"Just 1%?!" - Your thoughts on seeing the bank's fixed deposit rates?
Well...good news! The government has a better alternative!
They are called:
'Singapore Savings Bonds (2018)
And this guide will give you everything you need to know to start getting higher interest, just by knowing where you can park your money.
At the end of this guide, you will have the confidence and ability to ditch the fixed deposit for better returns.
Here's a quick glance of what you'll discover:
What Are Singapore Savings Bonds?
Specially structured government securities that were designed to be accessible and suitable for the individual investors.
That sounds complicated.
Here's a simple cheat code. Every time you see the word 'Bond', take it as 'Fixed Deposit'.
Eg: 'Singapore Savings Bonds' becomes 'Singapore Fixed Deposits'.
What are they exactly? Every time the government issues a bond - and when you buy one - it means you're lending the government money. In return, they give you a small interest rate (more on this later) on the money you've lent to them.
Think of it being like a one man bank to the Singapore Government. Except in this case, you're not the only 'bank'. Everyone with money can chip in.
Launched by the Monetary Authority of Singapore (MAS) in October, 2015, a new Singapore
Fixed Deposit will be issued every month for at least the 5 years after its launch.
The aim of the Government is to give investors access to long-term interest rate returns with maximum flexibility at zero risk.
Here are three quick-facts to learn about SSB:
A government bond designed to help Singaporean investors to save and invest for the long term
They are safe, principal-guaranteed investments backed by the triple A credit rating of the Singapore Government. That means zero risk. Unless the government goes bankrupt overnight.
The SSB have two unique features:
Here's a quick video summary of the key features of Singapore Savings Bonds:
Singapore Saving Bonds vs Fixed Deposit Accounts
We weren't joking when we mentioned that you could treat the Singapore Saving Bonds as a Singapore Savings Fixed Deposit.
In this section, we'll look at the similarities between the Singapore Savings Bonds and the familiar Fixed Deposit Accounts.
You'll be surprised to see how similar they are.
1. Earn Interest
We talked about Bonds should be treated as Fixed Deposits. We've even talked about how it's like being a one man bank to the government. What we haven't talked about is how much interest you get from lending the Government your money.
In the case of bonds, the interest rate goes up with each year that you hold the bonds. Which means the longer you lend the government your money, the more interest you get on the money you loaned them.
It's like being a loanshark to the government.
These are the interest rates for the Jan 2019 Bonds which mature in Jan 2029.
2. Interest rates varies
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. And vice versa.
Depending on the economy, the interest payable on new fixed deposits accounts varies.
Singapore Savings Bonds
The interest payable for SSB also varies. 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 (SGS). At the point of writing, the SBS coupon rate has been around 2%.
You can check the upcoming SSB tranche and its average coupon rate here: This Month's Singapore Savings Bonds
And technically, the SSB should always be paying put a higher interest rate than what you get from banks.
3. Interest rate is locked in upon commitment
Commitment can be rewarding. Especially in Fixed Deposits and the Singapore Savings Bonds. There is one upside to Savings Bonds in 2018/2019 however and that is that you can withdraw your money at any time with no penalties.
Once you have committed to a Fixed Deposit, the interest payable remains locked in. Regardless of how the general interest rate environment fluctuates.
Let’s say you have committed $10,000 to a Fixed Deposit account 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.
Singapore Savings Bonds
The SSB works in the same way. Suppose you purchase $10,000 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. Capital Guarantee
Fixed Deposits are backed by the bank that holds your account. 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. (if the bank goes broke, that's a different story)
Singapore Savings Bonds
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, governments are considered generally more secured than banks. Remember that the US government bailed out the US banks in 2007. Not the other way around. If 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.
5. No Fluctuation 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.
Singapore Savings Bonds
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.
6. Early withdrawal penalty
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.
Singapore Savings Bonds
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 an incentive to stay for the full length of time. 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 (as shown in the interest rate section above). The idea is the same – you reap the full benefits of the SSB if you stay invested for the entire tenure.
Fixed Deposit on Steroids
We hope you are convinced of their similarities.
