Oh it’s a bird! No, it’s a plane! And no, it’s none of them and definitely not Superman! The recent arrival is the new Singapore Savings Bonds! And it’s here to save everyone from those pathetic fixed deposits that our banks offer. 😛
During the past few days, the local personal finance and investment space was all abuzz with excitement over the new Singapore Savings Bonds (SSBs). SMS Josephine Teo (erm…plenty of media exposure lately?) made an announcement on 26 March but merely provided a teaser, leaving personal finance nerds like me eagerly drooling in anticipation.
What is SSB and how does it benefit me?
With the above resources, I need not bore you with the nitty-gritty details. But nonetheless, here’s some key features of the bonds:
- Offers better yields than other lower-risk investments like saving deposits
- Principal guaranteed by the government
- Flexible redemption and no penalty on early redemption
Seriously, if you understand how this SSB works, then perhaps you will realise that there may indeed be free lunches in the world. A SSB holder would receive higher interest rate on a risk-free product without compromising on his liquidity needs!
Since it’s such a wonderful product (I put it on the same level of the OCBC 360 account), it’s not surprising that there would be a cap on the investment. The authorities have yet to make a decision on this and understandably so. They are probably taking the next few months to better gauge the level of response.
What would the cap likely be?
Personally, to make this instrument a useful retirement supplement to CPF LIFE & SRS, the cap should be at least a 6-figure sum. Afterall, a $100,000 bond that receives the full 10 year coupons would only yield about $2,500 a year of coupon payments on average.
However, a realistic hunch is that it would probably be in the region of $50,000 at most, in order not to adversely impact the banks. To be honest, at this moment, the last place I want to be in is the shoes of the chief officer in charge of SGD fixed deposits.
The introduction of CPF LIFE a decade ago killed the private annuities market and the introduction of the SSB has the ground-breaking potential to make SGD fixed deposits obsolete in Singapore.
Why did the government introduce this now?
For the past decade, the public has been petitioning the government to introduce an instrument that allows the average citizen to directly enjoy the gains made by GIC or Temasek. Temasek bonds are what these people are crying out for and I think the SSB is a first step and in my opinion, a big step.
After the death of Mr Lee Kuan Yew (LKY) on 23 March, the government declared a week of mourning. Therefore, it’s really surprising to see SMS Josephine Teo coming out with an announcement on 26 March. Since all the preparatory work must have been done at least months ago, my hypothesis is that the announcement was deliberately planned or maybe even deliberately brought forward as some form of commemoration for Mr LKY. Perhaps this is another tribute to the great man?
I guess instead of changing Changi Airport’s name, we can call the SSB the LKY Bond?
And when I discovered that the SSB would only be available during the second half of the year, I couldn’t resist a chuckle. Elections are due by Jan 2017, this is an SG50 year and pro-PAP sentiments have never been this strong. And what’s more with this additional goody. You draw your own conclusions. 😎
What are my likely actions?
Obviously, there’s nothing much I can do now except to wait for more details and the official launch of this SSB. There’s little doubt that I will be participating in it. I have seen some people comment that they can achieve higher returns through corporate bonds or through dividends of blue chip stocks. But seriously, that’s comparing not comparing apples with apples.
So right now, in line with my recent strategy to accumulate more cash, I will be doing that to prepare for this product.
A possible approach (if this SSB isn’t a one-time launch) would be to build a bond ladder with this product. i.e. If the cap is $50,000, I might purchase a $5,000 tranche every year to enjoy both the maximum returns and the liquidity.
At the very least, I would think one should be making use of this instrument to park his or her emergency funds unless one can find another liquid instrument with higher returns.
P.S. Let’s say SSB is to become a permanent thing (i.e. I can keep on buying $500 every month if I do not exceed cap), which I think it should be. An investor buys a tranche of SSB today (assume 10 Year SGS rate is 2.5%, average returns over 10 years for SSB is 2.5%). If interest rates rise in a year’s time, a rational investor would sell that first tranche and buy a new tranche of SSB (10 Year SGS rate is now 3%, average return over 0 years for SSB is 3%). This will be quite a weird phenomenon.
If the bonds can be traded in the market, a rise in interest rate would result in the first tranche being valued at below par value. If the investor sells the bond in the market, the loss would offset the gain from the purchase of a new bond with higher interest rates.
I can’t seem to reconcile this but I guess I am assuming that yields of the SSBs are locked in at the rate of purchase (concrete expectations of coupons) and that might not be reasonable or what the government is planning.
Would appreciate if some financial or bond experts can clarify on this matter. Thanks in advance!