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The name is Bond, Singapore Savings Bond (Part 3).

Tuesday, March 31, 2015

There is more news on the Singapore Savings Bond (SSB) by now and there is also plenty of discussion in cyberspace about it. I am sure there is no shortage of questions along the line of "Good or not har?"

So, this is AK asking the same question (i.e. "Good or not har?")  and attempting an answer.




To answer this question, we must first answer a couple of other questions:

1. What is our purpose for considering the SSB?

2. What are the alternatives out there?


When I first found out about the SSB, I thought that it might be a good place to park my emergency fund and war chest. 

Whether I would do it or not would very much depend on the yield I could get from the SSB.




Currently, I park my emergency fund in fixed deposits. The emergency fund is money that I will not touch unless things go very wrong. If the unthinkable should happen, I would have to break the glass, um, I mean fixed deposits. 

So, locking up the money in several fixed deposits that pay 1.08% to 1.25% per annum made sense.

As for money in my war chest which is to be used to capitalise on investment opportunities, I need them to be very near to me. 

The nearest form would be money in savings accounts (unless we consider money I keep in a tin at home as well). I could easily transfer money to my broker using internet banking from my savings account without having to visit the bank.





So, I have an OCBC 360 account which earns higher interest of up to 3.05% (but this is due to change to 2.05% from 1 May, apparently) for the first $50K. I have a CIMB savings account which pays a flat 0.8% for the first $750K. 

I also have some money in my brokerage account which pays 0.6% in interest per annum. All of these rates are better than the 0.05% we get from regular savings accounts here. 

We need a war chest but we should try to reduce the cost of holding money.

If our war chest is somewhat bigger (and, logically, this should mean at least more than $50K in size since the OCBC 360 account, even at 2.05% per annum, would beat any 12 months fixed deposit's interest rate today), then, it makes sense to have some money in fixed deposits which offer interest rates higher than the 0.8% offered by the CIMB savings account. 

Try to make sure that each fixed deposit is smallish in size so that we don't lose out too much if we should have to break one.




When would the SSB make sense for me then?




I understand that the SSB's interest rate would step up every year and if we were to hold the SSB for the maximum of 10 years, we would receive the same yield as a 10 years Singapore Government Security (SGS) which has a yield of about 2.4% per annum. 

So, if we are simply renewing a 12 months fixed deposit each time it matures to capture higher promotional interest rates for the next 12 months, would the SSB be a better option?

Well, right now, the interest rate is about 1.4% for a 12 months fixed deposit and it is more likely than not that interest rates will increase, given time. 

With expectation of higher interest rates in future, each successive fixed deposit would probably have a higher interest rate in the next few years. In such an instance, it makes the SSB less attractive.




If the SSB is not really that attractive an option for my emergency fund, then, it is definitely not an attractive option for money in my war chest which is less likely to be locked up for a much longer period of time compared to money in my emergency fund (touch wood).

We want to remember that in a deflationary environment, interest rates will keep dropping. In an inflationary environment, however, interest rates are likely to keep rising.

Of course, I do not know for sure what is the yield going to be like for the SSB if it were to be held for only a year or two. Only the MAS knows the answer. 

However, I do know that if it is not above the interest rate which I can get for a 12 months fixed deposit from a local bank, it is probably not going to attract me, keeping my purpose for considering the SSB in mind.

Related post:
The name is Bond, Singapore Savings Bond (Part 2).

16 comments:

Maximillian said...

Oh, is the 360 account going to change to 2.05%? I didn't notice the announcement. :(

AK71 said...

Hi Max,

This was shared by a reader during the recent "Evening with AK and friends" event. I hope that he is mistaken. ;p

raymond350 said...

Dash account gives 1% interest, 25% more than CIMB. So it seems that ocbc 3.05% will last for 1 yr and 1 month, just hope that it will stay at 2.05%.

AK71 said...

Hi Raymond,

I have some money in a SCB DASH account too. I didn't mention it because the 1% interest rate is supposedly promotional but SCB have been extending it on a monthly basis for the first $100K. 31 March 2015 is supposedly the last day. Do you know if they are extending it again?

SMK said...

I agree that it will probably be lower than cpf interest rates because OA is the higher of 2.5% pa or 3 month interbank. while SA is higher of 10 year govt securities + 1% OR 4% pa.

however allowing for liquidity at PAR value means either a lower average yield or a variable yield.

the 2nd of which will make it difficult to implement and possibly have higher costs due to administration. hence the first is more likely.

the closest equivalent will be fixed deposits.

"As the Government does not use debt to finance its expenditure, SGS are issued to meet banks’ needs for a risk-free asset in their liquid-asset portfolios and as part of a broader strategy to grow Singapore into an international centre for debt capital management."

but the govt does not need to issue debt. so why are they doing this? and how are they financing this?

yeh said...

hi ak
i miss the OCBC 360 account. do not know about this at all.

now still can put the money in?

yeh said...

definitely i will patiently wait for SSB launching :)

AK71 said...

