Oh it’s a bird! No, it’s a plane! And no, it’s none of them and definitely not Superman! The recent arrival is the new Singapore Savings Bonds! And it’s here to save everyone from those pathetic fixed deposits that our banks offer. 😛
During the past few days, the local personal finance and investment space was all abuzz with excitement over the new Singapore Savings Bonds (SSBs). SMS Josephine Teo (erm…plenty of media exposure lately?) made an announcement on 26 March but merely provided a teaser, leaving personal finance nerds like me eagerly drooling in anticipation.
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What is SSB and how does it benefit me?
Many more details have since been released and two of the best resources out there explaining what the SSBs are all about is this MAS factsheet and this Business Times infographic.
With the above resources, I need not bore you with the nitty-gritty details. But nonetheless, here’s some key features of the bonds:
- Offers better yields than other lower-risk investments like saving deposits
- Principal guaranteed by the government
- Flexible redemption and no penalty on early redemption
Seriously, if you understand how this SSB works, then perhaps you will realise that there may indeed be free lunches in the world. A SSB holder would receive higher interest rate on a risk-free product without compromising on his liquidity needs!
Since it’s such a wonderful product (I put it on the same level of the OCBC 360 account), it’s not surprising that there would be a cap on the investment. The authorities have yet to make a decision on this and understandably so. They are probably taking the next few months to better gauge the level of response.
What would the cap likely be?
Personally, to make this instrument a useful retirement supplement to CPF LIFE & SRS, the cap should be at least a 6-figure sum. Afterall, a $100,000 bond that receives the full 10 year coupons would only yield about $2,500 a year of coupon payments on average.
However, a realistic hunch is that it would probably be in the region of $50,000 at most, in order not to adversely impact the banks. To be honest, at this moment, the last place I want to be in is the shoes of the chief officer in charge of SGD fixed deposits.
The introduction of CPF LIFE a decade ago killed the private annuities market and the introduction of the SSB has the ground-breaking potential to make SGD fixed deposits obsolete in Singapore.
Why did the government introduce this now?
For the past decade, the public has been petitioning the government to introduce an instrument that allows the average citizen to directly enjoy the gains made by GIC or Temasek. Temasek bonds are what these people are crying out for and I think the SSB is a first step and in my opinion, a big step.
After the death of Mr Lee Kuan Yew (LKY) on 23 March, the government declared a week of mourning. Therefore, it’s really surprising to see SMS Josephine Teo coming out with an announcement on 26 March. Since all the preparatory work must have been done at least months ago, my hypothesis is that the announcement was deliberately planned or maybe even deliberately brought forward as some form of commemoration for Mr LKY. Perhaps this is another tribute to the great man?
I guess instead of changing Changi Airport’s name, we can call the SSB the LKY Bond?
And when I discovered that the SSB would only be available during the second half of the year, I couldn’t resist a chuckle. Elections are due by Jan 2017, this is an SG50 year and pro-PAP sentiments have never been this strong. And what’s more with this additional goody. You draw your own conclusions. 😎
What are my likely actions?
Obviously, there’s nothing much I can do now except to wait for more details and the official launch of this SSB. There’s little doubt that I will be participating in it. I have seen some people comment that they can achieve higher returns through corporate bonds or through dividends of blue chip stocks. But seriously, that’s comparing not comparing apples with apples.
So right now, in line with my recent strategy to accumulate more cash, I will be doing that to prepare for this product.
A possible approach (if this SSB isn’t a one-time launch) would be to build a bond ladder with this product. i.e. If the cap is $50,000, I might purchase a $5,000 tranche every year to enjoy both the maximum returns and the liquidity.
At the very least, I would think one should be making use of this instrument to park his or her emergency funds unless one can find another liquid instrument with higher returns.
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P.S. Let’s say SSB is to become a permanent thing (i.e. I can keep on buying $500 every month if I do not exceed cap), which I think it should be. An investor buys a tranche of SSB today (assume 10 Year SGS rate is 2.5%, average returns over 10 years for SSB is 2.5%). If interest rates rise in a year’s time, a rational investor would sell that first tranche and buy a new tranche of SSB (10 Year SGS rate is now 3%, average return over 0 years for SSB is 3%). This will be quite a weird phenomenon.
If the bonds can be traded in the market, a rise in interest rate would result in the first tranche being valued at below par value. If the investor sells the bond in the market, the loss would offset the gain from the purchase of a new bond with higher interest rates.
I can’t seem to reconcile this but I guess I am assuming that yields of the SSBs are locked in at the rate of purchase (concrete expectations of coupons) and that might not be reasonable or what the government is planning.
Would appreciate if some financial or bond experts can clarify on this matter. Thanks in advance!
Hi, I’ve actually thought about building a bond ladder with the new SSB. In your article you suggested to buy 5k every year for the next 10 years (assuming 50k cap).
