Wednesday, 1 April 2015

Singapore Savings Bonds: New govt bond offers rising rates

By Chia Yan Min And Wong Wei Han, The Straits Times, 31 Mar 2015

A NEW government bond on the way offers investors two unusual benefits - steadily rising interest rates and the ability to cash out early without penalty.

Normally, bonds have a fixed interest rate and investors can find themselves out of pocket if they redeem them early and the market price is less than their initial price.

The new product - the Singapore Savings Bonds - is taking a different approach.

Its interest rate will be linked to the long-term Singapore Government Securities (SGS) rates. But unlike SGS bonds, which pay the same interest rates every year, the new product will start with smaller interest rates that will keep rising the longer you hold on to the bond.

The bond will have a term of 10 years. This means if you hold on to it for the full 10 years, you will earn the same amount that the 10-year SGS would have paid. But if you cash out early, your returns will be lower. Still, there will be no penalty, and investors will receive their initial outlay with the accrued interest.

The 10-year SGS has mostly yielded between 2 per cent and 3 per cent over the past 10 years.

The new bonds, which will be issued monthly, likely starting in the second half of the year, aim to provide a long-term, low-cost savings option that offers safe returns, said the Monetary Authority of Singapore yesterday.

They are targeted at retail investors with a minimum investment of just $500, with additional multiples of $500 up to a cap to be announced later.

The bonds cannot be traded on the open market.

Securities Investors Association of Singapore chief executive and president David Gerald said the bonds "provide Singaporeans with a government-guaranteed savings product that has a return that is above the inflation rate and which is also capital guaranteed".

Experts added that fixed deposits are for shorter terms - one year, for example - compared with bonds. Mr Jeremy Soo, head of DBS Bank's Singapore consumer banking group, said would-be bond investors who have been deterred by the traditionally high minimum investment amount - $250,000 in many cases - may find the Singapore Savings Bonds to be "an ideal addition to their investment portfolio".

Speaking at the Investment Management Association of Singapore (IMAS) 16th Annual Conference on 26 Mar (Thu), SMS...
Posted by Ministry of Finance (Singapore) on Monday, March 30, 2015

Low-risk product for beginners
The Singapore Savings Bond will be another safe, low-cost option for mom-and-pop investors.
By Lee Su Shyan, Money Editor, The Straits Times, 7 Apr 2015

A N INVESTMENT that guarantees the amount you put in, pays you interest and allows you to withdraw your money any time without any penalty; this is about as risk-free as it gets.

And you need only $500 to get started.

This is the promise of the Singapore Savings Bonds (SSB), to be launched later this year.

The anticipation that greeted the announcement was palpable. A large group of Singaporeans who are planning for retirement have liquidity and are searching for investments that are able to deliver attractive returns.

But some of that initial excitement has died down despite the clear advantages of this capital-guaranteed product that pays a reasonable interest on only a modest outlay.

One reason could be that the cap on the amount that people can buy has yet to be announced and may not be very high.

A second factor is that the interest will be decent but unexciting as it is based on the coupon rates for 10-year Singapore government bonds. Assuming a $10,000 investment and a 2.4 per cent interest rate, this gives an average interest of $240 a year or $20 a month.

Step-up rates will apply to encourage investors to hold the bonds for 10 years. The initial rate will be lower than 2.4 per cent but the interest paid in the 10th year will be higher than 2.4 per cent. This translates, for example, to an initial interest rate of 0.9 per cent in the first year and 3.3 per cent in the 10th year.

On that basis, the interest earned in the first year will be $90. Since it is paid out in six-monthly intervals, the first two payments will work out to $45 each in the first year.

That is small beer. The question is whether Singaporeans have the patience to sit out the 10 years to enjoy the full benefits.

Still, at an average of 2.4 per cent a year, the SSB is undoubtedly more attractive than its closest comparison - fixed deposits - for which promotional rates are around 1.5 per cent.

But how popular the bond will end up being will also depend, to a large extent, on the cap.

If the cap is set fairly low, say at $10,000 per person, it will not be meaningful enough to attract those who are managing or building up a retirement portfolio of a few hundred thousand dollars.

A $10,000 investment in the SSB means an investor still has to fret about how to manage the rest of his nest egg.

The investor may end up parking $50,000 or $100,000 in a fixed deposit, even though the rate is lower, simply because it is less work to worry about managing it.

Of course, the downside to a fixed deposit is that withdrawing it early means forgoing the interest, whereas the SSB will still pay some interest.

If the cap is fixed at the $5,000 to $10,000 level, its appeal will lie with a segment of the population who have not been saving or investing. As a safe and easy-to-understand investment option, the SSB is suitable for this group.

