Bond Revolution in Singapore – Lesson 5 : Idiot’s Guide to Singapore Government Securities

For the faithful readers, here is the catch you have been living with.

UOB Asset Management Ltd.’s Singapore dollar debt fund is beating most peers by buying perpetual bonds and investing 70 percent of its money overseas as rates on bank deposits and sovereign yields approach zero….The picks helped the plan return 5.1 percent this year through Aug. 29, topping 78 percent of rivals …

Why SGS ?

Because if you had bought the inaugural 30Y SGS at its auction in March this year, you would be sitting on an 8% return (10% if you had sold 2 weeks ago) for only 5 months ! Last done price on  SGX was 107.925 on 7 Sep 2012.

NA12100N 420401 10 PH1S 107.925

I can claim to know a fella with that foresight and is still sitting on a load of that 30Y paper. And by the way, sorry Dad, I did not let you in on this one.

Now, who is holding their nose up to SGS ?

While the rest of the world is stressing, slaving and slogging away to get their measly 5% return on much inferior assets such as perpetuals. My friend was sitting on his goldmine and filing his nails, I exaggerate.

Nonetheless this is not the signal for us all to run out to our ATM machines and get ourselves onto the next SGS auction gold bandwagon.

For the purpose of this short introduction, I will rein in my verbosity for this once. (I could go on for another 10 chapters if you like, describing the market right down to its petty nuances and comic characters.)

Let’s learn more about Singapore Government Securities.

Fact 1.

Everyone can buy them. Yes. It is a constitutional right and do not let them bankers tell you otherwise.

Fact 2.

They are available on auction days with a newspaper announcement preceding, usually in the Finance section of the papers and I am not sure if this ad appears in all the major language papers and I must say I certainly have not seen any ads in Today or The New Paper.

In any case, we have and in MANDARIN too –  to help you muddle your way through to your first purchase.

Fact 3.

The buying process is pretty much like an IPO application through the ATM. You can also approach banking counters of primary dealer banks to apply for the securities and/or, sell your securities.

Fact 4.

No. The Central Provident Fund (CPF) does not buy SGS although the return on your savings is pegged to the higher of 2.5% or the average yield of the 10Y bond. The Ministry of Finance issues special bonds to the CPF for them to deliver returns to the citizens. And I admit I do not know why 2.5% is the magic number although I believe it could be linked to their target core inflation rate for the country at 2-2.5%.

The Curve

Diagram : The SGS Yields Now (solid green line) vs 1 Year Ago (dotted line)

It is not the prettiest in the world. I must admit I never liked it much.

Presenting the Bonds

as of 13 Sep 2012

Our bond curve goes up to 30 years now. Used to be 20 till this April. It is a mighty long time and who decided that ? Well, the Monetary Authority of Singapore, of course. The MAS is the official regulator of the SGS market and they issue SGS on behalf of the Ministry of Finance, for the government.

How do they decide what bonds to issue and when ?

Well, to be blunt, it is a hit and miss process (in my opinion) mainly because Singapore does not really have a Budget deficit. That creates problems for the government because to sustain the bond market, they are, in fact, borrowing money that they do not really need.

Much as we would like to thumb down that idea, there are many reasons for them to do so.

Firstly, establishing a sovereign bond curve is the first step to developing the capital markets of a country and encouraging issuers to tap the markets for funds. Why is it so important ? For FAME, FORTUNE and GLORY of the country ! To be a capital market hub of the… region ? Asia ? So that major global banks will flock to set up shop here and give employment to the country ?

Secondly, all banks and financial institutions operating in the country have need for risk free assets to maintain their capital in. That asset is best denominated in the currency of the country and who best to park that money with ? The government, of course. (And, no. It does not make sense for Singapore to allow the American government to issue bonds here for obvious reasons)

The list goes on. And I venture to suggest that SGS exist for the people ? For all of us to earn an 8% return ? Amen.

So this is how the market goes.

  1. There are 13 primary dealers including some banks you may not have heard of. Oops for the faux pas there. Primary dealers are banks that are approved by the MAS to participate in government bond auctions and are obliged to provide liquidity in the marketplace. Secondary dealers form the rest of the marketplace. For more information :
  2. The bond curve starts from 3 months to 30Y. Technically it should be 1 week to 30 Y because there is a bill maturity each week and 3 months does not last forever, it rolls down (elementary financial jargon) to 1 week before it goes back home to the print press.
  3. There are 8 benchmarks – 3 months, 1 year, 2 year, 5 year, 10 year, 15 year, 20 year and 30 year SGS. The rest are referred to as off the runs. Do note that the 2 year is not an actual 2 year from today and neither are the rest because of the roll downs. And the benchmarks are constantly changing with each new auction.
  4. There are between 8-9 bond auctions per annum, decided a year in advance which is a luxury for most other countries have to wait for their Budget deficits before planning any such action.
  5. There are also 2 auctions of 1 year treasury bills per year, for May and November settlement.These bills are zero coupon instruments which are issued under par (1.00).

Current Bill Market Development

As of June 2012, the MAS has decided to do away with 3 month SGS issuances and issue 1 month and 3 month MAS bills instead.

The MAS bills are issued in the name of MAS and not the Government of Singapore. Retail investors cannot participate in the auctions as these bills are used as monetary management tools and as such, are available to the wholesale market instead.

SGS bills will be limited to 6 month and 1 year. The 6 month SGS treasury bills will be issued fortnightly and still available to the public through the ATM networks and banking counters.

Where to Get Information ?

SGX stock exchange has live prices during the day and the MAS website gives the day end prices.

Bonds Have Names Too

All bills and bonds have several identification numbers. Their ISIN (International Securities Identification Number) is usually used for matters on settlement and clearing.

However in the bond market, it is common to trade on maturity dates for SGS. For example, the 15Y SGS will be known as Mar 27, its final maturity date.

MAS also has an issue code for each bond that start with an “N”.  The original tenor of the bond would follow, for example, N212100H would be a 2 year paper. NX would refer to 10Y bonds, NY to 15Y, NZ for 20Y and NA for 30Y papers.

However, when these issues become off runs and are re-offered to the market, it is difficult to tell if the paper is trading as a different benchmark.

I notice that the SGX uses the MAS issue codes followed by the bond’s maturity date listed as yy-mm-dd. The coupon of the bond is not shown, which makes it difficult to calculate the bond’s yield from its dirty price.

Not to worry. We are working on something that will be useful in that regard.

With that, it looks like we need another chapter on basics to yield computation and some rule of thumbs to observe that, I promise, will not turn you into a bond nerd, much as I try hard to be one myself.