More Details On The New Singapore Savings Bonds
30 March 2015…The Monetary Authority of Singapore (MAS) today provided more information on the features of Singapore Savings Bonds. This followed Senior Minister of State Mrs Josephine Teo’s announcement that the Government and MAS would introduce the Savings Bonds programme to provide individual investors with a long-term savings option that offers safe returns . This will expand the range of simple, low-cost investment options available to individual investors to help them meet their long-term financial goals and retirement needs.
2 Singapore Savings Bonds are backed by the Singapore Government, with features that make them accessible and suitable to individual investors:
i. Principal guaranteed: Investors will always get their investment amount back in full. In other words, they will not suffer any capital losses.
ii. Term of ten years: This allows individuals to save for the long term and receive higher long-term interest rates (which comprise what investors call “term-premium”).
iii. Step-up interest: Investors will earn interest that is linked to long-term Singapore Government Securities (SGS) rates. Unlike SGS that pay the same coupon each year, Savings Bonds will pay coupons that “step-up” or increase over time. As a result, the average interest rate is higher the longer the Savings Bonds are held.
iv. Monthly issuance: This makes Savings Bonds accessible on a regular basis.
v. Flexible redemption: Bond-holders can choose to get their money back in any given month, with no penalty. This means that individual investors do not have to decide upfront how long they wish to invest.
vi. Small minimum investment amount: A minimum of $500, and in subsequent multiples of $500 up to a limit to be announced later. A limit will help to maximise participation and to ensure a broad reach.
vii. Only individuals can apply for and hold Savings Bonds.
3 A factsheet summarising the features of the Savings Bonds is available in the Annex.
4 MAS expects to launch the Savings Bonds programme in the second half of 2015. MAS will provide information on how to apply for Savings Bonds closer to the launch date.
more information at http://www.mas.gov.sg/news-and-publications/media-releases/2015/singapore-savings-bonds-for-individual-investors.aspx
To put things into perspective, while the no-penalty withdrawal is a big plus, for investors who are going for the long term, they can only start to rip the benefits if they put in at least 3 years vs putting in a FD. The biggest plus i see vs normal sgs is that it protects against interest rate drops because the rates are fixed and there is no redemption penalty. Of course, it doesnt apply if you hold to maturity.
Overall, it is a step towards opening up the bond market. But then again, this product doesnt scream a good buy. It will probably fill the space between vanilla SGS and corporate bonds.
To add on, based on what they have said so far, the interest steps up accordingly to the tenure and one of the key clauses is that if you redeem before maturity, the average interest you receive is going to be similar to the corresponding sgs yield at the point of termination. (Ie if you redeem after 2 years, you will get the nett yield equivalent to a 2 year sgs). I am not sure how they are going to work this out. Interest paid out is going to be dependent on the yield curve of 1mth sgs and 10 year sgs. I am guessing the yield curve will probably be fixed at the point of issuance.
Yes. I think the SGS yield curve will be fixed at the time of issuance via bootstrapping. So the 1 yr spot rate, 1yr forward 1yr rate, 2yr forward 1yr rate…9yr forward 1yr rate will be fixed upfront as the annual coupons.
If they allow shorts, we could do some nice carry structures with the inter-month issuance.
You can theoretically do an arbitrage.. In an interest rate rising environment.. Sell SSB and buy vanilla SGS. In short, you can be protected from both inflationary and deflationary environments?
This would be an ideal parking lot for SRS funds.