OCBC Bank's vice-president of wealth management in Singapore, Mr Vasu Menon, said the product will appeal "to individuals with a limited pool of funds to invest... It will also appeal to conservative investors looking for a very safe way to grow their money".

Aberdeen Asset Management Asia's director of business development, Mr Nicholas Hadow, felt that the SSB could also appeal to "those approaching retirement, requiring certainty of income and a need to protect their capital".

For PwC's Asia Pacific & Singapore asset management leader Justin Ong, the SSB will offer "an additional option to create a more balanced investment portfolio for retirement".

However, less conservative investors may turn their noses up at the SSB for its low return, given the range of options in the market.

Real estate investment trusts (Reits) have taken off in a big way because they offer a regular payout every quarter.

Malaysian bank RHB, in a report out yesterday, projects the yield of various Reits this year.

Suntec Reit, for example, should offer around 4.5 per cent while CDL Hospitality Trusts, which includes hotels such as Copthorne King's Hotel, will deliver around 6.3 per cent - all more attractive yields than the SSB's.

Reits are tradeable, but if prices fall, investors who sell will be unable to fully recoup their capital.

Unit trusts, too, will still have their followers. Lion Global Investors' head of fixed income, Mr Phoon Chiong Tuck, pointed out that unit trusts work by pooling together funds.

In that way, investors, for the same amount, can invest in a diversified range of bonds rather than just in one bond. Unit trusts also offer investors the chance to benefit from foreign currency movements.

The drawback is the sales charge of around 3 per cent when buying into a unit trust fund. However, unit trust proponents say that if the fund is held for 10 years, the charge of 3 per cent spread out over the decade should not be a deterrent.

Investors are also looking forward to the retail bonds that Temasek Holdings will likely introduce. This will materialise in the not-too-distant future as a bonds framework - which could cover the Temasek bonds - is currently being ironed out.

In the broader scheme of things, the launch of SSB improves the lot of the mom-and-pop investors in terms of giving them more choices that are simple, safe and low-cost.

The investing landscape is improving, with the recent changes introduced by the Monetary Authority of Singapore's Financial Advisory Industry Review, which aims to sell commission-free basic insurance products. The Central Provident Fund Board is also lowering the costs of investing in unit trusts and investment-linked insurance products under the CPF Investment Scheme.

All these moves, including the introduction of the SSB, level the playing field for retail investors.

But with many investment choices out there and many investors searching for ever-better returns, there is no short-cut from doing one's homework to ensure a comfortable and financially stress-free retirement.

A closer look at the new govt bond
Here are answers to some frequently asked questions about the S'pore Savings Bonds
By Chia Yan Min, The Sunday Times, 17 May 2015

Understanding what you get out of Savings Bonds

A new type of government bond targeted at retail investors will be launched in the second half of this year.

The Singapore Savings Bond aims to provide a flexible, low-risk option for investors to park their long-term savings.

The Sunday Times answers some frequently asked questions about the product.

How long can I invest for?

The bonds have a term of 10 years but you can redeem them in any given month before they mature with no penalty.

This differs from most other bonds, which have a set interest rate and investors can find themselves out of pocket if they redeem them too early.

How much can I invest?

People will be able to apply for each bond issue with as little as $500, and up to $50,000. They will be able to hold up to $100,000 of the Savings Bonds at a time.

If a particular issue is oversubscribed, you may not get the full amount you applied for. If this happens, you could apply for the issue in the following month.

The Government has said it could potentially issue between $2 billion and $4 billion in Savings Bonds this year, depending on demand.

How much returns will I get?

Singapore Savings Bond interest rates will be linked to the long-term Singapore Government Securities (SGS) rates.

But unlike SGS bonds, which pay the same interest rates every year, the new product will pay coupons that step up over time.

The average interest investors will receive over the period they hold Singapore Savings Bonds will match what they would have received had they bought an SGS bond of equivalent tenure.

This means that if you hold your Savings Bond for the full 10-year term, the average interest per year on your investment will match the return if you had invested in a 10-year SGS bond.

The 10-year SGS has mostly yielded between 2 and 3 per cent over the past 10 years.

You can cash out on the Savings Bonds at any time, subject to a one-month window.

In return, you get the principal sum, which is guaranteed by the Government, along with whatever accrued interest you have earned.

However, if you decide to redeem your Savings Bond early, the average interest per year will be lower than that of the 10-year SGS yield.

Singapore Savings Bonds will be issued monthly and the interest rate schedule for each issue will be announced before applications open.

Will I make or lose money if interest rates change?

Once a Savings Bond is issued, interest rate changes will have no effect on the bond's principal value and interest payments.

