1. SSB Was Massively Under-Subscribed
Honestly, I was thinking if the Mrs would get her full allocation for the first issue of the Singapore Savings Bond. She applied for $5,000 in the middle of September. The 2.63% of returns isn’t fantastic, but definitely not to be sneezed at for what is essentially a risk-free rate.
But it seems we are the rare few that thought this way.
In the end, all applications (up to the maximum limit of $50,000) were accepted.
According to this document, MAS actually prepared $1.2 billion for this first issue but only slightly more than $400 million from ~20,000 individuals was taken up. Seriously, I wonder if MAS is embarrassed by this public dismissal of the SSB.
2. Why The First Issue Was Unpopular
- With interest rates rising (sooner or later), expectations of higher rates in subsequent issues are there. Many have written about this (here, here and here) and I actually think what was written makes sense. Many savvy investors might think that way too and postponed their SSB purchases?
- Stock markets are tanking and as I am writing this article, I have just put in a trade to buy 2,500 shares of STI ETF again. Many investors might feel that conserving their cash in preparation for a market crash/correction would be a better strategy that would yield many times the returns of the SSBs.
- I hate to say this but it appears there might be many who lack faith in MAS or the government. CPF funds are invested in SGS bonds, which is also the underlying instrument that SSBs are based on. But come on guys, the Singapore government has never defaulted on any of their bonds!
3. Free Put Option Can Likely Be Exercised
Even though I agreed and believed that rates for the November launch of the SSB was going to be considerably higher, I still went ahead and encouraged Mrs 15HWW to apply for the first issue. Afterall, I thought there is no guarantee we could get our desired allocation in the next launch.
But how wrong I was.
No damage done, though. As the SSBs come embedded with a free put option, i.e. If I bought $10,000 worth of SSBs, I will always get back $10,000 worth of SSBs, I could easily roll over my purchases.
Let me illustrate:
Assuming that November’s SSB yields a much higher return at 2.8%, I could simply increase my application by another $5,000 for that launch. And if I get the full allocation, I can proceed to redeem October’s SSBs for the full principal amount.
And in the unlikely event that subsequent launches’ returns fall, I can just happily hold on to my previous purchases and bide my time to add more SSBs to my portfolio.
Perfect, isn’t it? Especially when applied to a portion of your emergency funds.