Bond Market Developments : Singapore Savings Bonds, Retail Bonds and ETFs

The government will introduce the new Singapore Savings Bonds (SSB), a type of Singapore Government Securities (SGS) for local individual investors, announced Josephine Teo, Senior Minister of State for Finance and Transport, at the annual conference of the Investment Management Association of Singapore (IMAS) on Thursday.

Like SGS, the Singapore Savings Bonds are safe investments, principal-guaranteed by the government, Mrs Teo said. Holders of the SSB can also get their money back in any given month, with no penalty, and can earn interest that is linked to long-term SGS rates. Also, unlike bonds that pay the same coupons each year, the SSB pays coupons that increase over time.

The exact words are as follows.

i) An individual bond-holder can get his/her money back in any given month, with no penalty1. This means that they do not have to decide upfront how long they wish to invest.
(ii) Bond-holders can earn interest that is linked to long-term SGS rates.  Moreover, unlike bonds that pay the same coupon each year, the SSB will pay coupons that “step-up” or increase over time.  As a result, the effective coupon rates are higher the longer the bonds are held.

35   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.  As the name suggests, we hope that the Singapore Savings Bond programme will encourage individuals to save and invest to meet their long-term financial goals and retirement needs.

My first thought, alas, as a cynical former government bond trader is that this is the reason why the government bond yields have crashed in the past 3 days led by furious, ferocious and frenetic buying out of a single local bank.


Just kidding, of course. But surely you do not expect me to write a typical newspaper story about how good and how wonderful it will be, right ?

It is Too Good To Be True, this product – promise of yield and only higher (never lower) yield and a put option at 100 (no capital loss) ? I know who I am voting for !

This is how I assume it will work since we do not have the details yet. MAS or a fund manager like Temasek will be managing this pool of money and thus it makes sense for them to hedge via SGS (Singapore government securities) because the payouts are tied to the yields. Alternatively, it can be treated as new money as if it were a new auction. Is the reason for the rally we saw due to “hedging” ?, to play the Devil’s advocate….

To pay increasing term premiums, means they will have to work harder for the money and I cannot imagine the government running a deficit for them.

Thus I am sure there will be a quota for each citizen (PRs not included) and there will be no secondary trading in the true spirit of saving.

Enough about speculation on the mechanism, I think it is more important for us to wonder about the implications.

Worst Case Scenario

1.  Deposits will suffer. Much of those stagnant deposits in those forgotten savings accounts will be leaving for a better place. And who has most of those accounts ?

I am too lazy to drag out the latest loan/deposit ratios but I have some numbers from Nov 14.

Loan deposit ratios :

UOB : Group 85.8% SGD 94.1% USD 70.6% Total Cust Deposits $233 BIO
DBS : Group 86% SGD 78% Non SGD 95% Total Cust Deposits $317 BIO
OCBC : 85.5% Total Cust Deposits $ 246 BIO

UOB is the most under funded in SGD dollars.

2.  Margins will suffer as banks have to pay up for deposits to be competitive because this is a short term product we are fighting against – monthly puts for the SSB. When banks pay higher interest rates, their margins will suffer, unless they up those loan rates ! Maybe we will finally see SIBID emerge to counter the higher SIBOR ?

Probable Scenario

How much will deposits suffer ?

Let’s assume the quota is SGD 5k per citizen, just like the HK Inflation linked bonds, and assume that 1.5 mio Singaporeans (half the population) will subscribe to the bonds. That would be just SGD 7.5 bio.

It will not make a dent on the banks at all.

I shall look forward to the first initiative mentioned, of retail corporate bonds with targeted implementation 2Q15, with a lot more enthusiasm.

retail bonds initiative

Both the ETF and retail bond business will be good for stock brokers, in my opinion and I think we are in for some exciting times ahead, both for the retail and the OTC bond buyers who will benefit from new window of liquidity in the retail market, which more often than not, trades tighter than the wholesale market. Eg. Genting retail perp 99.60/100.40 versus Genting OTC perp 99.08/99.38.

In addition, trading in the retail market or via the stock exchange improves transparency, doing away with bankers’ mark-ups.

Let’s keep our fingers crossed and see.