New Kid on the Block – The Singapore Savings Bond

The Singapore Savings Bond (SSB) was recently introduced by the Singapore Government and the Monetary Authority of Singapore (MAS). The key features of the Singapore Savings Bond includes

1. Principal guaranteed by the Singapore Government (top AAA credit rating with key rating agencies such as S&P)
2. Interest rate linked to the 10 Year Singapore Government Securities (SGS)
3. No lock in period or early redemption penalty

The objective of introducing SSB is to provide individual investors (such as you and me) a no risk alternative (principal guaranteed) that gives a higher return (based on 10 Year SGS rates), while at the same time, providing flexibility on redemption (no early redemption penalty).

Quick Facts

Who can buy	Individuals only.
Age Criteria	18 years old.
Investment Amount	Cash only. Minimum of $500 (subsequent in multiples of $500), up to a maximum of $100,000 (capped at $50,000 per application/issue).
Term	10 Years per issue. Able to redeem in any given month without penalty.
Other Requirements	Own a DBS/POSB, OCBC or UOB bank account and ATM card. (more banks might participate in future) CDP account linked to the bank account.
Type of Gain	Interest Income Only. No capital gain upon sale of bonds / maturity.
Interest Income	Every 6 months from the date of issue. Not taxable. Direct deposit into the bank account linked to the CDP account.
Interest Rates	Offers a “Step-up” interest rate. This meant that the interest rate will increase over time. SSB interest rate is linked to a 10 Year SGS with an average interest rate of 2 to 3% per annum. Interest rates details will be published at the beginning of each month for each new Savings Bonds.   For example, by investing in SSB, you will get an initial 0.90% return in the first year, 1.5% in the second year and so on. On the 10th year, you will receive a 3.3% return. In other words, at the end of 10 years, the average interest rate earned will match the 2.4% earned from a 10 Year SGS (as at April 2015).
Transferable	Non Transferable.
Launch Date	Second half of 2015.
Issue Amount	Could potentially issue a total of S$2 billion to S$4 billion over several months depending on demand.
Applications / Redemption	Open on the first business day of each month and close four business days before end of the month.   Application/Redemption can be made via the participating bank ATM card. DBS/POSB users may apply via Internet Banking. Upon application, money will be deducted from the bank account.
Fees	A $2 non-refundable transaction fee for each application and/or redemption. Subject to additional bank charges if any. No additional fees when the Savings Bonds mature at the end of the 10th year.
Allotment	Allotment results will be announced three business days before the end of the month. SSB will be issued on the first day of the following month
Redemption	Redemption amount are in multiples of $500. Redemption proceeds (with accrued interest if any) will be deposited to the bank account by the second day of the following month.
Maturity	No action required. The principal and the final interest payment will be deposited to bank account that is linked to your CDP account.

 

Key Differences between SSB & SGS & Fixed Deposit & Banks

	Singapore Savings Bond	Singapore Government Securities	Fixed Deposit	Banks Savings Accounts
Principal Guaranteed	Yes	No	Yes	Yes
Redemption Penalty	No	No	Yes	No
Issuance	Monthly	Per Issuance Calendar	N.A.	N.A.
Redemption / Withdrawal	Monthly	Any time; Subject to Market Price	Any time; Subject to Admin Fee	Immediate
Interest Rate	Step-up rate; linked to 10 Years SGS Avg of 2% to 3%	Fixed Rate; Depending on Bond Type Avg of 2% to 3%	Fixed Rate; Depending on Amount & Time Frame Avg of 0.1% to 2%	Subject to Banks and their requirements Avg of 0.05% to 3.25%
Term	10 Years	2 – 30 Years	1 – 3 years	No term
Lock in Period	No	Yes	Yes	No
Time required to get your money back	Second business day of the following month	3 Business Days	Immediate	Immediate
Minimum Investment Amount	$500	$1,000	$1,000	Depends on bank
Tradable	Non-tradable	Tradable through SGX	Non-tradable	Non-tradable

As you can see from the table above, placing your money with SSB is somewhat similar to putting your money in the bank. Notably, there are 2 major differences for placing your money with SSB.

• Advantage – The Savings Bonds offer a higher interest rate
• Disadvantage – We will need to wait until the second business day of the following month to receive the redemption proceeds

The reason for SSB to offer a “step-up” interest is to make it fair for all investors as they are provided the flexibility to choose when they would like to redeem their Savings Bonds. It will be unfair to pay investors who hold the bonds for one year the exact same interest rates as investors who hold the bonds for the full 10 years. With the “step-up” interest, the average interest each investor will receive will match their investment period of a similar period SGS bond.

