Singapore Savings Bonds – a new investment option for retail investors

The Government and Monetary Authority of Singapore (MAS) are planning to introduce Singapore Savings Bonds (SSB), a new type of bonds to help individual investors get a better return on their savings.

“In short, the Singapore Savings Bonds will offer the higher returns of a long-term bond and give what investors call a term premium, while retaining the flexibility of a shorter-term deposit, and the safety of an instrument guaranteed by the Government,” – Senior Minister of State for Finance Josephine Teo

While details about SSB are still being finalised, here’s what we know about this product:

• It is a low-cost investment made widely available to retail investors to encourage individuals to save and invest to meet their long-term financial goals and retirement needs.
• SSB will be principal-guaranteed by the Government which means the investor’s original outlay is fully protected.
• Bond-holder will be able to sell the bond and get his money back in any given month without incurring a penalty.
• SSB will pay higher coupons if the bonds are held longer unlike conventional bonds where the same coupon rate is paid each year.

Given that my current portfolio is 100% equities instead of an 80-20 split between equities and bonds, I certainly look forward to rebalancing my portfolio after SSB becomes available.

In my opinion, SSB has a steep hill to climb in order to be well-received by retail investors.

Offer higher interest rates than the regular bank deposits

I don’t think this will be difficult seeing how the average interest rates that banks are offering for deposits are very low. The highest bank deposit interest rate offered in the market right now is the OCBC 360 deposit account where account holders can earn up to 3.05% per year in interest by performing these tasks every month:

• Crediting their salary to the account
• Spending at least $400 on an OCBC credit card
• Paying any 3 bills using OCBC online or GIRO

If SSB could offer an interest rate of approx. 2.5-3.5% per year, I’m pretty confident that investors would move their deposits from OCBC to SSB because it is much more simple. I for one would love to not have to spend at least $400 on my OCBC credit card if I don’t have a need to.

Be more attractive than Singapore Government Securities (SGS) bonds

Singapore Government Securities (SGS) are marketable debt instruments of the Government of Singapore. These debt instruments take the form of either Treasury bills (T-bills) or bonds and are backed by the full faith and credit of the Singapore Government.

They are offered in the following options:

• 3-month Treasury Bill
• 6-month Treasury Bill
• 1-year Treasury Bill
• 2-year SGS bond
• 5-year SGS bond
• 7-year SGS bond
• 10-year SGS bond
• 15-year SGS bond
• 30-year SGS bond

The SGS bonds and Treasury bills are not widely marketed and I’m quite sure that the average investor would not have the knowledge on how to go about applying for one. I personally have participated in a 1-year Treasury Bill auction many years ago when the interest rates offered back then were quite attractive. In recent years, the interest rates offered for SGS bonds and Treasury Bills have been rather unattractive for me to make the effort to add them into my portfolio.

Our senior minister has mentioned that SSB offer interest rates close to long-term SGS bonds and would not have any lock-in periods tagged to them. Awesome! The next hurdle to cross would be to make SSB easy to buy (and sell). The best way to do this would be to allow investors to purchase SSB through internet banking platform of local banks and making payments with their deposit accounts.

Remain simple to understand and sustainable in the long run

With lofty ideas such as to offer interest rates close to long-term SGS bonds and allowing investors to get their money back any time without penalties, this product will need to be well-planned and given a thorough scrutiny to ensure that it is self-sustainable and not become a ponzi scheme.

As an investor, I would want to know how the money in the bond is being invested in order to generate the returns promised. As they say, if it sounds too good to be true, it probably is.

If done correctly, the SSB could become a disruptive innovation that forces the fixed-income market to improve on its offerings in order to retain its investors. Banks may be pressured to increase their interest rates for deposit accounts to keep account holders from withdrawing their money to buy SSB. Bond issuers will have to think out of the box in order to entice investors in parking their money in their bonds.