The Federal Reserve raised interest rates by 0.75% in June 2022 and the market is pricing in another 75 basis points for July’s meeting. If the estimates pan out, Fed would have raised interest rates by a total of 3.25% – 3.5% by end of 2022. Rising interest rates have a direct negative impact on our floating home mortgage payments as well as the stock market. Thankfully, it’s not all doom and gloom in a rising interest rate environment. If you are sitting on the other side, you can also demand higher interest rate when “lending” out your money. That is why the yields of fixed deposit, endowment funds, bonds etc have been on an upward trend since the beginning of 2022. In fact, government-backed Singapore Savings Bond yields interest rate of 3.0% for August 2022. It has risen to quite an attractive rate that made me take notice of it.
What Is Singapore Savings Bond?
Singapore Savings Bond (‘SSB’) was launched on 1 October 2015 by the Monetary Authority of Singapore (‘MAS’). The issuer is the Government of Singapore which is rated AAA by international credit rating agencies such as Fitch and Moody’s. With the strongest possible credit rating possible, this makes SSB one of the safest investment instruments out there.
The minimum investment amount is S$500 and increases in multiples of S$500. At such a low threshold, it is clear that the Singapore Savings Bond programme is targeted at retail investors. Prior to the launch of SSB, minimum ticket size is usually $200,000 for accredited investors to gain access into over the counter (‘OTC’) bonds.
Singapore Savings Bond is issued every month and the maturity of each tranche is 10 years. Investors have to apply and balloting might be required if demand outstrips the issuance size. Therefore, to ensure that more people can access SSB, the total amount held by any individual at any 1 time cannot exceed $200,000.
What Is Singapore Savings Bond’s Interest Rate?
From Diagram 1, you will observe that interest rates increases as we go further into the tenure of the instrument. Under normal circumstances, we would demand higher interest rate to compensate for the unknown risks in parting with our money for the long term. That is why the yield curve is typically upward sloping.
Because this is a bond, the coupon payable is “locked/fixed” at the point of issue. These semi-annual coupons will not fluctuate according to the vagaries of the market. Taking August’s issue as an example, we can expect with confidence that 2.0% will be paid in the first year and 2.86% in the 2nd year and so forth. These interest rates will be further broken up into 2 equal payments per year to reflect its semi-annual payment nature. Certainty of these future cashflows (assuming issuer doesn’t go under) is one of the key benefits of having bonds in one’s portfolio.
As I have stated earlier, the recent yields on Singapore Savings Bond have risen sharply in tandem with the Fed’s rate hikes.
As shown in Diagram 2, the 1st year interest for Jan 2022’s issuance was only 0.45%. Contrast this with 2% for August 2022’s issuance!
Other Characteristics of the Singapore Savings Bond
Having explained the low investment quantum, high interest rate, other key benefits of the SSB worth highlighting include:
Noteholders can choose to exit their investment in any given month with no applicable penalty. This flexibility is great as this means there is no need to pre-commit on an exact investment period before application. Its near liquidity (30 days) also suggest that it may be a good place to store your emergency funds.
2) Capital Guaranteed
SSB is fully backed by the Singapore Government which means that investors get their investment amount back in full with no capital loss. This characteristic is particularly attractive for retirees and pensioners who cannot afford to have their standard of living compromised from an unexpected loss.
3) Exempt from tax
The dividends received from SSB is exempt from personal income tax.
4) Portfolio Diversification
As a bond, it usually does not have a strong correlation with other investment products such as equities, cryptocurrencies and property. Therefore, SSB complements other savings/investment products as a safe way to grow the value of your savings for the long term by hedging against this volatility.
With the flexibility to exit without incurring any penalty and the attractive interest rate dangled on it, it is clear why some may think SSB is superior than fixed deposits!
How To Apply For SSB
SSB is highly accessible because any individual (Singapore Citizen, Singapore Permanent Resident and Foreigner) who is aged 18 and above can apply for the Singapore Savings Bond. This can be done through DBS/POSB, OCBC and UOB internet banking portals or at ATM across the island. There is a $2 non-refundable transaction fee for each application.
SSB can be paid via cash or SRS but note that CPF funds are not eligible. You will be required to enter your CDP or SRS account details so do get them ready. As interest payments will be automatically paid into the bank account linked to your individual CDP Securities Account or SRS Account Operator, do make sure that direct crediting service is activated for your CDP account. If you have been receiving dividends from your stock investments regularly, that means direct crediting service is already activated.
Using August 2022 issuance as an example, the application’s Opening Date is 1 July 2022 while the Closing Date is 26 July 2022. Allotment will be on 27 July 2022 with issuance on 1 Aug 2022. For those who are looking to redeem their previous SSB, the redemption timeline has also been published.
If you are applying for the August’s tranche, good luck in your allotment! As a tip, SSB is allocated based on quantity ceiling concept and not on a first-come-first-served basis. Therefore, you can wait till its nearer to the closing date to ensure your funds do not get locked up and earn no interest while waiting for the allotment outcome!