Points to Consider

Are you interested in the Singapore Savings Bonds? But you are unsure if it is suitable for you? Let me highlight the following points for you to consider.

Age Group

• For a young person, say 30 years old and below. A recommended balanced portfolio should consist of more equities that are able to give higher rate of return. This is because young people are able to take more risks. This group of people might want to consider assigning a small portion of their portfolio to include the Savings Bonds as a form of diversification.
• For older people who are either retired or retiring soon, it is recommended that they take up more bonds as compared to equities to protect their capital. The last thing this group of people would like to have is to lose a portion of their portfolio meant for retirement.
• What about people who are in between the above age group? You might like to consider what type of investor you are or your risk level. See next point.

Investor Type / Risk Level

• An aggressive investor who is fully vested in equities might not be interested in the Savings Bonds as they believe that they are able to achieve much higher returns with equities alone.
• A passive investor might prefer to get the Savings Bonds as they are able to generate a comfortable rate of return with no risk and with capital as little as $500.
• Including Savings Bonds add diversification to your portfolio. When times are bad, resulting in equities price falling, the principal amount held in the Savings Bonds will not be affected as they are protected by the Singapore Government.
• Some investors might consider parking their excess cash into Savings Bonds (or any other type of bonds) while waiting for the right opportunity. Value investor, Warren Buffett is one of them. Warren Buffett does not like bonds generally, but favors shorter duration bonds that are due in a year or less. In doing so, he enjoy the flexibility of being able to get his cash easily due to high liquidity of the short term bonds, while at the same time enjoying a higher interest rate as compared to parking the money in the bank. Do note that Warren Buffett does not recommend holding bonds that will be due in more than a year.

Emergency Funds

• There is a risk of misusing our emergency funds if we put them in a bank account and we might incur additional costs if we were to put them into Fixed Deposit or SGS.
• Savings Bonds is a good place to park our emergency funds as it offers a higher interest rate and at the same time, offering flexibility on redemption without incurring any penalty.

 Inflation

• Singapore has an average inflation rate of approximately 3% in the last 5 years. As SSB is only able to give us an average annual return of 2% to 3% over a 10 year period, the Savings Bonds does not beat inflation effective and we could run the risk of having our money getting eroded if we placed them in Savings Bonds.
• However, do note that the intention of SSB is not to beat inflation but to offer individual investor a safer alternative to invest their money.

Other Alternatives

• The interest rate for a standard bank account gives us an average of 0.05% per annum only. However, certain bank accounts, such as OCBC 360, will give us an interest rate as much as 3.25% if we meet certain criteria. This definitely beats the average interest rate derived from SSB. In addition, you will also have the added flexibility to getting your money back immediately, unlike in SSB, you will need to wait until the second business day of the following month.
• The interest rate for a Fixed Deposit depends on the term and the amount deposited. Currently, these interest rates are much lower than what SSB is able to offer. However, looking forward, with the introduction of the SSB, this will put pressure on the Fixed Deposit interest rates offered by the banks and there could be a possibility that the banks might improve their Fixed Deposit offerings by providing much higher interest rates.
• The Central Provident Fund (CPF) Ordinary Account offers 2.5% interest rate per annum, and the Special and Medisave Account offers 4%. CPF board will pay an extra 1 per cent for the first $60,000 of members’ combined balances, of which up to $20,000 can come from Ordinary Accounts. If there is no intention to use the money at all until you retire, you might be better off by placing your money in either CPF account (preferably the Special Account since it offer a much higher interest rate).

To buy or not to buy?

To answer this question, you will have to consider several factors such as your age group, your investment/risk level and other factors.

If you are young or have extensive knowledge in generating higher returns via investing, you might not want to even consider the Savings Bonds. And if you are retired or near retirement or a passive investor, this might be a good investment vehicle to place your money without fear of any capital losses. However, you might also want to consider factors such as inflation rate and other alternatives that could give a much better returns and at the same time, protecting your capital too. Lastly, you must also clearly understand all features of the Singapore Savings Bonds to determine if it is suitable for you before making your final decision.

Would you like to accelerate your training on investments? Click here to join our Free Value Investing Masterclass In Singapore :

 

Rais Bin Mahmud

Project X Team

P.S. If you think the returns of the savings bonds too low for you, consider this PROVEN way of profiting in the stocks market instead.