Hi SMK,

Thanks for weighing in on this. Like the way you explained why the SSB's yield is unlikely to be higher than the CPF's interest rates. :)

Why is the government doing this? My guess is that they do this to help people better achieve retirement adequacy, especially for those who are more risk averse.

As to how are they financing this, I guess the funds will be channeled into investments that yield higher returns. Just a guess. ;p

AK71 said...

Hi yeh,

I blogged about OCBC 360 a number of times. The first time was middle of last year. It is odd that you missed all of the blog posts. :(

You could go start an account now but starting from May, the bonus interest might be lower. Still good but just lower than what it is now.

SMK said...

The interesting thing about the financing is that CPF returns are financed by GIC's returns. And in recent years, a increasingly good portion of it has probably started to come from private equity deals. If it is already driving CPF yields, and will be used to drive SSBs, what does it tell you of CPF contributions?
Not enough contributions by the people? (Likely)
They want to raise interest rates? (unlikely)
Soak up excess liquidity? (maybe)

But the thing is why not just increase the CPF contribution income limit from $5k to $6k? Uneven distribution of income? Possibly. Complaint by the people? Probably.

Still I am not entirely for the idea that SSBs will help much with retirement savings. Just quick glance throughout the blogs will show you that most slightly finance inclined will be inclined only to put in their emergency funds or warchest if you will.

This has got to be aimed at the elder age group with lesser growth aspirations and more preservation goals. But what does that tell you of the inflation targets or projections?

Also anyone investing in equities with the view towards building a nest egg will know it to be a tricky affair. When to take profit? How much of warchest rotting at low interest? Let the profit run? Cut loss? Macro event affecting income tools much?

even more tricky if you have unexpected need of liquidating investments to pay off SSBs withdrawals.

No. To do this, they must have good reason or confidence of profitable deals (hopefully no more shin corp or SuZhou deals)

OR

every confidence in a "carry" trade. Using longer dated fixed income tool to finance this shorter SSB.
if so, can you guess which one? :)

How much of this matters to the retail investor?

SMK said...

Thanks for bloggin this, AK :)

AK71 said...

Hi SMK,

Very thoughtful comment. Made me think so much that I got a bit dizzy! LOL!

Seriously good questions. Unfortunately, I don't have answers to most of them. -.-"

I can only say how I view the SSB from my standpoint as an investor. Specifically, how and when would the SSB make sense to me?

As a tool to help pure savers get a better return, I think it is mildly persuasive especially for people who just keep renewing their 12 months fixed deposits but, of course, you are right, the SSB is a bit more complex than fixed deposits.

Thanks for the very good comments. It was a pleasure reading them. :)

caelitus said...

I went to the OCBC Branch at Bedok to verify.

Payment Bonus interest 0.5%
Credit Card Spend 0.5% (on top of that, credit spending has to increase to $500).

As mentioned during the discussion, there will be 2 new bonus interest categories and the criteria will be announced on 1 May. More hoops for us to jump through before getting more interest? =)

I took a photo of the notice and it is available for posting if required. How do I send it to you?

AK71 said...

Hi caelitus,

How is the flying? ;)

I didn't get your name during the chit chat session on Monday but thanks for the heads up regarding the changes once more. Thumbs up!

You could send me the photo you took of the notice through Facebook. That would be the easiest and fastest way, I guess. :)

Zhixiong Lin said...

Hi all,

The details on the revised OCBC 360 Account are below:

Official Notice from OCBC
http://www.ocbc.com/personal-banking/notices.html


OCBC tightens terms for savings account with 3% bonus interest
http://www.businesstimes.com.sg/banking-finance/ocbc-tightens-terms-for-savings-account-with-3-bonus-interest#xtor=CS1-3&utm_source=Facebook&utm_campaign=Echobox&utm_medium=Social

AK71 said...

Individuals who wish to buy the bonds must be at least 18 years old, and have the necessary bank and CDP accounts before the bonds are launched, said MAS.

Investors will be able to apply for and redeem the Savings Bonds through DBS, POSB, OCBC or UOB ATMs, or through DBS/POSB internet banking channels. Non-refundable transaction fees will be charged by the banks for each application and redemption request.

A new Savings Bond will be issued monthly, and applications will open on the first business day of each month, and close four business days before the end of the month. Requests to redeem existing bonds can be made during the same period, added MAS.

Individuals will only be able to buy the bonds using cash, and application and redemption requests must be made in multiples of S$500.

Investors will be able to apply for each Savings Bonds issue with amounts ranging from S$500 to S$50,000, and they can hold up to S$100,000 of Savings Bonds at any point in time.


Source:
http://www.channelnewsasia.com/news/singapore/mas-on-how-to-apply-for/1839400.html

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