Singapore Savings Bonds – A good deal?

The Monetary Authority of Singapore (MAS) announced the introduction of a new government bond targeting at retail investors starting with minimum investment of just $500 with multiples of $500 up to a cap. (Source: The Straits Times, 31 March 2015)

This new bond is guaranteed by the government and is called the Singapore Savings Bond (SSB). The interest to be paid on this bond is linked to the long-term Singapore Government Securities (SGS) rates, such as the 1-year, 2-year and 10-year Government Bonds.

Investors get step-up interest each year. There is no penalty for early cashing out of the bond. This is better than current fixed interest rate of a 10-year Government Bond and early cashing out can result in less amount being received for the principal sum invested.

The following table compares the two types of bonds (Singapore Savings Bond vs 10-year Government Bond) using hypothetical interest rates for Year 3 to Year 9 for SSB.

Year SSB Interest rate SGS 10-yr Bond Interest rate
0 -1000 -1000
1 9 0.9 24 2.4
2 15 1.5 24 2.4
3 20 2.0 24 2.4
4 22 2.2 24 2.4
5 24 2.4 24 2.4
6 26 2.6 24 2.4
7 28 2.8 24 2.4
8 30 3.0 24 2.4
9 33 3.3 24 2.4
10 1033 3.3 1024 2.4
Total Interest 240 240
IRR* 2.35 2.40

* IRR = Internal Rate of Return

The total interest for both bonds over 10 years = $240 (2.4% per annum). In this example the computed internal rate of return (IRR) for SSB is 2.35% p.a. and the SGS Bond remains the same at 2.40% p.a.

With the introduction of this new government bond some time in the second half of this year, what is the impact on the investment communities vis-à-vis the other investment products?

The direct competition for investors’ dollars must be fixed deposits of banks. Banks pay very low interest rates for fixed deposits. 1-year fixed deposit pays 0.25% p.a.; 2-year fixed deposit pays 0.55% p.a. (POSB) SSB pays 0.9% interest in first year and 1.5% in year 2. These rates are way better than the fixed deposits.

The banks may be a loser, losing a cheap source of funds for their issuance of loans. The banks may lose some depositors moving funds to SSB. Hopefully in the longer term, the banks need to increase their fixed deposit interest rates to compete for sources of fund. This will have impact of credit/loan interest rates and whole lot of impact on general interest rate in the economy. I cannot imagine the final outcome.

Copyright © 2015, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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