Don't write off S'pore Savings Bonds

PHOTO: ISTOCKPHOTO
Mr Vasu Menon
Mr Vasu Menon
Mr Marc Lansonneur
Mr Marc Lansonneur

Safe option for people who would otherwise not invest at all

The first issue of the Singapore Savings Bonds (SSBs) met with a lukewarm response from the public last month but investors should still look closely at this investment option.

Applications worth $413.16 million were lodged by 19,505 people. That amount was only a third of the maximum $1.2 billion available, an outcome that surprised many in the financial industry.

If you were one of those applicants, you would have received your amount in full up to the $50,000 limit. The bonds would have been deposited into your Central Depository (CDP) securities account by now.

Applications for the second issue close at 9pm on Tuesday.

RETURNS STEP UP OVER TIME

Unlike SGS, that pay the same coupon each year, SSBs pay coupons that step up or increase over time. As a result, the average interest rate is higher the longer the bonds are held.

MR VASU MENON, senior investment strategist at OCBC Bank, on how the bonds are suitable for those with holding power

COMPLEMENTARY ROLE

It should be considered as an investment option included in a more diversified portfolio, which could consist of a combination of SSBs, fixed deposits, shares, exchange- traded funds and unit trusts.

MR MARC LANSONNEUR, DBS' Singapore head of investment products, on the role that SSBs can play in a portfolio

This batch, which will be issued on Nov 2, comes with an average interest rate of 2.78 per cent per annum for 10 years - higher than the 2.63 per cent promised for the first issue.

Financial experts told The Sunday Times that the second issue's average interest rate will likely be higher than that for the first and third issues, as we explain below.

There is no need to rush for these bonds as there will be tranches issued every month for at least the next five years, including between $2 billion and $4 billion worth this year.

While you could incur opportunity cost if you wait too long, it is more important to decide first and foremost if the bonds are suitable for your financial needs and risk profile, given the many investment alternatives on the market.

The Sunday Times highlights some issues regarding SSBs.

INTEREST RATES MARKET-DRIVEN

Some bondholders who bought into the first bond issue are unhappy that the second tranche offers higher interest rates.

It helps to understand that these rates are market-driven and not set by the Government. The SSB rate is determined by the average Singapore Government Securities (SGS) yields in the month before a new issue opens for application, so levels will vary.

The interest rate for the second SSB issue, which opened for applications this month, is based on the SGS yields last month.

These yields moved up relative to August, which resulted in higher interest rates for the second bond issue compared with the first.

Mr Vasu Menon, senior investment strategist at OCBC Bank, says investors can estimate the likely rate for the third issue - which opens for applications on Nov 2 - by looking at the average 10-year SGS yields this month.

"Looking at the SGS yields in October, it seems very likely that the interest rate for the third issue will be lower than the second issue," he notes. This is because the average SGS yields in the first three weeks of this month were lower than the average rate of the first and second issues of the savings bond.

So, if you wish to invest in SSBs, you have until 9pm on Tuesday to subscribe as the average interest rate of 2.78 per cent is likely to be higher than that for the first and third issues.

You can check the daily SGS yields used to compute the bond rates at https://secure.sgs.gov.sg/ fdanet/SgsBenchmarkIssuePrices.aspx.

Mr Menon says there are many factors that could impact SGS yields beyond the third issue, including possible interest rate rises in the United States.

SSB rate 'reasonable' for risk-free investment

Given that US interest rates are likely to head higher next year, there is a real possibility that rates here could also rise in the medium term. That could mean higher SSB returns as well, he adds.

Generally, finance experts say that the SGS yields over the past 10 years indicate that the average interest rate for SSBs is likely to be between 2 per cent and 3 per cent a year.

It is impossible to predict the rates accurately on a month-to-month basis so you will find it difficult to time your purchase to get the highest interest rate.

