Why Most Singaporeans Don’t Hold Government Bonds

Whenever I come across personal finance advice, especially those based in the US that were written some time ago, the authors always urge more risk-averse investors (like me) and older folks to buy their fair share of bonds. According to these experts, this will enable us to reduce the volatility of our portfolio. Afterall, many studies have shown that bonds have been resilient (or even performing well) when stocks tank.

This camp actually believes that proper asset allocation is actually the most important factor behind investment performance. If the market tanks by 30%, some might panic and think that the sky is falling, and then sell the entire portfolio. However, with bonds as a cushion, the overall loss might only be in the region of 10%-15%? And then one would be more inclined to stay invested for the longer haul?

I am not about to disagree with this slightly more conservative camp. But then I do realise that local government bonds are rarely being mentioned in the local newspapers. Similarly, when we look at the networth/assets of local financial bloggers, you would be hard pressed to find bonds in their portfolio. Heck, even I don’t own them. And here’s some good reasons why:

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Low bond yields vs strong performance of blue chips

A quick check at the MAS website shows us that the 10-year SGS bonds are yielding less than 2.5% in recent weeks. These rates are not an anomaly and have been low historically for the past two decades. Since our government/country’s reserves are piling up higher and higher, a default for the next few dacades is improbable, which also helps to explain the low yields. It’s a really risk-free investment, as long as you are willing to accept the low yields on the bonds.

But most Singaporeans are looking for better deals and also feel that some of the listed companies on SGX are almost risk-free too. Examples include state/Temasek-backed companies like Singapore Airlines, Singtel & SPH. It helps that most of these companies enjoy monopoly or oligopoly profits that are either natural (small size of Singapore) or artificially erected due to policy/political reasons. =p

Of course, there have been missteps from some. Chartered Semiconductor, anyone?. But generally, these companies should have easily made >5% returns (inclusive of dividends) for long-term shareholders in the past decade and this is a big factor why most money-savvy Singaporeans prefer to hold stocks rather than bonds.

Red-hot bullish decades-long property market

With a 2.5% return from bonds, our savings will not be able to keep up with inflation. Since property prices should theoretically increase at least proportionally with inflation in the long run, that seems to be a better place to park our money, right? Furthermore, by only paying a small downpayment, the positive returns are leveraged further.

The truth is even better than this with the red hot local property market. Over the past 15 years, HDB resale flats have more than doubled in prices and the annualised return is ~6%, which is much higher than inflation. Similarly, prices of private residential property have risen sharply in the past 4 years. This is also helped by Singapore transforming from a third-world country to a first-world city.

Since most Singaporeans are home owners, the Singapore Dream for many now is really to own more than one property. This is only possible after accumulating a sizable stash to pay for the downpayment of a one/two bedroom rental condo. If that’s the case, then where’s the money left to purchase government bonds?

Large proportion of wealth in CPF Funds

Actually, if you observe the situation from a different angle, one could even argue that Singaporeans are too heavily invested in our government bonds. This is because if you’re under the age of 35, 36% of our income is automatically channelled to our CPF accounts. Out of this, 13% is credited to our Special and Medisave Accounts.

If you don’t know, the monies in these two accounts are invested in Special Singapore Government Securities (SSGS) that are supposed to yield a return that is 1% above the 10 Year SGS bonds. Since the rates of those 10 Year SGS bonds are currently below 3%, the governement has extended the 4% floor rate for our Special and Medisave accounts in recent years to boost our retirement savings. Not bad, eh?

So even when I save 50% of my income, another 13% indirectly invested in bonds would mean that I have up to 1/5 of investable monies in government bonds. This will be a higher proportion for other Singaporeans since most save only a small percentage of their take-home pay. Moreover, as you age, a higher percentage of CPF monies would be credited to the Special & Medisave accounts.

With a 4% return that is much higher than what is currently available in the open market, it is no wonder why most opt to top up their CPF accounts instead of buying a separate SGS bond.

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