The rush for Singapore Savings Bonds (SSBs) last month was the first time the product had been over-subscribed since it was launched in September 2015.
More than 6,300 investors submitted applications for February's issue (SBFeb18) totalling about $172 million, exceeding the issue size of $150 million, figures from the Monetary Authority of Singapore (MAS) show.
It was a striking change from the many previous issues, which had attracted varying levels of interest but never to the red-hot degree seen in January.
Mr Sam Phoen, co-founder of Wateram Capital, said investors were lured by the bonds' high first-and second-year yields.
The yield in the first year will be 1.55 per cent, rising to 1.59 per cent in the second year. At these rates, SBFeb18 would seem a better alternative to deposits.
A spokesman for MAS said these were the highest first-and second-year yields "since the launch of the programme".
If the bonds are held to the 10-year maturity, the average yield will be 2.04 per cent.
"In addition, the ability to withdraw without penalty provides flexibility to investors," added the MAS spokesman.
An estimated 55,000 people held about $1.8 billion of SSBs as at Feb 1, the MAS said. This is up from $810 million garnered from 32,000 individuals as at March 1, 2016.
Before the surge in demand for the February issue, the overall take-up rate had been low when compared to the amount on offer. 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 such as fixed deposits.
The first-year yields for some issues were below 1 per cent, with the lowest at 0.77 per cent for the November 2016 tranche.
The lowest 10-year average interest rate was 1.75 per cent for the September 2016 issue.
An SSB believer, Mr Phoen has hit his individual SSB entitlement of $100,000, having parked $50,000 each in the first two tranches in 2015. The first issue - known as SBOct15 - offered the second highest 10-year average interest rate of 2.63 per cent while SBNov15 offered 2.78 per cent, the highest so far.
This translates into total investment and interest amounts of $63,455 (at the end of 10 years for tranche 1) and $64,205 (tranche 2) for Mr Phoen at maturity.
While Mr Phoen had no trouble getting his full allocation in those early days, the over-subscription last month means some investors did not receive the full amount they wanted in the February issue.
Those who applied for up to $41,000 worth have been given a full allocation, subject to the individual limits of $50,000.
The limit includes the amount they may have subscribed for in earlier tranches. So investors who applied for $41,500 or higher would receive $41,000 or $41,500. MAS uses a "quantity ceiling" method of allotment, so an additional $500 worth of bonds can be allotted to an applicant on a random basis.
This was what happened to Mr Phoen's wife who applied for $50,000 and got $41,500 instead.
GOOD INVESTMENT TOOL
SSB is a good complement to CPF and retirement schemes but should not be the sole investment. It should be considered as an investment option included in more diversified portfolio, which could consist of a combination of SSBs, fixed deposits, shares or/and exchange-traded funds and unit trusts.
MR BRANDON LAM, Singapore head of financial planning group, DBS Bank.
Mrs Joyce Chua, who has been monitoring the SSB yields, helped her housewife mother apply successfully for $30,000.
WHAT IS SSB?
Fully backed by the Government, the SSB is a principal-guaranteed, risk-free, affordable and low-cost investment option for retail investors.
The SSB rate steps up over time, so over a 10-year period, the average interest is generally higher than that for fixed deposits.
You will need at least $500 to invest in these bonds, lower than conventional Singapore Government Securities (SGS), which require $1,000. Corporate bonds usually require $250,000. The investment amount must be in multiples of $500. You can invest up to $50,000 in a single SSB issue and hold up to $100,000 at a time.
Mr Brandon Lam, Singapore head of financial planning group at DBS Bank, said SSBs are intended to be a safe, flexible and long-term instrument for new and risk-adverse investors. "In our view, SSB is a long-term investment tool and should not be seen as a short-term deposit alternative. Our recommended minimum investment horizon for the SSBs would be two to three years," he added.
"SSB is a good complement to CPF and retirement schemes but should not be the sole investment. It should be considered as an investment option included in more diversified portfolio, which could consist of a combination of SSBs, fixed deposits, shares or/and exchange-traded funds and unit trusts."
For more information, visit the SSB website at www.sgs.gov.sg/ savingsbonds or call the SSB hotline on 62213682.
WHAT HAPPENS IN AN OVER-SUBSCRIPTION?
When demand exceeds supply, an applicant will be allotted $500 of bonds with the amount increasing in multiples of $500 until he or she has either received the full amount applied for or until all the available bonds have been allotted.
If the number of applicants is so large that issuing $500 to each person exceeds the amount of bonds available, then bonds will be allotted on a random basis.
This means that when the bonds are oversubscribed, an investor may not receive the full amount applied for and smaller applications will have a higher chance of being fully allotted. This is known as the "quantity ceiling" method of allocation and seeks to distribute the bonds as equally as possible.
HOW ARE SSB INTEREST RATES DETERMINED?
The bond rates are linked to the yields of SGS. These are traded, so their yields fluctuate daily based on changes in market conditions. SGS closing yields are published by the MAS at the end of each business day.
The SSB on offer in any given month is linked to the daily average SGS yields in the previous month.
If you hold your Savings Bonds for the full 10 years, the average return per year will match the returns of a 10-year SGS at the point of your investment. In the past 10 years, the 10-year SGS yield has generally been between 2 per cent and 3 per cent.
WHAT INTEREST RATES WILL NEW ISSUES OF SSB OFFER?
Mr Phoen noted that SBFeb18 has the flattest yield curve ever in the SSB's history. The current month issue (SBMar18) has steepened slightly with lower front-end yields (1.42 per cent in the first year and 1.55 in the second year) and a higher 10-year yield of 2.11 per cent. A yield curve is a line that plots the interest rates, at a set point in time.
"For new issues in the rest of this year, one should expect higher front-end rates, in line with the US hiking rates about three times this year," he added.
"The 10-year rate should also be higher with slightly higher inflation coming through as the synchronised global economic recovery continues."
Mr Lam of DBS said short-term interest rates for the bonds may rise, while longer-term rates may be subdued.
Mr Heng Koon How, head of markets strategy at UOB, said its 2018 year-end 10-year SGS forecast is at 2.45 per cent.
ADVICE TO RETAIL INVESTORS?
There is no penalty for selling your SSBs early, and accrued interest on the redemption amount will be paid. You can redeem on a monthly basis and in multiples of $500.
This makes the SSB very flexible and investors can make use of this feature to switch to new SSB issues with higher yields. But there is an administrative fee of $2 each time you apply or redeem.
Mr Phoen said: "If yields turn higher, as we expect, switch to another higher-yielding SSB issue or another bond with a higher yield. If yields unexpectedly turn lower, you can still enjoy the locked-in long-term yield.
"Essentially one has a free option in the current rising rates environment, and with the first-year SSB rate even higher than one-year fixed deposit rates, everyone should consider deploying excess cash in SSB."
For investors who have been allocated February's issue, Mr Phoen suggests selling it within two years as yields should be higher by then.
He is against holding SBFeb18 to maturity as the 10-year average yield is a low 2.04 per cent, unless rates start falling in the next two years because of unforeseen circumstances.
Investors who bought bonds issued in the last four months of 2016 - SBSep16, SBOct16, SBNov16 and SBDec16 - could also consider applying now for SBMar18.
The 10-year average yield and second-year interest rate of those four 2016 issues are way below SBMar18's 10-year average yield and first-year rate. They are below the yields for most other years as well, noted Mr Phoen.