I read with great delight that Singapore Government Securities or SGS bonds for short will be available for auction from 1 July 2009 using the ATM! This is great news. Since the financial crisis has proven that banks are not safe and that fixed deposits are merely fixed income instrument subjected to the credit risk of the bank, I've been encouraging my clients to park their FD via the SGS bonds.
Currently, Singapore's FD are guaranteed by Singapore government but when this is lifted, FD are no more safe except those part guaranteed by SDIC. However, in the even when banks default, it may take time and many legal battles to get the insured amount. So why the trouble? Here is my advice:
- If the money cannot be afforded to be lost, one should not permit any sort of counterparty risk. The only instrument with no counterpart risk is SGS Bonds (because government can print money to repay their debt). Fixed deposits counterparty risk is the bank which is the most dangerous place on planet earth! Because safety is of utmost importance, it is uninmportant what kind of yield this will be. Many people complain that SGS bonds is so low in return but do not mind 1% or 1.5% in yield for FD. Come-on, 1%, 1.5% 2% or even 3% is meaingless and it will not increase a person wealth materially. Moreover, this yield is to compensate you for the default risk of the bank. If the bank goes belly up, even if the yield is 10% you wouldn't want such lemon.
- If a person do no mind taking some risk, a plain vanila equity/sovereign bond portfolio can be considered but stay away from derivatives which have started gaining popularity again.
Despite my advice in asking clients to park their FD in SGS bonds, almost all of them did not do so because it was a great hassle. To participate in the auction, one must visit a bank to do this. I have done this myself & I almost fainted. I have to endure the hassle of the bank staff continously pushing dangerous products to me (discouraging me from putting the money in SGS bonds) but at the same time the bank staff being unfamiliar has to do some revision from her notes which took more than 45 mins. Because of their unfamiliarity, I was quite fearful that there will be mistake in the transaction.
After that first visit, I realised that I could be sending my clients to the lion den if they really want to buy the SGS bonds from the bank. For myself, to save the hassle of being eaten up by the lions, I bought Singapore Government Securities from fundsupermart. But I found that the charges are high and that it was bought from the secondary market which was not transparent to me who are their counterparties. So I got a very bad pricing.
Now, it is good news that SGS bonds can be bought from the ATM machine. No more fixed deposit! This is good news for Singaporeans!
BTW, do not be the first to apply for SGS bonds from the ATM machine. Let the system run for a few months to ensure any teething problems are resolved first. Also it seems there is no auction in 1 July. I will try it myself first. Once I feel OK with the new system, I will be willing to assist my clients to apply for the auction by going to the ATM machine with them (but this service only available for those under Retainer Service only).
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