Singapore Saving Bonds’ details were released by MAS yesterday. By now, everybody would have read about the details of the Singapore Saving Bonds. Important details to take note of are:
- Capital guaranteed by the government.
- Only individuals can apply. Companies are not allowed to purchase.
- Application to purchase is similar to that of buying an IPO – you need a CDP account and either apply it via ATM or Internet Banking.
- Similar to purchasing an IPO share, the CDP account cannot be a joint account.
- The CPD account must be linked to a bank account for direct crediting.
- Monthly liquidity.
- Minimum $500 and maximum $50,000 per issue. At any time, the maximum holdings is $100,000.
- Not transferable except via testamentary transfer or a court order.
- Not taxable.
- A non-refundable transaction fee of $2 is applicable for each application (regardless of amount). This is in additional to any other bank charges.
- Government is not doing this because it needs money.
As mentioned in my previous blog post HERE, that the Singapore Saving Bonds is like a free lunch. After doing some simple analysis, I still think it is free lunch except the lunch is not as great as it appears. Anyway, here are the reasons why it is free lunch:
Reason 1: There is no duration risk because regardless of interest rate movement, the investor can always sell at a par. Recall that duration is the differentiation of bond price with respect to the interest rate. This differentiation is always zero because the bond price is always the same (i.e. purchase at par and sell at par). When you differentiate a constant you get zero.
Reason 2: The Singapore Saving Bond consists of an long bond and an embedded put option. Normally the investor is short put in a callable bond. But for this case it is the other way round – the investor is long put.
Reason 3: There is no commission. No need to pay 2% to a financial adviser. But there are transaction fees ($2) and unknown amount of bank charges. Hence, it is advisable to purchase the Singapore Saving Bonds in a larger quantity assuming the bulk of the charges are fixed charges.
Reason 4: The Singapore Saving Bond is 100% guaranteed by government. Whereas deposits in the bank are insured by Deposit Insurance Scheme up to $50,000 only. It is permitted for an individual to have $100,000 invested in Singapore Saving Bonds at any one time.
I personally think that the $100,000 is a generous limit for each individual. For a family consisting of husband and wife, the combine limit is a whopping $200,000. I have hardly met any family with such large amount of cash in the fixed deposits before. Usually those with such large amount of cash is because they have recently sold a property or they were preparing to use this large amount of cash to purchase another property or to invest in a business.
Let’s calculate the true return of the Singapore Saving Bonds
Below is an example provided by the MAS to illustrate how the Singapore Saving Bonds work.
Using the above example, the average interest for holding for 2 years is (0.9 + 1.5)/2 = 1.2%. This is the same as yield-to-maturity of a 2-year SGS as at April 2015.
However, the return of the Singapore Saving Bonds is NOT 1.2%. In fact, the return is 1.198%pa when solving for 2r of the following equation:
(0.9/2)/(1+r) + (0.9/2)/(1+r)2 + (1.5/2)/(1+r)3 + (100+1.5/2)/(1+r)4 = 100
I decided to use a more extensive data to calculate. The following is a table showing the term structure of the SGS bonds. I just use the link from SGS website HERE to obtain the yield for the benchmark yields namely the 1-year, 2-years, 5-years and 10-years. For the rest, I use a simple linear interpolation to obtain the SGS yields using data provided by fundsupermart. In the third column below, I calculate the predicted Singapore Saving Bonds interest.
|Term (years)||SGS bond yield %||Singapore Saving Bonds interest %|
|8||2.27||3.25000 <- NOTE the interest dropped|
|9||2.32||2.72000 <- NOTE the interest dropped|
|10||2.39||3.02000 <- NOTE the interest dropped|
The first thing I found was that the interest of the Singapore Saving Bonds dropped in the latest three years. This happens because the yield curve is quite flat although still positively slope.
