1. SSB Was Massively Under-Subscribed
Honestly, I was thinking if the Mrs would get her full allocation for the first issue of the Singapore Savings Bond. She applied for $5,000 in the middle of September. The 2.63% of returns isn’t fantastic, but definitely not to be sneezed at for what is essentially a risk-free rate.
But it seems we are the rare few that thought this way.
In the end, all applications (up to the maximum limit of $50,000) were accepted.
According to this document, MAS actually prepared $1.2 billion for this first issue but only slightly more than $400 million from ~20,000 individuals was taken up. Seriously, I wonder if MAS is embarrassed by this public dismissal of the SSB.
2. Why The First Issue Was Unpopular
- With interest rates rising (sooner or later), expectations of higher rates in subsequent issues are there. Many have written about this (here, here and here) and I actually think what was written makes sense. Many savvy investors might think that way too and postponed their SSB purchases?
- Stock markets are tanking and as I am writing this article, I have just put in a trade to buy 2,500 shares of STI ETF again. Many investors might feel that conserving their cash in preparation for a market crash/correction would be a better strategy that would yield many times the returns of the SSBs.
- I hate to say this but it appears there might be many who lack faith in MAS or the government. CPF funds are invested in SGS bonds, which is also the underlying instrument that SSBs are based on. But come on guys, the Singapore government has never defaulted on any of their bonds!
3. Free Put Option Can Likely Be Exercised
Even though I agreed and believed that rates for the November launch of the SSB was going to be considerably higher, I still went ahead and encouraged Mrs 15HWW to apply for the first issue. Afterall, I thought there is no guarantee we could get our desired allocation in the next launch.
But how wrong I was.
No damage done, though. As the SSBs come embedded with a free put option, i.e. If I bought $10,000 worth of SSBs, I will always get back $10,000 worth of SSBs, I could easily roll over my purchases.
Let me illustrate:
Assuming that November’s SSB yields a much higher return at 2.8%, I could simply increase my application by another $5,000 for that launch. And if I get the full allocation, I can proceed to redeem October’s SSBs for the full principal amount.
And in the unlikely event that subsequent launches’ returns fall, I can just happily hold on to my previous purchases and bide my time to add more SSBs to my portfolio.
Perfect, isn’t it? Especially when applied to a portion of your emergency funds.
Would you consider building a bond ladder with SSB? Say buy X amount worth of SBBs each year so that you get a recurring interest income that is higher on average?
Hi Mickey J,
If I don’t recall wrongly, MAS has only promised that there would be monthly issues for the next 5 years. Beyond that, hmm…
I would just say that we would likely be participating in most of the launches for the 1st couple of years?
Hakuna matata! With the SSB, there really isn’t any wrong choices because of free put option!
To apply for the Nov issue and later redeem your Oct issue works very well if you have the liquidity to spare. You should be in a net neutral position with the Oct money since $5,000 would get $4 of accrued interested which offsets the $2 application and $2 redemption fee!
I’m excited to see the participation of the SSBs in the future issues!
Hi GMGH,
Hakuna matata. U had me googling over there. :p
I actually didn’t realise the returns of a $5k allocation covers the fees nicely! Or maybe, subconsciously, I got it sorted out already?
Let’s see what happens in a month’s time. Things should be clearer by then if our strategy would work.
Hi 15HWW,
I am quite surprise on the outcome. So could it be Investing is still alien to many in Singapore. I think SSB is a good choice to reap almost risk free return! At least better than fix D. Hopefully the next tranche will have higher yield.
In my humble opinion, this generation of working class is still lacking not only knowledge of investing, but also INTEREST and TIME! Most are either too pre-occupied in work or family. I seriously doubt majority of the working class population will have time to go in depth to acquire knowledge of investing, unless faced with some sort of “trigger”.
To many of my peers, they hear more stories of people invest losing money, than they hear people buying properties losing money!
So imagine you are one of the average working class who has neither time nor interest in investing, judging by historical stories statistically “you heard”, where will you put your money? Maybe more education is needed even starting in schools?
Just my thoughts!
Hi Rolf,
Indeed, the yields are higher. I will ballot for more and if I get the full allocation, I might sell of Oct’s issues?
I think you are right that most people might not be aware. And maybe that’s where we can add more value?