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.
Singapore Savings Bonds vs Singapore Government Securities
The more informed investor would be inclined to compare the Singapore Savings Bonds to its closest relative instead of fixed deposits. This section was created for you.
To be honest, the SSB is a subset of the SGS rather than a separate product:
SSB is a subset of SGS.
SSB is not totally new.
But because the SSB is a new product, for the sake of this section we will be comparing the SSB against its 'predecessors' - the Singapore Government Bonds and Singapore Treasury Bills (T-Bills).
We summarised 8 key differences that you should know when you are considering your investing options in the Singapore Government Securities.
All entities and individuals
Step-up rate, SGS-linked coupon payable semi-annually
Fixed coupon, coupon payable semi-annually
As per issuance calendar
Monthly, no penalty. Full principal amount will be refunded
Subject to prevailing market prices, can be sold at either premium (gain) or discount (loss)
SGD 500, in multiples of SGD 500
SGD 1,000, in multiples of SGD 1,000
Tradeable through Singapore Exchange (SGX)
There are actually quite a few differences, as listed in the table above, but here are some key differences you should take note of.
Firstly, the SGS are tradable and your capital is not guaranteed like with the SSB.
Secondly, the SGS have a minimum investment sum of $1,000, which is higher than the $500 minimum sum for SSB.
And thirdly, the target audience is different – SGS bonds are designed to meet organisations’ needs for a risk-free asset in their portfolios, whereas SSB are designed to meet the needs of retail investors like us.
Why You Should Invest in Singapore Savings Bonds?
The unique selling point about the SSB is its flexibility. Unlike conventional bonds where investors receive the short end of the stick if they redeem the bonds early, the SSB has no lock-in restrictions.
Although each SSB has a maturity term of 10 years, you can redeem your bonds at any time before maturity.
Even if you redeem the bond early, you still get to keep the interest paid out at six-monthly intervals.
How Long Should You Invest?
That’s really up to you.
The bond tenor is 10 years, but because you can get your money back at any time with no penalty, you do not have to decide about the duration of your investment upfront.
Obviously, the longer you invest, the better the yield. The question is, do you have the patience to sit on your SSB for the full 10 years?
Singapore Savings Bonds Interest Rate: How Much Can You Earn?
Interest on the SSB will be linked to long-term SGS rates.
This means that the average interest you receive over the period you hold the SSB will match what you would have received had you bought an SGS bond of equivalent tenor.
The key difference is, while SGS bonds pay the same interest every year, the SSB offer “step-up” rates, meaning that interest payment will increase the longer you hold your bonds.
Just to give you an idea of how much to expect: the 10-year SGS has mostly yielded between to 2 to 3% over the past 10 years, with the current yield being 2.4%.
Assuming a S$10,000 investment, this gives an average interest of $240 a year or $20 a month, over 10 years.
Financial adviser Wilfred Ling has done an interesting analysis on the projected yield percentages, arguing that the realised return for the SSB is actually slightly lower than that for the SGS.
If we go according to his figures, here’s how much your investments would work out to over the long run.
If you think about it, the SSB’s interest rates aren’t bad, if you’re a conservative investor.
Sure, they’re lower than that of long-term CPF funds, but at least they’re higher than that of short-term fixed deposits and savings accounts.
If you’re looking for somewhere to park your savings (under $100,000), forget about the banks and go for the SSB instead.
How To Buy & Invest In Singapore Savings Bonds?
Before you apply
You will need the following to start applying for the Singapore Savings Bonds:
- A bank account and ATM card with one of the participating banks – currently DBS/POSB, OCBC or UOB. (More banks may be included in future)
- An individual (not joint) CDP Securities account with Direct Crediting Service activated. Note that you must be at least 18 years old to open an individual CDP Securities account.
A new SSB will be issued every month for at least the next five years. The application window for each SSB issue will open on the first business day of each month and close four business days before the end of the month.
You can apply through any participating bank’s ATMs, or via DBS/POSB’s internet banking channels. Application requests must be made in multiples of $500. Bank charges may apply.
