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

Tuesday, March 31, 2015

On 26 March, I blogged about the Singapore Savings Bond (SSB) and during last night's "Evening with AK and friends", we talked about it too.

I am of the opinion that the SSB's coupon is unlikely to be as high as the CPF-OA's base 2.5% interest rate although it has been said that the coupon will be linked to long term Singapore Government Securities' (SGS). If we look at the yields of the 10 years to 30 years SGS, they are above 2% to under 3%.

The SSB gives holders the flexibility of early termination without incurring penalties. Holders will not have to worry about price volatility if they were to sell their SSBs before maturity date. Bonds are supposed to be safer if held to maturity. With the SSB, there is no need to hold to maturity and will be equally safe. This is a big plus.

Of course, now, what is on our minds is what will be the yield?

During last evening's session, Azrael, a fellow blogger whom I got to know not too long ago shared that the yield might be between 0.375% to 1.75%. He blogged about it too. You might want to read his blog post: here.

Credit: Yune Ki.

We really have to wait for more details from the Monetary Authority of Singapore (MAS) closer to the date of the launch which has been scheduled for sometime in the second half of this year. Who knows? We could be pleasantly surprised with the yield. 2.5%? Dare I hope?

Although I really like this development, I feel that the banks will have reason to be worried. Of course, by extension, their shareholders should worry too. Interest income forms about 60% of their total income. The finance companies will have to worry too. Interest income forms about 80% of their total income.

These financial institutions' interest income will take a hit if their cost of funds should go up. Cost of funds will probably go up if they have to compete with the SSB for deposits. By this, I mean they will have to offer more competitive rates for their fixed deposits. Will they be able to charge borrowers correspondingly higher interest rates to maintain their NIMs? Well, whichever way we slice it, things will get a lot more competitive for them.

However, all is not gloom and doom because the MAS also said that there will be a cap as to how much SSB each person is allowed to buy. They said that they want a broader reach and I think, by that, they mean that the SSB is not to benefit the very rich but the masses. This is similar to the mission of the CPF. If the cap is rather modest, then, the impact on the banks and finance companies is likely to be minimal. A cap of $20,000 to $50,000 per person, perhaps?

A modest allowance of SSB per person will also mean that the institution that is the CPF remains relevant as a long term savings tool. The SSB could be like the SRS which is an additional tool to help us achieve retirement adequacy.

I do feel that the government will tread carefully so as not to make the CPF less relevant nor cause hardship for the local financial institutions (which will have unpleasant ramifications).

Let's wait and see.

Related posts:
1. The name is Bond, Singapore Savings Bond.
2. National Day Rally (2014): CPF and retirement.
3. SRS: A brief analysis.


AK71 said...

What are Singapore Savings Bonds?

They are a new type of government bond, which will be launched as part of moves to make low-cost investment options more widely available to retail investors.

A feature of the product is that a bondholder can get his money back in any month, with no penalty imposed. This means investors do not have to decide upfront the duration of their investment.

Normally bonds have a set interest rate and investors can find themselves out of pocket if they redeem them too early.

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, the longer you hold on to the bond.

(Example: 0.9% in the first year, 1.5% in the second year...)

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.

Singapore Savings Bonds will be issued monthly and the interest rate schedule for each issue will be announced before applications open.


gerimegaly said...

Hi AK,

With the possibility of the "cost of funds" going up, then wouldn't that also have a direct impact on interest rates of Housing Loans, since banks also depend heavily on this other source of business?

AK71 said...

Hi gerimegaly,

It was just a possibility that I was tossing around in my head. I do that a lot. -.-"

For sure, if cost goes up for any business, they must try to pass the increase to consumers. This is one of the ramifications I thought of.

However, it seems like the proposed "annual step up" coupons for the SSB will be lower than interest rates for fixed deposits offered by the banks. The only way to get much higher coupons is to hold the SSB for many years.

So, just treat my blog post as an academic exercise. ;p

KC said...


My take:

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