 1.6% for 6 months? The rates/returns seems better than these SGS bonds in the short term and should therefore be better if we add it up over a 10 year period too?

Kyith

Thursday 14th of May 2015

Hi K Tong, if i am correct your 1.6% for 6 month is annualized so you wont enjoy the full 1.6%. Having said that, the fixed deposit usually correspond to same duration SGS bonds. The bonds provide higher rates should you keep the money long enough. in the case when the 10 year is at 2.3%, that is definitely better than the 1.6 cited.

Serendib

Friday 27th of March 2015

Lets see what transpires -- the devil is in the details, not just the terms and conditions, but also the ease of execution -- SGS was a pain as the local banks were clearly not eager to serve customers who wanted to buy SGS. Personally I would have thought that TIPS (US Treasury inflation-protected securities) would have been a better way to go, but let see what they come up with...

Kyith

Friday 27th of March 2015

Serenlib the sgs auction is like some voodoo art to a lot of folks. No marketing on this

Mickey J

Friday 27th of March 2015

Another interesting angle to look at this is the tax deduction proposal that was raised together with this bond. Some investors may see this fund as an option for tax deduction. Though I wonder how it would be implemented considering there's no lock-in period.

Kyith

Friday 27th of March 2015

Thanks mickey ,

We can rely on you to provide that perspective . however , usually these accounts have lock in. People can game it by putting more in and withdrawing for tax purpose. Perhaps layered the tax benefit to keep it for 3 years.

Lazy Singaporean

Friday 27th of March 2015

Looks quite good. Wonder what is the coupon rate.

Kyith

Friday 27th of March 2015

Hi wen ge,

Everyone is wondering about that. I am curious but at the same time thinking we shouldn't go Intl this too much.

It might be a good bond allocation

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