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).