5 Things You Should Know About Singapore Savings Bonds (SSBs)

The Monetary Authority of Singapore has released more details about Singapore Savings Bonds (SSBs), a new initiative to encourage individuals to save and invest to meet their long-term financial goals and retirement needs. In this article, we look at five things that everyone should know about the upcoming SSBs.

iFAST Mar 31, 2015

The Monetary Authority of Singapore has released more details about Singapore Savings Bonds (SSBs), a new initiative “to encourage individuals to save and invest to meet their long-term financial goals and retirement needs”. In this article, we look at five things that everyone should know about the upcoming SSBs.

1. The SSBs will be guaranteed by the Singapore Government

Like the existing Singapore Government Securities (SGS), the SSBs will be guaranteed by the AAA rated Singapore Government, which ensures the certainty of semi-annual coupon payments and the return of the investment. This makes them safer even compared to bank deposits (although those are guaranteed by deposit insurance for up to the first S$50,000).

2. Lower interest rate risk compared to traditional bonds

Due to the ability for the investor to redeem his SSB investment every month in full, this means that investors are essentially not exposed to interest rate risk. This is unlike a traditional bond, where bond prices fluctuate according to interest rate changes, which can expose an investor to capital losses if the bond is sold prior to maturity. In more complicated financial lingo, the SSBs are structured with “put” options, which can be exercised at the discretion of the SSB investor each month.

3. SSB yields are structured to rise over time

According to details released by the MAS, SSB yields are dependent on prevailing SGS rates, with average interest rates over each holding period matching the prevailing SGS yields (for any particular maturity) at the point of issuance. So for example, if an investor redeems his SSB after 2 years, he should receive the same average interest rate on the investment as the 2-year SGS at the point of issuance. Since long rates tend to be more than short rates, this suggests that SSB yields will rise over time. The maximum tenor for each SSB has been set at 10 years. 

4. Yields are averaged over time, so yields may not always be “stepped up”

Based on calculation details released so far, it is in fact possible for SSB yields to be “stepped down”, given that the structure intends to ensure that the average yield received over the lifetime of the SSB should match the SGS yield corresponding to that particular maturity (at the point of issue). In our hypothetical calculation of “SSB equivalent” yields based on the prevailing SGS yield curve (as of 31 March 2015), we find that in Year 6, interest payments have to be stepped down so that this condition can be met (see Chart 1).      

Chart 1: Hypothetical calculation of “SSB equivalent” yields

Table 1: Hypothetical calculation of “SSB equivalent” yields

SGS Bond Yields SSB Yields Average SSB Yield (Over holding period)
1y

1.01

1.01

1.01

2y

1.32

1.63

1.32

3y

1.50

1.88

1.50

4y

1.69

2.26

1.69

5y

1.88

2.63

1.88

6y

1.97

2.41

1.97

7y

2.06

2.58

2.06

8y

2.14

2.76

2.14

9y

2.23

2.93

2.23

10y

2.32

3.11

2.32

Source: iFAST compilations, Bloomberg

5. If it sounds too good to be true…

Usually a benefit that sounds “too good to be true” usually is. In the case of the SSBs, their features make them ideal for both saving up and also for diversifying one’s investments. The important catch here is that since the benefits are so good, there will be a cap imposed on the amount each individual can buy. SSBs will also not be offered to corporations or institutions, only individuals. Another con is that the rates of return are fixed at the time of investment, so if rates are low at the point of investment, the investor does not benefit if rates rise in the future. The no-penalty early redemption feature also means the investor may eventually have to decide if it is worthwhile to look at a new issue (and redeem his existing bond prior to maturity), which would result in a “reset” of yields on the new instrument.  

 

This article was provided courtesy of iFAST. iFAST Corporation operates in Singapore, Hong Kong and Malaysia as iFAST Financial Pte Ltd (Singapore), iFAST Financial (Hong Kong) Ltd and iFAST Capital Sdn Bhd (Malaysia) respectively and is licensed by the local financial market regulator in each respective jurisdiction .

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