You could consider that the prevailing SSB average interest rate of about 2.78 per cent is reasonable for a risk-free investment and compare it with alternatives such as fixed deposits, equities, structured notes or funds that offer higher potential returns but come with higher risk.

Mr Marc Lansonneur, DBS' Singapore head of investment products, says you can avoid the highs and lows of SSB yields by subscribing to the bonds using fixed amounts on a regular basis instead of placing all of your funds in a single investment.

REDEEMING THE BONDS

Some investors who bought into the first issue are wondering if they should redeem their bonds and invest in the second issue, which will have a higher average interest rate.

Mr Menon suggests that it may be worthwhile to redeem only if the average interest rate for another issue is "significantly higher".

One of the attractions of SSBs is that there is no penalty for redeeming early, but there may be an opportunity cost.

"Unlike SGS, that pay the same coupon each year, SSBs pay coupons that step up or increase over time. As a result, the average interest rate is higher the longer the bonds are held," says Mr Menon.

"If the bonds are redeemed early to re-invest in later issues, it is possible that the interest rate in the first year for the new issue may not be as high as the interest rate that the bond investor would be enjoying at the point of redemption (if the bond is held for more than a year)."

Furthermore, bondholders must bear in mind that they will incur a $2 redemption fee and another $2 application fee for the next issue. These fees are charged by banks to cover the cost of processing redemption and application requests through ATMs and Internet banking channels.

An investor who holds at least $5,000 of the first savings bond would have earned enough accrued interest from holding it for one month to defray the $4 fees.

You should also note that you are not able to immediately re-invest the redemption proceeds from, say, the first issue into the second issue as applications for this close on Tuesday, while the redemption amounts from the first tranche will be paid out on Nov 2.

So, if you are keen to invest in the second issue, make sure you have enough cash in your account when you apply.

BONDS VERSUS FIXED DEPOSITS

Some of you may have seen that fixed deposits can pay higher interests than SSBs in the short term. But the SSB rate steps up over time so that over a 10-year period, the

average interest is higher than that for fixed deposits.

SSBs are a long-term savings option that allows you to save for up to 10 years, while fixed deposits are generally for shorter-term savings like three to 24 months.

So an investor who holds a one-year fixed deposit, for example, and rolls it over every year for 10 years is likely to receive less interest than if he had invested in a long-term instrument like SSBs for 10 years.

However, there may come a time when interest rates for fixed deposits or other "safe" investment products become significantly more attractive than SSB rates.

You could then redeem your SSB investments.

A DIVERSIFIED PORTFOLIO

The SSB programme is part of a set of initiatives by the authorities to improve the availability of simple, low-cost investment products to retail investors. It is meant to complement the Central Provident Fund system and other savings, investment and retirement options such as deposits, unit trusts and insurance plans.

In fact, with their risk-free and monthly withdrawal features, the bonds are an attractive option for people who would otherwise have not invested at all.

Mr Lansonneur says that SSBs are suitable for investors looking for a low-risk investment on a minimum two- to three-year horizon. However, they should not be the sole investment as yields are on the low side.

"It should be considered as an investment option included in a more diversified portfolio, which could consist of a combination of SSBs, fixed deposits, shares, exchange-traded funds and unit trusts," he adds.

UOB's head of wealth management, Singapore and the region, Ms Chung Shaw Bee, says SSBs are a flexible risk-free investment option suitable for investors who have a low risk appetite and are looking for cash and returns.

She says: "For young investors with a high risk tolerance and $50,000 to invest, they can consider an allocation of up to 20 per cent to bonds. This can include SSBs and bond unit trusts which invest in corporate bonds. The allocation to SSBs should increase for investors with lower risk appetites and shorter time horizons.

"For older investors with a 10-year horizon, a low risk appetite and the same investment amount, the SSB allocation can go up to 80 per cent as the focus should be on wealth preservation and income generation."

A version of this article appeared in the print edition of The Sunday Times on October 25, 2015, with the headline 'Don't write off S'pore Savings Bonds'. Print Edition | Subscribe