Key Points
- SGS Bonds provide safety and regular income that rivals fixed deposits for durations above 3 years
- SGS Bonds are backed by the Singapore Government and fixed deposits are backed by banks, with insurance on the first S$20,000 paid out on the decision of the MAS
- Investors who are comfortable with a 10yr+ holding period can get coupon rates of nearly 3% or more
We’ve been harping about short-term (ST) funds and money-market (MM) funds for some time now. At its simplest, the advantage ST and MM funds provide over fixed deposits are 1) a competitive rate of interest and 2) greater liquidity.
But if you’re less worried about liquidity, and your priority lies in safety, and regular income, what then?
The Savings Account Option
Using Fixed Deposit rates as a proxy, the last published rates on UOB and DBS are shown in Table 1. Figures quoted are for deposits up to S$999,999.
| Table 1: Fixed Deposit Rates for Two Local Banks |
0.7% |
0.7% |
0.6% |
NA |
Source: uob.com.sg, dbs.com.sg, last accessed on 27 January 2011 |
Based on Table 1, the best rate investors can get is 0.70% from UOB.
In terms of safety, fixed deposits are covered for the first S$20,000 under the Deposit Insurance Scheme In Singapore. As stated on the SDIC (Singapore Deposit Insurance Corporation) website,
MAS may decide that a deposit insurance payout should be made if: A court order has been made to wind up a Scheme member; or MAS has determined that a Scheme member is insolvent, unable or likely to become unable to meet its obligations, or about to suspend payments (Source: www.sdic.org.sg/payout, last accessed on 27 January 2011).
In other words, MAS is the decision-maker with regards to when deposit insurance on the first S$20,000 is paid out.
The SGS Bonds Option
As published on the Fundsupermart SGS Bond Info page, the last published rates on 2-yr and 3-yr maturity bonds are shown in Table 2.
For new bond investors, the coupon of the bond refers to the interest paid out per annum until the bond’s maturity. At maturity, the bond’s principal is also repaid. For a quick guide to SGS Bonds, investors can read ‘Singapore Government Bonds In A Nutshell’.
As retail investors purchase bonds on the secondary market, the annual yield of the bond is not the coupon rate. Instead the offer indicative yield is the interest received per annum, based on the offer price investors purchase the bond at.
From Table 2, investors can get equal or higher yields if they are willing to invest into bonds where years to maturity exceeds 3 years.
In terms of safety, local currency SGS Bonds are issued by the Singapore government through the MAS and are rated triple-A (or equivalent) by Moody’s, S&P, Fitch and R&I. According to the SGS website,
Singapore's ratings indicate that it has a very strong credit rating with a minimal probability of default on its local currency debt obligations. From the perspective of individual investors, this means that SGS are among the safest possible investments to hold, and the principal value of their SGS investments is preserved if held to maturity. (Source: http://bit.ly/fH0K6t , emphasis added, last accessed on 27 January 2011)
This means the Singapore government has been rated one of the lowest in terms of default risk globally. Granted, there’s no guarantee, since there’s no insurer significant enough (especially not after the financial crisis) to guarantee the bonds of a government, but having the highest credit rating from four established ratings agencies is as close to an international vote of confidence as you’ll get.
We’ve summarised the above data into Table 3.
| Table 3: Summary of Characteristics |
UOB |
DBS |
N508100V |
NX03100Z |
N508100V |
NX03100Z |
0.7% |
0.6% |
0.38%
(2.18 yrs lock in) |
0.31%
(2.42 yrs lock in) |
NA |
NA |
0.7% |
NA |
NA |
NA |
0.70%
(3.42 yrs) |
0.74%
(3.73yrs) |
S$5,000 |
S$1,000 |
S$1,000 |
S$1,000 |
S$1,000 |
S$1,000 |
First S$20,000 insured under SDIC |
Triple-A or equivalent rating by Moody’s, S&P, Fitch and R&I |
Source: Fundsupermart compilations |
The Highest Yields on SGS Bonds…and the Tradeoff
Clearly, we’ve been talking about SGS bonds throughout the article. We also suggested that SGS Bonds can potentially offer better yields if liquidity is a lower priority than safety and regular income. Thus far, we’ve shown how SGS Bonds can match bank interest rates with roughly similar lock-in periods.
SGS Bonds can offer yields of several times higher than 0.70% - specifically, 2.98% and 3.18% per annum. The tradeoff is a much longer years to maturity. Table 4 shows two SGS bonds that can provide such rates.
Nearly 3% yield, backed by the Singapore government, is nothing to scoff at.
In the wake of market volatility global giants like AIG and Lehman Brothers (and their respective assets) crashed and burned. Institutions rise and fall, but the Singapore government has pulled through relatively unscathed throughout the global financial crisis of 2008.
Investors seeking safety and regular income, and who are not averse to leaving their money with the Singapore government until the bond’s maturity of 10+ years should definitely consider SGS bonds as an option to seriously consider.
If you have any comments, questions or complaints about the article, feel free to drop a feedback post in our forum, or email me: nicholastay@fundsupermart.com
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