Note that you can purchase SSB only using cash, at least for the time being. In future, the Government may consider allowing people to use their CPF savings and Supplementary Retirement Scheme (SRS) funds to buy SSB.
How Will I Know If My Application Is Successful?
The success of your application depends on the demand for the SSB in that particular tranche.
The issuance size for each SSB tranche will be announced before application opens. If the demand exceeds the amount on offer in a particular month, MAS will allocate the bonds to maximise the number of successful applicants.
If you read between the lines, you’ll realise this means smaller applications stand a higher chance of being fully allotted.
But fret not – if you did not receive your full allotment, you can always apply again for the next issue. (Although there is little reason to worry about not getting your full allocation…)
If your application is successful, you will be notified by CDP via mail of the amount of SSB credited to your account. Application results will also be announced three business days before the end of the month.
How To Redeem Singapore Savings Bonds
The redemption process is similar to the application process – submit your request through any participating bank’s ATMs, or via DBS/POSB’s internet banking channels. You will get your cash (along with any accrued interest) back in the bank account linked to your CDP Securities account.
Do note, however, that redemption proceeds will only be processed by the second business day of the next month.
So don’t invest your entire nest egg in the SSB; you should still keep a portion of emergency funds separately in case you need them urgently.
How Much Can I Invest In The Singapore Savings Bonds?
The minimum sum is $500 and the maximum sum is $100,000. In other words, you can only hold up to $100,000 worth of SSB at any one time. You can top-up in multiples of $500 and apply for up to $50,000 on any single bond issue.
(Note: These figures may be revised in future, pending MAS’s review after the programme has been in place for some time.)
Yes, there is a quota imposed, but it’s a far more generous cap than what many of us were expecting.
This cap should be sufficient to meet the needs of most Singaporeans, as more than 90% of individual bank deposit accounts have balances of $100,000 or lower.
Investing Strategies for Singapore Savings Bonds
#1 - Optimising the SSB and SGS
The SSB’s pre-set coupon rate is good news if you’re an astute investor, because you’ll be able to decide whether to participate based on last month’s yield compared to current yields.
Financial blogger TradeHaven has proposed a possible strategy you could consider:
- If the 10-year SGS yield is higher than the prior month’s where the SSB would be issued at, buy the 10-year SGS.
- If the yields collapse by, say, 0.32%, you would have made 0.2% (cross the 0.12% bid offer spread on the SGX). This would translate to around 2% returns.
- Cash out the SGS and buy the SSB, which has no capital downside but pays interest.
- When the SGS yields rise again, cash out the SSB and buy the SGS. If not, hold on to the SSB till another opportunity arises.
It's a rather 'active' trading strategy, but if done religiously over time could bring some significant returns.
Due to the amount of work and complications in the execution of the strategy above, most busy investors would not find it sustainable. Instead, the following strategy may be more sound.
#2 - Endowment Replacement
Endowments are attractive in that they provide a hope for greater returns through their 'non-guaranteed' returns. We don't have the exact numbers, but often times the non-guaranteed returns are not returned to us.
So, instead of placing your money in endowment and having a tiny portion of it eaten up by the fund managers, why not just purchase into the SSB regularly.
- Purchase a fixed amount of SSB every quarter or half yearly.
- Hold them over 10 years.
- Start receiving payouts every quarter or half yearly once they mature.
There are limitations to this strategy as well.
Depending on the uptake and response, the frequency of new SSB tranches may change. This means that if the government decides to only release SSBs annually 5 years later, you might need to readjust and reconsider the pros and cons.
B) Investment Limit
There is a maximum individual holding limit of $100,000. This means that you can only own $100,000 worth of SSB at any one time.
In our opinion, the Singapore Government has created the most perfect financial product ever (for the lazy investor and the non-investor who wants their savings to grow). Such an instrument will never exist in the free market.
Unless you consider the need to activate the Direct Crediting Service in your CDP account as 'work', its like having the option to unlock free returns.
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.
And that it isn't as intimidating as it's name.
With that in mind, we hope more will explore and subscribe to the offering.