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Singapore Savings Bond (Part 4): Good or not?

Tuesday, May 12, 2015

More details have been released with regards to the Singapore Savings Bond. Here is a quick and very simple summary:

1. Person must be at least 18 years old, have a bank account (DBS, POSB, OCBC or UOB) and a CDP account.

2. Application for the bond will be through the ATMs (DBS, POSB, OCBC or UOB) or internet banking (DBS and POSB only). Fees will be charged by the banks for application and redemption requests.

3. New Savings Bond to be issued every month. Application and requests for redemption must be done before the window closes 4 working days before end of the month. Must be in multiples of $500.

4. Application amounts of $500 to $50,000 are allowed but each person can only hold a maximum of $100,000 of Savings Bond at any one time.


Quite obviously, the Savings Bond (just like the CPF) is not created with HNW individuals in mind. 

It is meant to help the average Singaporean who is more of a saver and who wants a safe place to park his savings which will reward him with a higher interest rate compared to a paltry 0.1% paid by some banks for money in savings accounts now.

I must first state the obvious and that is the Savings Bond is a better place to park our savings than a regular savings account if we have more liquidity than we need on a monthly basis. The most obvious reason for saying this is the much higher interest rate.

Although the Savings Bond is not as liquid as a regular savings account, it really is not too bad. The minimum lock up period is basically one month.

We could apply for a savings bond this month, receive it next month and if we decide that we need the money back, we could request for a redemption and get the money back in the following month. We would be paid a pro rated interest income based on the coupon for a holding period of 1 year (which is 0.9% per annum based on an example given by the MAS). We will not suffer any loss of capital in the process either.

If the holders of these Savings Bonds would like to get higher interest rates, they must hold the bonds for longer periods of time. How does this work?

If someone should hold it for the full one year before redemption, he could enjoy a coupon of 0.9%. If he should hold the bond for another year, in the second year, he could receive a coupon of 1.5% (using the example given by the MAS earlier). So, on average, it would be 1.2% per annum which is the coupon for a 2 year bond.

The coupon for each following year steps up until the 10th year and the average coupon for each of the 10 years could be 2.4% (which is the coupon for a 10 year bond around now).

In my earlier blog post on the Singapore Savings Bond, I said that it does not seem very attractive for me, the operative word being "me". When I said I have reservations about it and that I don't really like it, I was thinking about me. OK, why did I say what I said?

For a while now, I could get higher interest rates from fixed deposits offered by the banks and I feel that interest rates will only go higher in future.  So, for example, one year or so ago, a 13 months fixed deposit in UOB was offered an interest rate of 1.08% p.a. Today, the offered interest rate is 1.45% p.a. This is a big increase in a year.

Of course, we must note the following points about the fixed deposits:

1. Minimum amount required is $20,000.

2. No interest will be paid in case of early redemption.

So, logically, for someone who has less than $20,000 to be deposited or who might need to make an early redemption in case of an emergency or opportunity (depending on whether the money is in his emergency fund or war chest), if $20,000 is all he has, this option is out.

However, if someone has quite a bit of spare cash, then, whatever liquidity is not required for the immediate future, fixed deposits with higher interest rates might make more sense than the Savings Bond in terms of returns. Just remember to have the fixed deposits in tranches of $20,000 (or whatever is the minimum sum required by the bank).

The Singapore Savings Bond is a good thing to have as it allows people to get higher interest rates for their savings with as little as $500. The very short minimum lock up period with no risk of capital loss are favourable points too.

Whether the Savings Bond is the best option for us, however, would depend on our circumstances, our motivations as well as the alternatives available to us.

Added (3 Feb 2017):
Monetary Authority of Singapore has added 
three more application channels for Singapore 
Savings Bonds (SSBs) - OCBC's and UOB's 
banking portals and OCBC's OneWealth app.

MAS said in a news release (Feb 1) 
that since the start of the programme, 
a "significant number of investors" applied 
for the bonds through DBS/POSB's Internet 
banking portal and that there were requests for 
more online options. Those interested can also 
apply via ATMs of the three Singapore banks.

Related post:
Singapore Savings Bond (Part 3).


KC said...

The weird thing is MAS is exploring the possibility of allowing CPF funds to buy into SSBs. Same same but different?

AK71 said...

Hi E H,

There could come a time when the SSB offers a coupon that is higher than the interest given on our CPF-OA savings. It would make sense then. :)

Serendib said...

EH... some months ago I heard from a someone in the system that SSB would be a way to transition CPF to a floating rate. I said this would not be very palatable to the public.. but from what MAS is saying now, perhaps there is some truth in that.

AK71 said...

The first Singapore Savings Bond will be issued on Oct 1, 2015 and retail investors will be able to apply for them from Sep 1.

This was announced by the Monetary Authority of Singapore (MAS) on Tuesday (Jul 21) at a press conference on its annual report for financial year 2014/2015.

Singapore Savings Bonds are a special type of Government bonds that cater to individual investors. Like regular Singapore Government Securities (SGS), they are said to offer the same long-term risk-free returns. But holders of Singapore Savings Bonds are said to not be exposed to price risk if they redeem the bonds early.

Details of the first issue such as the amount of bonds available and the interest rates will be released when applications open.

