Singapore Savings Bonds

7 Myths debunked

They are a viable option for small investors, with decent yield for both short and long term

Recent figures show that risk-free Singapore Savings Bonds (SSB) have found favour with retail investors from all age groups, particularly among retirees and small investors.

Launched in September, the initial six issues of SSB had garnered $810 million from 32,000 individuals as at March 1, the figures from the Monetary Authority of Singapore (MAS) showed.

Generally, the overall take-up rate so far has been low when compared with the amount offered, and the demand for SSB appears to be declining. This is partly due to the lower average returns not just for the 10-year term of each tranche, but also for the short term, relative to comparable products. For instance, the first-year yield has fallen below 1 per cent to 0.97 per cent in the latest issue.

Other reasons for the lukewarm response include a lack of awareness of SSB and the key features, and the need to open a Central Depository (CDP) account.

Nevertheless, MAS told The Sunday Times that its ultimate aim is not about the take-up of SSB. Rather, it is about helping people save and invest for the long term through financial education, and fostering a competitive and well-regulated marketplace that provides investors with good investment options.


UOB's Mr Francis Tan says the bank expects SGS yields, on which SSB interest rates are based, to rise, in tandem with likely US Fed rate hikes.

In fact, MAS noted, the take-up of SSB by 32,000 investors is a significant increase in retail participation in the Singapore government bond market, from just 2,000 investors in conventional Singapore Government Securities (SGS).

An MAS spokesman said: "The Savings Bonds programme was introduced to expand the range of simple, low-cost investment options available to individual investors to help them meet their long-term financial goals and retirement needs.

"We also hope that Savings Bonds investors who are new to investing would, as they gain a better understanding of saving and investing, consider other instruments for long-term investment."


DBS Bank's Mr Marc Lansonneur suggests subscribing to SSB using fixed amounts on a regular basis to avoid the highs and lows on the bond's yields.

It is encouraging to note that two out of 10 SSB investors were new CDP account holders, suggesting that they are first-time securities buyers.

Also, the spread of application amounts shows that about half or 49 per cent are for sums of $10,000 and below, with 25 per cent ranging from $40,000 to the maximum investment sum of $50,000.

An active investor and former fund manager, Mr Sam Phoen, says this is an indication that small investors are warming to SSB. This is crucial as fixed deposits with higher yields usually have a minimum amount requirement which might be out of reach for small investors.

"That leaves SSB as the main non-capital-at-risk instrument paying a decent yield for the smaller investors, both for the short and long term," he said.


UOB's Mr Dennis Khoo says investors could place some of their emergency funds into SSB as the bond carries no penalty on early redemption.

According to MAS, 46 per cent of the investors are aged 49 and above, and a significant 13 per cent are young investors aged 18 to 30.

The average interest rate of the first six issues was 2.63 per cent, 2.78 per cent, 2.44 per cent, 2.5 per cent, 2.58 per cent and 2.09 per cent.

Let's look at some common myths about SSB.

MYTH 1: SSB ARE INFERIOR TO FIXED DEPOSITS

Singapore Savings Bonds offer comparable returns but are actually more flexible than fixed deposits.

Fixed deposits are offered in terms that range from a few months to three years. Promotional fixed deposit rates are significantly higher than regular fixed deposit rates.

However, these promotional rates are usually available for limited periods, and come with conditions such as minimum amounts of fresh funds or purchasing investment products. Early withdrawal of funds may attract some penalties, such as forgone interest and other fees.

Upon maturity, fixed deposits are usually rolled over at the prevailing regular fixed deposit rates. You cannot know in advance whether higher promotional rates will be available at that time.

The SSB were launched when several banks were offering attractive promotional interest rates on fixed deposits and some deposit accounts, and that could have dampened the demand for SSB.

The attractions of SSB are significant. They provide certainty on interest rates for the next 10 years, and can be purchased with a minimum investment amount of $500.

SSB can be redeemed (in multiples of $500) in any month with no penalty. Interest earned over the period of investment will also be paid in full.

MYTH 2: SSB ARE INFERIOR TO CORPORATE BONDS

Some corporate bonds pay higher interest rates than SSB for tenors of four to five years.

The higher interest rates are to compensate the investor for taking on higher risks, which include the credit risk of the issuer (risk of not being repaid if the issuer defaults), liquidity risk (risk of not being able to readily sell the bond and get back your investment proceeds at any time), and market risk (risk that interest rate movements cause the bond to decrease in value).

In addition, do bear in mind that not all corporate bonds are created equal and please do your own due diligence before applying for them.

