More details about the Singapore Savings Bonds (SSB) was announced by the Monetary Authority of Singapore (MAS) last Monday. This is an entirely new initiative by the Government to ensure that citizens have another long term savings option with better than CPF returns. We think it is a great product that all eligible Singaporeans should subscribe to.
At the same time, we also understand that in general, retail investors are more acquainted with equities. Far and few are familiar with bonds and the bond market. For many, bonds are an extremely foreign instrument. They are thought to be the domain of high net worth individuals and institutions. The thought of putting hard earned money into something so unfamiliar is a rather off-putting one.
For all of you who think that way, we offer one little hack to help you understand the Singapore Savings Bond better – Treat the Singapore Savings Bond like the Singapore Savings Fixed Deposit. Every time you come across the word ‘Bond‘, substitute it for ‘Fixed Deposit‘.
Here are six features of Fixed Deposit Accounts. I will compare the Singapore Saving Bonds against Fixed Deposit and explain why they are actually a lot more similar than you would have imagined.
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1. Fixed Deposit Accounts pay interest.
Everyone should have an idea of how fixed deposits work. You visit the bank to deposit some money with them. In return for taking your money the bank agrees to pay you a fixed interest rate at regular intervals.
The interest payable is always displayed prominently on all promotional material. The banks use it to capture our attention and to attracts us to open fixed deposit accounts with them.
The Singapore Savings Bonds work the same way. You pay upfront for the ‘bond’, depositing your money with the government. Every six months, the Government gives you a payout. (They call it the coupon rate but it basically means the same thing – the amount of money you will receive at periodic intervals).
2. Interest rates for Fixed Deposit Accounts change with time. It depends on when you start the account.
The interest payable on fixed deposits change with time. Naturally, as economic conditions changes, banks vary their fixed deposit rates. When the general interest rate environment is high, banks will have to pay more interest to attract depositors to open accounts.
The interest payable for SSB also changes with time. In fact, MAS will announce the interest rates payable for each tranche of SSB at the beginning of each month.
This fixed rate will be based on the corresponding coupon rate derived from the 10 year Singapore Government Securities. It is fine if you do not know what the SGS are. Leave it to the geeks to figure them out. Just be aware that the rate for the first tranche will very likely to be just a tad below 3 percent. Not shabby at all.
And technically, the SSB should always be paying put a higher interest rate than what you get from banks.
3. Once you have committed to a Fixed Deposit, your interest is locked in.
Further down the road, the general interest rate environment might change. But once you have committed to a Fixed Deposit, the interest payable remains locked in.
Let’s say you have committed $10000 to Fixed Deposits at a bank at a rate of 2% for five years. In three year’s time, the interest rate goes down to 1%. Your deposit will still earn you 2% because that has been agreed upon at the start. There is no change to your returns.
The SSB works in the same way. Suppose you purchase $10000 worth of SSB at 3%. Some time after, interest rates fall and hover around the one percent mark. Your holdings on SSB will continue to pay you 3% if you were to hold the SSB to maturity.
In that sense, you are not affected by interest rate fluctuations.
4. For Fixed Deposit Accounts, there is a penalty for early withdrawal.
All Fixed Deposits come with a tenure. You go to a bank, hand over the money and agree to have them safe-keep it for you for a fixed period of time.
There is a penalty for early withdrawal. If for any reasons you decide to close the account before the tenure is up, the bank will impose a penalty on you and will not pay out the entire interest in full. Depending on the time period, the bank may pro-rate your interest payouts according to a pre-determined formula.
The SSB also comes with a tenure. In this case, it is 10 years. If you choose to sell the SSB before the 10 year tenure is up, the coupon payments you receive up till that point will be lesser than if you have held the SSB to maturity. Think of it as a penalty for early withdrawal. You will only reap the entire benefits of the SSB if you hold it till the end.
MAS chooses to explain this via a step up interest illustration. The idea is the same – you reap the full benefits of the SSB if you stay invested for the entire tenure.
5. All Fixed Deposits are capital guaranteed.
Fixed Deposits are backed by the bank that you choose to deposit your money with. The value of Fixed Deposits is not dependent on market conditions. If the stock market crashes, you will still be able to go to the bank and get your entire sum back in full.
All SSBs are also capital guaranteed. They are backed by the Singapore government. Think of the government as a bank taking in your fixed deposits. In terms of risk hierarchy, governments are considered generally more secured than banks. In you have enough faith in Singapore banks to leave your money with them, you should have no issues with the stability of the Singapore Government.
6. Fixed Deposits do not fluctuate in value.
Unlike stocks, commodities or traditional bonds, the actual value of Fixed Deposits do not fluctuate. The value of your deposit is not dependent on market conditions.
Unlike traditional bonds, the Singapore Savings Bond does not fluctuate in value. Not only will you receive the full value at time of maturity, the par value is also fully guaranteed at any time. There is no chance of losing money on the investment.
Fixed Deposit on Steroids
The official launch date has yet to be determined but according to the MAS, it should be in a couple of months. Minimum investment is $500 and an investor can invest up to $100000. Charges are capped at $2 per transaction. The SSB is only open to individual investors. MAS website has a comprehensive FAQ on how to buy the Singapore Savings Bond.
The Singapore Savings Bond is a fantastic instrument like no others. It offers higher returns (compared to fixed deposit) with lower risks. The bonds are capital guaranteed, fully liquid and the transaction cost is negligible. Think of them like a fixed deposit account on steroids. In my opinion, the Singapore Government has created the most perfect financial product ever. Such an instrument will never exist in the free market.
Unfortunately, bonds tend to be highly misunderstood and hence shunned by many investors. Because of that, the take up rate for the Singapore Savings Bond will likely remain low among retail investors in Singapore.
We hope that by changing your perspective, you are able to see that despite the name, the Singapore Savings Bond has more features of a Fixed Deposit rather than a Bond. With that in mind, we hope more will sign up and subscribe to the offering.