If the Singapore Saving Bonds are held to 10 years, the return can be determined by solving the following equation:
(1/2)/(1+r)1 + (1/2)/(1+r)2 + (1.28/2)/(1+r)3 + (1.28/2)/(1+r)4 (1.26/2)/(1+r)5 + (1.26/2)/(1+r)6 + (2.3/2)/(1+r)7 + (2.3/2)/(1+r)8 (2.51/2)/(1+r)9 + (2.51/2)/(1+r)10 + (3.23/2)/(1+r)11 + (3.23/2)/(1+r)12 (3.33/2)/(1+r)13 + (3.33/2)/(1+r)14 + (3.25/2)/(1+r)15 + (3.25/2)/(1+r)16 (2.72/2)/(1+r)17 + (2.72/2)/(1+r)18 + (3.02/2)/(1+r)19 + (100 + 3.02/2)/(1+r)20 = 100
Those who are savvy will know there is a simple function for this using the Excel sheet. In any case, the solution for 2r is 2.34%. This is lower compared to the 10 years SGS of 2.39%.
I think one of the mistake people will have is to assume their returns will be 2.39%pa if they hold to 10 years. In fact, they will only get 2.34%. Moreover, their realised return will also depend on their reinvestment return. Still, the lower return can be viewed as the cost of the put option. So this means the put option is not free.
Comparing the Singapore Saving Bonds to 10 years Endowments.
I used compareFIRST.sg and found the following:
- For a 1 year old (last birthday) boy, there are only 4 insurers offering 10 years endowment. They are Great Eastern, NTUC Income, Etiqa and Prudential. These 4 insurers guaranteed returns are NEGATIVE. I used 1 year old as the age so as to minimise mortality cost. See printout from comapareFIRST.sg here: blog-2015-05-12-10-year-endowment-1-year-old-boy.
- For a 44 year old man (last birthday), there are 5 insurers offering 10 years endowment. They are Aviva, Great Eastern, NTUC Income, Etiqa and Prudential. Their guaranteed returns are also NEGATIVE. See printout from compareFirst.sg here: blog-2015-05-12-10-year-endowment-44-year-male2
If you are looking at guaranteed returns and deciding whether to choose Singapore Saving Bonds or a 10 year endowment, I suggest you consider the Singapore Saving Bonds.
Comparing saving / fixed deposits with Singapore Saving Bonds
One of the common questions is whether is it worth the switch from one’s fixed deposits to Singapore Saving Bonds.
Most of people’s fixed deposits are actually their emergency cash. The rests are invested or gone into properties. So the question should be rephrased as to whether is it wise to park one’s emergency cash into the Singapore Saving Bonds.
According to the FAQ provided by MAS, up to one month notice is required to redeem the Singapore Saving Bonds. For example in the worst case scenario, if you need the money on the 1st of the month, you will only receive the proceeds in your bank account on the 2nd of the following month. Therefore, it is advisable to retain at least one month of emergency cash in one’s savings.
Another issue is that the most common ‘emergency’ is the huge hospital bills. The Letter of Guarantee provided by the private integrated shield plan providers is usually only $10,000 (not forgetting that the insurers are not contractually obligated to issue the Letter of Guarantee). In the event of a very large hospital bill, paying by cash UPFRONT is required prior to the commencement of the surgery. Therefore, I do not recommend parking one’s emergency cash into Singapore Saving Bonds.
Interested to learn more about personal investing?
If you want to learn more about personal investing, I have a 33 pages guide on personal investing. The contents of the guide are:
- Understanding Return and Risk.
- What is diversification?
- What is asset allocation?
- Investment time horizon.
- Why invests in cash equivalent?
- What are bonds and its characteristics?
- How to invest in shares?
To download the guide on personal investing, do the following:
- Enter your particulars below. If you are already on my mailing list, you will be directed to the webpage to download the guide.
- If you are not in my mailing list, an email will be sent to you to confirm your subscription to my mailing list. Once you are on my mailing list, you will receive useful regular financial planning articles from me. (You can always unsubscribe anytime.)
- We will email you the guide to personal investing as soon as possible once you confirm your subscription.
If you are on my subscriber, you just need to key in your name and address and you will be directed to the link. If you are not my mailing list subscriber, do the following:
- Enter your particulars below.
- An email will be sent to you to confirm your subscription to my mailing list. Once you are on my mailing list, you will receive useful regular financial planning articles from me. (You can always unsubscribe anytime.)
- We will email you the link as soon as possible.
This article also appeared on the Are You Ready website managed by CPF: https://www.areyouready.sg/Pages/Views_Analysis-of-Singapore-Saving-Bonds_WilfredLing.aspx