I read a first commentary on the SSB. Methinks Chris K does a more comprehensive job with it. Read to judge for yourself.
The government is launching Singapore Savings bonds (SSB) which according to SMOS for Finance Josephine Teo has two attractive features that help individuals to earn a better return on their savings (http://www.channelnewsasia.com/news/singapore/new-savings-bonds-for/1742898.html),
- The individual investor gets his money back in any given month without penalty
- Interest rates that are linked to long-term Singapore Government Securities (SGS) yield.
SSBs pay coupons that “step-up” or increase over time, providing investors with a higher return the longer they hold the bonds. The Monetary Authority of Singapore has now published a factsheet. (http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2015/Factsheet%20Savings%20Bonds.pdf)
|Interest||Paid every 6 months. At issuance, rates are fixed based on prevailing SGS (Singapore Government Securities) yields and locked in for each issue.|
|Redemption||Monthly with no penalty.
Principal and any accrued interest will be paid
|Investment Amount||Minimum $500 and subsequent multiples od $500 up to a cap to be announced.|
|Non-tradeable||Savings Bonds are non-marketable securities and cannot be bought or sold in the secondary market|
This is how it works based on the pricing of SGS yield in the factsheet.
|1 year||2 year||10 year|
|0.9% pa||1.2% pa||2.4% pa|
In the 1st year, the investor earn 0.9%.
In the second year, he earns 1.5% which is higher than the 2 year SGS yield of 1.2% but need to average the 1st and 2nd year to determine the 2 year interest rate so it is still 1.2%.
In the 10th year, the SSB pays out 3.3%; the total return or average interest earned is 2.4% matching the yield you would have earned had you invested in SGS instead of SSB.
Withdraw all your money to buy the stuff for mum, dad, the missus and the kids? However, these SSBs hardly perform better than SGS and compares poorly to other countries’ savings bonds.
No free lunch
There are 2 major influences on interest rates;
- Liquidity Preference tells us the longer we part with our money, the lesser our ability to access ready cash and therefore the higher the return we expect.
- Long term interest rate represents an expectation of future short term interest rates; the larger difference between long and short rates, the higher future short term rates are expected.
Therefore a bond that allows withdrawal like a deposit and yet earn interest rates of long term bonds defies economic logic and so it did not. To earn that 2.4% interest rate, you part with your money for 10 years. Getting the money back after 1 or 2 years still earns you the same low rates.
- If higher yields are expected, you invest short term accepting low rates such as 1 year SGS and when 10 year yields have risen, to say 3.5% you invest in 10 year SGS. If you have invested in SSB, then you would have to withdraw after 1 year in order to buy new SSBs with 3.5% maximum yield. There is no difference buying SGS or SSB.
- If lower yields are expected, you keep the SSB for 10 years to earn 2.4% but is not different from investing in 10 year SGS at 2.4%.
- But if yields have fallen and after 2 years you need the money, you withdraw from the SSB and earn 1.2% accrued to the date of withdrawal. However if you invested in 10 year SGS, you earn 2.4% until the day you sold the bonds and additionally make a profit since lower yields means a bond with a higher rate sells at a higher price. This makes non-tradeable SSBs a lousy deal.
- SSBs protects the saver if yields move in opposite direction to expectations. In 1) if yields fell instead of rising, you may have to accept 10 year SGS below 2.4 % a year later but you get the maximum yield of 2.4% from that SSB if held for 10 years. In 2) if rates rose instead of falling, you are stuck at 2.4% in 10 year SGS but you can withdraw your old SSB and buy a new one with a higher maximum yield.
Savings Bonds Comparison
Savings bonds in other countries also enjoyed government guarantee and usually served a social purpose. For example, the UK’s 65 Plus National Savings Bonds are available only to those aged 65 and above and limited to GBP10,000 (S$20,000) per person. They are available in 1 and 3 year tenors paying 2.80% and 4.0% which are 2.30% and 3.2% more than UK government bonds of the same tenor respectively. They can be redeemed by foregoing part of interest earned.
Because savings bonds gave a much higher return than normal government bonds and even corporate bonds, they can potentially drain funds from other parts of the economy, causing severe economic distortions. Therefore, the above-mentioned restrictions are necessary.
Singapore Savings Bonds do not help savers to earn higher returns because they do not provide higher yields than SGS of comparable maturities. The protection provided by SSB in some circumstances is scant reward compared to the certainty of 2-3% extra interest provided by the UK’s 65 Plus Savings Bonds.
Remember. This government’s fiscal conservatism is extreme, its attitude to helping citizens commonly described as “you die your business”. Helping the ordinary saver may be a noble idea but will not stand in the way of low borrowing costs for itself and the pampered corporations.
There is certainly on a campaign to butter up the voters before the big day. After 15 years of being deaf to poor returns on savings, SSBs are presented to those unused to the nuances of investing as the government helping them to earn better returns. But the reality is rather different.
PS: If the MAS is seriously in helping savers, it should persuade the banks to reduce the minimum certificate size of corporate bonds from $200,000 to $500