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Singapore Savings Bonds 101

by Apoorv Trivedi on
Savings

The Bottom Line

At current yields of 2.60%+, Singapore Savings Bonds (SSB) are more attractive than Bank Fixed Deposits (promotional yields around 2.6%), Robo Cash Management products (1.9-3.3%) and most savings accounts.

In a rising rate environment, despite a lower yield, we think they are also competitive with medium duration Savings Plans offered by many insurers (3.1% for 3 years) and longer duration SGS’ (3.20% for 10 years).

This is because SSBs can be sold at par, anytime. So you have the option of switching to a higher yielding product if one becomes available at a later date. This is an embedded American Put Option with significant value and this is not available in the Savings Plans, FDs or other SGS’.

SSBs use in the overall portfolio is somewhat limited because of the constrained and uncertain monthly allocations available to investors.


What are Singapore Savings Bonds (SSB)?

SSBs are innovative bonds issued by the MAS and guaranteed by the Singapore government.

The 10 key features of SSBs are:

  1. Government guarantee for principal and interest
  2. 10 year maturity with semi-annual interest payment
  3. Monthly liquidity provided by the MAS with no early redemption penalty
  4. Interest rate you receive steps up over the 10 year life of the bond
  5. Targeted at individual investors
  6. Subscription can be in multiple of S$500 with a S$500 minimum
  7. Maximum holding for an individual is S$200,000 across all issuances
  8. Cash and SRS funds can be invested, CPF funds not eligible
  9. New bonds are issued monthly
  10. Subscription via DBS, UOB and OCBC Internet Banking and ATMs

How are SSBs different from other SGS’ and FDs?

The key features that make SSBs different from other instruments, like Singapore Government Securities (SGS) and Fixed deposits, are their guaranteed monthly liquidity despite the long maturity and the step up in coupon paid over time.

Monthly Liquidity Even though the SSBs have a 10 year maturity, you can sell them to the MAS at any time, with no penalty and only a S$2 fee to your bank. No matter when you redeem, you only receive the amount (along with accrued interest) on the 2nd business day of the following month.

Step up Coupon The interest you earn on an SSB depends on how long you have held that particular issuance. The MAS has a formula to make sure that the interest rate increases for longer holding periods.

For example, the Sep 2022 issuance pays 2.63% in the first year, 2.71% from year 2 to 5 and then increasing every year to 3.04% in year 10. This schedule is different for every issuance and is linked to the yield on 1, 2, 5 and 10 year benchmark Singapore Government Securities (SGS)yields.

Interest Rates on SSB in Sep-22
Interest Rate Schedule for Sep-22 SSB (Source: MAS)

The schedule of interest rates is available on the MAS website before you apply for the SBBs.

The main limitations are that you can only invest a total of S$200,000 across all SSBs and you do not have control over how much you can invest in a given issuance. Every month, the MAS follows a Quantity Ceiling Format to allocate SSBs for that month.

Quantity Ceiling Format The way this works is that based on the total demand for an SSB, the MAS sets up a ceiling amount. If you applied to invests less than the ceiling amount, you will get what you requested.

However if you requested more than the ceiling amount, you will be allotted bonds worth the ceiling amount only. This system is intended to favor small savers.

For example, in Sep 2022, the MAS issued SSBs worth S$900 million and received a total demand of S$1.9 billion. The ceiling was set at S$13,000, meaning people who applied for S$13,000 or less got as much as they wanted, while everyone else was capped at S$13,000.

S$200,000 Cap MAS tracks how much each individual has invested in SSBs over time and the total holding at a time is capped at S$200,000 per person at one time. This means if you have redeemed some SSBs early, that amount does not count towards your limit.

Every person over the age of 18 is eligible to invest in SSBs and has their own limit.


How to buy / redeem SSBs?

You can buy SSBs via online banking or ATMs of the 3 local banks – DBS, OCBC and UOB. You also need an account with the CDP and you need to set up a Direct Crediting Service (DCS) with one of the 7 participating banks.

The DCS specifies which account will receive the interest and also the principal on maturity or early redemption.

Timeline for Investment / Redemptions

The key point here is that if you decide to redeem (i.e. sell) your SSBs, you will only receive the money back on the 2nd business day of next month. It doesn’t matter when you put in the redemption application.

Whether its done on the first day of a month or the last possible day (the 4th last business day of the month) – you only get the money on the 2nd business day of the next month.

On average, therefore, it takes something like 21 days on average from the day you decide to sell, to get your money back.

The fastest time to getting your money back is 7 days. This is if you decide to sell on the last day of applications. In that case, you must wait out the 3 remaining business days of the month and 2 working days of the next month. In most cases, this period will include a weekend as well, which gets us to 7.