For their part, SSB pay interest rates of 2 per cent to 3 per cent if held for 10 years.

They are fully backed by the Singapore Government, which makes them one of the safest investments.

Investors do not run the risk of not being able to sell their SSB nor the risk of a loss on their investment, as they can redeem the full amount of their investment in any month.

MYTH 3: INTEREST RATES OF NEW SSB WILL CONTINUE TO FALL

The interest rates of each SSB are based on the average SGS yields the month before application for the bond opens.

At issuance, interest rates for the entire 10-year term are fixed and locked in for each issue. Interest rates for new bonds could turn out to be higher or lower than for older bonds.

SGS yields have been falling in recent months. A major reason is that the market has changed its view of the pace of US interest rate increases, and expects it to be slower. This has decreased the yields on government bonds in the US, and has also decreased the yields of SGS.

UOB economist Francis Tan said that the bank's expectations for the SGS yields are tied closely to the actions of the US Federal Reserve, which is likely to raise interest rates twice this year.

"We expect the SGS 10-year yield to rise from the current 2 per cent to 2.7 per cent by the end of 2016. Should the Fed surprise the market with a more aggressive rate hike, we may see the SGS 10-year yield move to a higher point," he said.

MYTH 4: IT IS BETTER TO WAIT FOR SSB INTEREST RATES TO RISE BEFORE PURCHASING THEM

There is no need to wait as you have the flexibility to redeem your SSB and reinvest your redemption proceeds when interest rates rise.

It is difficult to predict whether or when interest rates will rise or fall. You can invest in SSB and redeem the bond in any month if interest rates have gone up and you wish to invest in a new, higher-yielding issue.

In the meantime, investing in SSB even for only a few months allows you to earn interest rates of about 1 per cent or more.

Mr Marc Lansonneur, DBS Bank's head of investment products (Singapore), said: "To avoid highs and lows on SSB yields, our recommended approach would be to subscribe using fixed amounts on a regular basis instead of placing your investable cash in a single investment."

MYTH 5: SSB ARE ONLY MEANT FOR LONG-TERM INVESTING AND THOSE WHO ARE RETIRING

While the SSB is promoted as a long-term instrument, it can also be considered as a liquid or short-term alternative to holding cash in a savings and/or fixed deposit account, says Mr Phoen.

One of the attractions of the principal-guaranteed SSB is that there is no penalty for redeeming early - that is, before they mature in 10 years.

Mr Phoen said: "Investors have the option to redeem the SSB and get their cash back with interest and no capital loss in the following month should they need liquidity in a hurry."

Mr Dennis Khoo, UOB's head of personal financial services, Singapore, said: "With no penalty on early redemption, investors may choose to place some of their emergency funds into SSB."

Mr Phoen said more can be done to educate younger investors on the merits of SSB.

Young investors (aged below 31) typically have competing cash needs as they build their families and assets so they tend to gravitate towards investments with potentially higher yields.

"However, if the young can be more informed of taking advantage of the high yield for the short term (relative to savings account interest rates), I am sure they would be more willing to park their spare cash in SSB for the short term," said Mr Phoen. Savings account rates are about 0.05 per cent a year currently.

MYTH 6: SSB WILL LOCK UP YOUR MONEY FOR 10 YEARS

When you purchase SSB, you need not hold the bond till it matures in 10 years. So be assured that your money is not locked up for a decade.

You can redeem in any month and get your money back in full the following month. The good thing is you can redeem part or all of your SSB early with no penalty. Pro-rated interest or interest earned over the period that you held the bond will also be paid in full.

Just bear in mind that a small application fee of $2 and another $2 redemption fee are charged by the banks to cover the processing cost.

MYTH 7: OPENING A CDP ACCOUNT TO BUY SSB IS A HASSLE

The Central Depository performs an important function of helping investors keep an accurate and reliable record of their SSB investments (as well as other securities investments like stocks) and ensures that interest payments and redemption proceeds are paid out accurately and on time.

Setting up a CDP account is a one-off process and there is no cost to opening or maintaining this account.

Investors can open a CDP account by mailing to CDP the completed account application form, which they can download from its website (www.sgx.com/cdp/faq) or request through the CDP hotline (6535-7511).

Investors can also choose to apply for a CDP account in person at CDP's service counter or through any SGX securities broker.

Once you have a CDP account and become more familiar with investing, you can consider other Singapore-listed instruments such as equities, bonds, real estate investment trusts and exchange-traded funds.

A version of this article appeared in the print edition of The Sunday Times on April 24, 2016, with the headline '7 Myths debunked '. Print Edition | Subscribe