The bonds will always be redeemable at par, regardless of interest rate movements, and the interest rate schedule is locked in upon issuance. This is unlike conventional SGS, whose values fluctuate with interest rate movements.

However, future interest rate levels could turn out to be higher (or lower) than the rates you receive from your Savings Bond holdings.

You can redeem your Savings Bond for the full invested capital with no penalty and apply for new Savings Bond issues with higher interest rates if you think this is more attractive.

Before you do this, you will have to consider whether a new Savings Bond with lower initial interest payments outweighs the stepped-up coupons you will be receiving on an existing Savings Bond that you may have held for some years.

When can I start buying Savings Bonds?

Applications for Savings Bonds will open in the second half of the year.

The Monetary Authority of Singapore (MAS) will announce the launch date one month before applications open for the first Savings Bond issue.

How do I apply for Savings Bonds? How do I redeem my Savings Bonds?

Applicants need a DBS/POSB, OCBC or UOB bank account and an ATM card.

This is because applications will be through ATMs. DBS/POSB customers may also apply through Internet banking.

You can also submit redemption requests through ATMs of the participating banks, or Internet banking portal.

Applications and redemption requests must be made in multiples of $500, and Savings Bonds will be available only for purchase using cash.

You also need an individual (not joint) CDP securities account with direct crediting service activated. You must be at least 18 to open an individual CDP securities account.

What are the fees and charges involved?

The bank will charge a transaction fee of $2 for each Savings Bond application and each Savings Bond redemption request. The transaction fee of $2 will still apply if your application or redemption is unsuccessful. It will not be refunded.

Compared with other products, the fees are low, said analysts. SGS bonds also incur a $2 transaction fee but there are also other such fees, like broker fees. Investing in equities also incur broker fees.

When is interest paid?

Interest is paid every six months on the first business day of the month. The first interest will be paid six months after you get your Savings Bond.

Are Savings Bond interest payments taxable?

Interest income on Savings Bonds is exempt from tax.

Am I allowed to transfer or sell my Savings Bonds to someone else?

No. Savings Bonds cannot be transferred to someone else except in specific situations such as in the event of death of the individual or under a court order.

Savings Bonds cannot be bought or sold in the open market or traded on the share market.

What are the pros and cons of Savings Bonds?

Singapore Savings Bonds combine the flexibility of a short-term investment, the affordability of a low-cost product and the stability of a long-term government bond.

Usually a bond investor must choose his bond tenure and lock the money in. He cannot cash out until the bonds have matured but can trade the bonds on the stock market. Trading comes with the risk of price fluctuations.

Savings Bonds will not be traded and so there is no risk that an investor gets back less than his investment.

The flexibility also gives Savings Bonds an edge over a fixed deposit with a bank, which pays no interest if the principal is withdrawn before the account's maturity.

The minimum investment of $500 is also more affordable than many other financial products. SGS bonds require a minimum investment of $1,000 while most banks require $1,000 to $5,000 in minimum savings for a fixed deposit.

Savings Bonds can be seen as an extremely safe investment as they are backed by the Singapore Government just like SGS bonds, which have the top AAA credit rating with all key rating agencies.

However, Singapore Savings Bonds have some drawbacks compared with other time financial products.

Unlike SGS bonds, Savings Bonds are not tradable.

The cap on the investment amount also renders Savings Bonds less attractive to institutional players with a bigger appetite.

But Savings Bonds are intended for smaller investors and the MAS does not envision the low-cost retail product catering to institutional investors.

How do the Savings Bonds compare with other investments such as corporate bonds?

Savings Bonds are backed by the Singapore Government, which has the top AAA credit rating with all key rating agencies.

Corporate bonds, such as those issued by Frasers Centrepoint last Wednesday, carry credit risk.

The property firm's first retail bond offering is now open for subscription and closes on May 20 at 12pm.

The minimum investment amount is $2,000, or higher amounts in multiples of $1,000.

Although Frasers Centrepoint is a "good name", there could be periods such as during the global financial crisis when companies go through difficult times and are unable to repay debt, resulting in capital loss, said Mr Victor Wong, investment director at Financial Alliance, a Singapore-based advisory firm.

As corporate bonds carry more risk, the yield for Savings Bonds is lower compared with corporate bonds of similar tenor. "If investors want a higher yield and are comfortable with the credit risk, then they can invest in a corporate bond," said Mr Wong.

Head of deposits and secured lending at DBS Bank Singapore Lui Su Kian said that for investors, fixed deposits also "allow for a wide range of tenors and deposit sizes, and customers are also able to diversify their portfolio by having fixed deposits in different currencies".

For more information about Singapore Savings Bonds, visit:

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