The slowest time to getting your money back is about 36 days. This is if you decide to sell the minute after applications close. In this case, you must wait out the 3 remaining business days of the month, plus all the days of the next month (31) and two business days of the subsequent month.


Why are SSBs suddenly in the news?

The interest rate on SSBs has shot up to 2.63% in Sep-22 from 0.52% in Feb-22.

2.6% is a very attractive interest rate when many banks are still offering 0.05% as the base rate on savings deposits.


So should I buy SSBs?

We think SSBs are a great investment option right now if you have some cash lying around that you won’t need to access immediately but cannot invest for long term.

It doesn’t work if you need the funds available at short notice and arguably there are better options (even risk free ones) if you need to invest for long term.

The fact that you can’t really invest large amounts in SSBs at a time also limits their usefulness in the portfolio.

SSBs have many unique features that make them difficult to compare with alternatives like Fixed Deposits or cash management product.

There are 3 factors that you should consider in evaluating SSBs and their alternatives:

  1. Yield or Interest Rate
  2. Risk
  3. Liquidity

The first two are simple – for two otherwise identical instruments, you want the one with the higher interest rate and lower risk.

The third one, liquidity, is the confusing factor for SSBs.

SSBs have a 10 year maturity, which often leads people to lump them with the likes of Fixed Deposits, Insurance Savings plans and SGS’.

SSB vs Long Duration Instruments
SSB Yields don't excite vs. long term risk-free instruments

In this case SSB doesn’t look always great because the other investments have higher yield and relatively similar risk.

But the key feature of SSBs, that makes them unique, is that you can redeem them at any time with the MAS and get your money back in an average of around 21 days, with no penalties. You don’t have to, but you can. This option is valuable.

If you want to compare them with the long term investments correctly, you need to include the value of this option before comparing. More on this later but we think after this adjustment, they look better than 12-18 month FDs and Insurance Savings Plans.

A better comparison is against savings accounts, cash management accounts offered by Robo advisors and short duration fixed deposits. This is because the liquidity characteristics of SSBs are more similar to short-term products, than to long-term products.

SSB vs Short Duration Instruments
SSBs beat short term products hands down

In this case SSBs really shine with the much higher, risk free yield. Clearly SSBs are not appropriate for money you will be spending in the next month but if you have cash that will not be spent or invested in the next few months, SSBs are a great, risk-free option.


The embedded American Option in SSBs

Technically you can think of the SSB as being a 10 year maturity SGS with an embedded American put option.

If you just compare the yield on SSB with the yield on a 10 year SGS, it looks to be lower (2.80% average return for Sep-22 SSB vs. 3.20% for 10 year SGS). However this ignores the value of the American put option that comes for free with the SSB.

An American put option is a contract that allows you to sell the underlying asset at the pre-agreed price at any time before maturity. These options are valuable and a put option is especially valuable in a rising rate environment that we have today.

Imagine you invested in an SSB  and 10 year SGS in Jul-21. The average yield on the SSB was 1.53% and the first year yield was only 0.36%. The SGS, on the other hand yielded 1.625%.

Fast forward to today, you have collected only about 40c coupon on the SSB but about $1.80 on the SGS. However, if you now want to sell both and invest in the 3.20% SGS (current yield!), you can put the SSB for S$100 to the MAS, while you will only get about S$88 (current price of the Jul-31 10 year bond).

So your S$100 investment in SSB has returned S$100.47 while an identical investment in SGS has returned S$89.645. The option have proved extremely valuable in a rising rate environment.

  Singapore Savings Bond
Issued July 2021
(Issue Code: GX21070X)
10 Yr Singapore
Governement Security
Issued Jul 21
(Issue Code: NX21100N)
Coupon Rate (%) 0.36%* 1.625%
Amount Invested S$100 S$100
Coupon Received S$0.47** S$1.625
Redemption / Sale Value
(on 22 Sep-22)
S$100^ S$88.02^^
Total Received S$100.47 S$89.645
* First year interest rate for SSB issued on 1-Jul-21
** First year coupon and 3 months of accrued interest at the time of sale
^ Proceeds available on 4th Oct-22
^^ Source: MAS Website

It is possible to value this American option but that is outside the scope of this post.

What we can confidently say is that if you are choosing between the promotional FDs offered by some banks with an interest rate of 2.60% and the October SSB (1yr yield of 2.60%) – you should definitely choose the SSB. If you are lucky enough to get the allocation you need.

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Sundeep
2 months ago

Balanced article evaluating a current hot topic. SSBs make a good cash income alternative. Thank you.

Venky
2 months ago

a very interesting way to analyse SSBs Apoorv. The embedded option value is seldom mentioned and you have explained it very well.

Vineet
1 month ago

Very well laid out article with detailed analysis, thanks Apoorv!

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