MAS said a new Singapore Savings Bond will be issued every month for at least the next five years, so there is no need to rush for the first issuance.


AK71 said...

The first Singapore Savings Bond (SSB) will be issued on Oct 1, with those holding the bonds for the full 10 years earning an average interest rates per annum of 2.63 per cent, the Monetary Authority of Singapore (MAS) said on Tuesday (Sep 1).

For those who redeem the bonds at an earlier date, the average return per year will range from 0.96 per cent at the end of the first year to 2.53 per cent at the end of year nine. Those who hold the bonds for five years will earn an average of 2.01 per cent per annum.

Applications for the bonds will open from 6pm on Tuesday till Sep 25 and MAS will announce the allotment results after 3pm on Sep 28. The bonds will be issued on the first business day of the following month.

MAS said S$1.2 billion worth of SSB will be issued for the month of October. Depending on demand, up to S$4 billion of savings bonds could be issued in 2015.

Application for the SSB should be in multiples of S$500 with a minimum investment of S$500. One can buy a maximum of S$50,000 each issue, but one can only hold a maximum of S$100,000 overall.

MAS said a new savings bond will be issued every month for at least the next five years.


KW said...

SSB as another option to park our emergency fund?


AK71 said...

Hi KW,

Yes, I think it could be an option although it is not as liquid an option as a fixed deposit. :)

AK71 said...

More than S$413 million in applications from 19,505 people have been accepted for the first Singapore Savings Bond issue, the Monetary Authority of Singapore (MAS) announced on Monday (Sep 28).

Singapore Savings Bonds are a special type of Government bonds that provide individual investors with a safe and flexible long-term savings option.

The bonds have a "step-up" feature, which pays more interest the longer they are held and they can be redeemed at any time with no penalty. Investors who hold the inaugural bonds for the full 10 years will earn 2.63 per cent annually.

Successful applicants will be informed by mail of the amount of Savings Bonds they have received within three to five business days. All applicants will receive their application amount in full, subject to the limit of S$50,000 per person, said MAS in a news release.


AK71 said...

Can we use money in our CPF-OA or SRS account to buy Singapore Savings Bond?

Nope. We can only use cash. However, I hope this changes in future as it would make sense for me to use money in my SRS account since I cannot make a withdrawal till age 62 at the earliest anyway.

AK71 said...

The second issue of the Singapore Savings Bonds has closed, with only about 20 per cent allocated to investors. This is lower than the one-third allocation rate in the first issue.

Excluding applications that exceeded allotment limits of S$50,000 per bond issue or up to S$100,000 worth of total bonds, the Monetary Authority of Singapore (MAS) said S$257 million worth of bonds will be allocated. This is compared to the S$413 million in applications for the first tranche, also capped at S$1.2 billion. Both issues were capped at S$1.2 billion each.

“A lot of people probably are still not familiar with this. But those who are following all this news, who are more savvy, probably they are expecting the yield to be higher."

This group of investors - betting on global interest rates to go up - are most likely to have redeemed their bonds.

Data released by the MAS on Wednesday showed that bondholders applied to redeem S$9.3 million worth of bonds. This will be effected on Nov 2. The Savings Bonds will be issued every month for at least the next five years.


AK71 said...

The Monetary Authority of Singapore (MAS) said on Thursday (Nov 26) that for the December issue, total application within individual allotment limits amounted to S$40.99 million, well below the maximum allotment of S$1.2 billion.

The application amount was down sharply from S$257 million for the previous month's issue and S$413 million for the first tranche.

Singapore Savings Bonds offer individuals a safe, long-term, flexible savings option that pays higher interest over time.

For the December issue, the bond will pay investors an average interest rate of 2.44 per cent if it is held for the full 10 years.

In the second tranche, investors could earn an average interest rate of 2.78 per cent over a 10-year tenure, while the first issue would pay an average interest rate of 2.63 per cent.


Mao Mao said...

Hi AK,

It looks like lesser and lesser people are applying for the SSB tranches. Hopefully 2016 will be a better year.

AK71 said...

Hi Mao Mao,

I think it has to do with the fact that the coupon is the lowest of the first 3 issues. Only 2.44% against 2.63% and 2.78%.

Interest rates should go higher in 2016.

AK71 said...

Reader says...
Is there any high quality bonds on the open market u can recommend?

AK says...
unless u are ok with SSB 🙂

Kevin said...

Hi AK and Reader,

It is not advisable to purchase long-term bonds in a rising interest rate environment right now. Any duration which is not more than 3 years is a wiser choice. ;)

AK71 said...

Hi Kevin,

Which was why I suggested only the SSB because there is no risk of capital loss.

Unknown said...

SSB bonds are really safe, how much it will be paid off eventually?

AK71 said...

Hi Manish Dwivedi,

If we cannot trust SSB, then, we can trust no bonds at all. ;)

jogoh said...

Hi AK,

Re-reading this reminds me I should park some $ that I won't use until 6 months later for maximum return. Have since been fishing for some good fixed rate but so far I think ICBC and CIMB are the top two at around 1.7-1.85%. I don't have any account with them so not sure it's a good practice to do the fixed deposit with them. Any advice for this novice? Thank you.

AK71 said...

Hi jogoh,

Quite simply, money should go to where it is treated best. ;)

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