For a very long time, Singaporeans were deprived from investing in good financial products.
Bond has always been the cornerstone of financial institutions and high net worth individuals’s investment portfolio. However, most bonds in Singapore had a high entry barrier such as $250,000 which makes it exclusive to the wealthy.
When retail investors battling in stock markets with bloodshed, bond investors often sit at the beach enjoying their lives and collecting the coupons.
If you are not familiar with bond and want to check out how it works, you can check out two tutorials here
Fortunately, with the impending changes in CPF and potentially a whole new retirement system, MAS is finally open up and launching a new product called “Singapore Savings Bonds”.
What are “Singapore Savings Bonds”?
They are a new type of government bond, which is designed to make low-cost investment options more widely available to retail investors. The bonds are targeted at small retail investors with the minimum investment just $500 with additional multiples of $500 up to a cap to be announced later.
One critical feature of the Savings Bond is its coupon, which steps up every year. The to-date average interest rate of the Savings Bond at any one point in time will be as if an investor had bought a Singapore Government Security right from the
start of the Savings Bond and that matures in the current year.
Investors are therefore incentivised to hold the bonds for as long as possible, but are not punished for early withdrawals.. This also means investors do not have to decide upfront the duration of their investment.
How much returns will I get?
Singapore Savings Bond interest rates will be linked to the long-term Singapore Government Securities (SGS) rates. But unlike SGS bonds, which pay the same interest rates every year, the new product will start with smaller interest rates that will keep rising. Below graph shows how the step up interest works.
The average interest investors will receive over the period they hold Singapore Savings Bonds will match what they would have received had they bought an SGS bond of equivalent tenure.
This means that if you hold your Savings Bond for the full 10-year term, the average interest per year on your investment will match the return if you had invested in a 10-year SGS bond.
The 10-year SGS has mostly yielded between 2 and 3 per cent over the past 10 years.
What are the differences between Fixed Deposit, Singapore Savings Bonds and Singapore Government Bond
The Savings Bond combines features of a fixed deposit and a regular government bond. Notably, the early redemption feature, the long tenure and step-up coupons make for a unique offering. Below is comparison table compiled by Business Times.
Why Singapore Savings Bonds are better than direct bonds
I have long been struggling to find suitable low risk investment instruments for my clients.
In practice, although direct bond investment sounds simple, investors are often shortchanged by financial institutions. Many times, people buy bonds from the banks or brokers without knowing that
- They pay a commission to the bank, sometimes as high as 1%
- The price they got is not the market price as there is a “spread”
- There may be a custodian fee
- When you want to sell, you will be charge unreasonable fees again as the transaction is over the counter.
Moreover, many bonds come with terms and conditions which make the deal worse off for investors. You can read my post “Preference Share – Head I win, tail you lose” for an illustration of this point. Anyway, all these eat into the already pathetic bond returns in Singapore as good company in Singapore pays peanut yield.
Singapore savings bonds appear to be fully transparent and since it is issued by and sold back to the government directly, I assume there won’t be any additional charges.
With almost certain raising interest rate environment ahead, the step up interest rate feature appears to be very attractive to me.
What could be the problem
In fact, Savings Bonds are not new and have a long history around the world. In many instances, governments have used them for fiscal purposes, such as paying for wars.
The problem I foresee is that being a debt free country, the Singapore government does not need to borrow money to finance its budget, how much such bonds can be issued is questionable. After all, bond is a debt instrument and the return must come from somewhere. This has already been sort of confirmed as there will be cap for individuals to buy such bonds and institutions are not allowed to buy.
How do you think about this Singapore Savings Bonds? Would you add it to your investment portfolio and retirement funds? Share with us by leaving your comments below.