I’ve though about it in another way. Since it is liquid and has flexible redemption, wouldnt it be possible for an investor to build a bond ladder instantly by maxing out the 50k cap and then redeeming 5k every subsequent year? And then buy back into the new SSBs if he/she so wishes to continue the ladder. (Assuming he/she has 50k and wishes to put 50k in one lump sum on a SSB purchase)
Of course this can be done with lower sums up to the individual investor and it’s only for the starting of the ladder.
Cheers,
DJ
Hi DJ,
Assuming the person has the 50k from the start, then you are indeed right!
The method you have suggested would mean that the person is buying a 1-year, 2-year, 3-year bond and so on…
Thanks for your suggestion!
Hi 15hww
Good to see you blogging more often now.
Two things I gather from what I read:
The first is the SSB bond is not tradeable in the market so the likelihood is everyone gets in at par value and the interest rate gets adjusted based on the 30 years SGS bonds in the market subject to a cap.
The second thing is one guy brought up regarding the ocbc 360 promotion which will be revised on 1st May 2015. The part where you need to spend the 3 bills and at least $400 will be revised from 1% to 0.5%. In all the interest will then be revised from a total of 3% to 2% by then. Maybe we’ll see an exodus of exit by then who knows.
Hi B,
A bit more focused recently so there’s some time for writing. Miss it a little too! =)
Regarding the interest rate adjustment, I am not sure how the mechanics work, especially if the SGS (SSB is tied to SGS) yields are also fluctuating.
Wow, you knew about the OCBC 360 adjustments really early! If I don’t recall wrongly, you just opened an account right? I seriously thought that the promotion would last a little longer since they are still advertising it. But well, I always it wouldn’t be permanent.
And maybe here’s where the SSBs come in.
Some questions-
1. Have they (ocbc and other banks) been arm-twisted so as to “push” everyone else to this wonderful bond?
2. Principal sum guaranteed, but in the end, there may be no interest at all. But of course, citizens don’t own their own $$, do they? What is ours is theirs too. No wonder taking a holiday now.
3. Desperate times, are we?
Hi JD,
For 1, I actually think that it’s the opposite. Perhaps they were given an early notice of SSB, which helps explain why OCBC became so aggressive over deposits with the introduction of the 360 account.
For 2, the government has never defaulted on the interest on both CPF and the SGS bonds. The AAA rating speaks for itself.
Hi 15hww,
i think a bond ladder with this new instrument is a good idea. Just put in a fixed amt every month and you can liquidate a set amounts as and when you need it. Let’s just wait and see what the cap will be like.
Hi LP,
Yup, the cap is critical to how people like us will use it for. If the cap is low, it will just be a place for us to store our emergency funds. =)
The SSBs are issued with a fixed schedule of step up coupon rates based on the SGS yield curve at the time of issue. Therefore subsequent SSBs will not have the same schedules unless the SGS yield curve has not changed in the meantime. If you redeem after 2 years, you get 1.2% (the current 2y SGS yield). To get 2.4%, you need to keep the SSB for 10 years. If yields rose, you can redeem your old SSB at no penalty and buy new SSB which has a schedule of higher coupon rates. There is a free option embedded into the SSB but to say this free option equal to “helping the ordinary saver to get better returns” as the SMOS said, is rather stretching the truth. The SSBs are better than SGS in circumstances when yields moved contrary to that priced by the yield curve. They are a lousy deal if you need an early redemption after yields have fallen (if you redeem after 2 years, you accrued the 2y SGS yield until the date of redemption while the 10y SGS will accrue at 2.4% until the date you sell the SGS and additionally you make a profit because your bond fetch a higher price). Another thing to consider, the brand name “savings bonds” is being stretched here. True national savings bonds carry a premium yield e.g. UK national savings bonds are priced at 2-3% over comparable UK government bonds.
Hi Chris,
Thanks for shedding some light on the SSB and clarifying on my question. With that, I think there are generally 4 possible scenarios:
a) SGS yields drop in the future and you hold for 10 years
b) SGS yields drop in the future and you have to redeem it early
c) SGS yields increase in the future and you hold it for 10 years
d) SGS yields increase in the future and you have to redeem it early
Under the likely SSB rules which both of us understand as, the ability to redeem the SSB at par value allows one to benefit from three of the above scenarios.
For a), since yields are dropping, it pays to hold the bonds for 10 years.
For c) and d), one should just sell the original SSB at par value and buy another tranche of SSBs which yield higher coupons.
And as you pointed out, only b) is bad for the investor since if SSBs were tradable, they would sell at a premium to par value in the market.
Since one can benefit from 3 out of the 4 scenarios with SSBs, that makes it a pretty amazing deal, no? I would agree with SMOS that this product does “help the ordinary saver to get better returns”.
Would be happy to hear your reply! =)