SSB Review | How To Invest In Singapore Government Bonds

In learning how to invest money in Singapore for beginners, one should not just focus on one particular asset class like Reits. Instead, there is a need to broaden our circle of competence. This will allow us to have a greater set of available opportunities. It will also help to diversify the risk that one takes on when they venture into the financial markets. However, in an earlier post, we did ask the question of whether diversification works in the Reit Space, and the answer seemed to have been a no. So now why are we talking about diversification again?

Diversification may not have worked if you wanted to buy two Reits, irregardless of how different their respective sub-sector may be. This is because, when you buy into a reit, you do not just buy into the underlying business. Instead, you are also subjected to the effects of sector plays that institutional investors make. At times, these plays involve rotation from one sector to another. In such cases the sheer size of these institutional plays allow most high quality reits to rise in price and hence it is difficult to see any clear diversification gains when you buy one reit from another.

Before we answer the question about whether SSB can help in diversification, let us understand what SSB is and also again a working knowledge of its many features.

The Singapore Savings Bond is a special type of bond that the Singapore Public has access to. These bonds have a 10 year maturity and pay a coupon to the bond holder every 6 months. If the bond holder buys the SSB at issuance, the yield will be the average SGS yield from the month before. They are unique, as they are guaranteed by the Singapore Government, have an interest rate step up and a very low hurdle of SGD 500 and maximum individual holding of SGD 200,000. Further there is no transaction cost. Below are the list of unique features which we will go through in greater detail.

• Guaranteed by Singapore Government
• Interest rate step up
• 500 dollar minimum sum
• No Transaction Cost
• No Duration Risk

The Singapore Savings Bond is a special type of bond that the Singapore Public has access to. These bonds have a 10 year maturity and pay a coupon to the bond holder every 6 months. If the bond holder buys the SSB at issuance, the yield will be the average SGS yield from the month before. They are unique, as they are guaranteed by the Singapore Government, have an interest rate step up and a very low hurdle of SGD 500 and maximum individual holding of SGD 200,000. Further there is no transaction cost. Below are the list of unique features which we will go through in greater detail.

• Guaranteed by Singapore Government
• Interest rate step up
• 500 dollar minimum sum
• No Transaction Cost.

There are few investment opportunities for Retail Investors that are backed by Singapore Government which has the best sovereign external rating that anyone can hope for (i.e AAA). Even amongst other opportunities offered by Temasek linked corporations like Singapore Airlines or Sembcorp Industries, few have had the explicit guarantee that the Singapore Savings Bond enjoy.

The whole idea of having a step up is a little interesting and unique for beginners who are learning how and where to invest their money in Singapore. A step up is basically a commitment from the issuer to increase the coupon on the bond in the next corresponding period. This means that if there is a step up of 25 bps to the original coupon rate of say 3%, investors holding the bond will receive 3.25% next year.

The reason for having a step up is so that investor protect like returns from the effects of inflation. This means that, the step up helps to offset any decrease in real yields that is caused by inflation. We mentioned in a separate post on why inflation matters to investors.

To ensure that ordinary Singaporeans have a shot at this investment, the Government has made the entry level to SSB, exceedingly low. Whereas the minimum denomination of a normal Sing Dollar Denominated Bond is 250,000, it is only 500 for a Singapore Savings Bond. What this means is that all Singaporeans above the age of 25 and have SGD 500 dollars of idle cash can benefit from the scheme.

To ensure that ordinary Singaporeans have a shot at this investment, the Government has made the entry level to SSB, exceedingly low. Whereas the minimum denomination of a normal Sing Dollar Denominated Bond is 250,000, it is only 500 for a Singapore Savings Bond. What this means is that all Singaporeans above the age of 25 and have SGD 500 dollars of idle cash can benefit from the scheme.

When buying other bonds or equities, there will more often than not be a bid ask spread. This means that on any actual point in time, the selling price will be lower than the buying price. The difference is what is commonly referred to as the bid ask spread and is the earnings of the market maker who has found a buyer and seller for that particular security.

As SSBs are not traded on the exchange, investors can redeem them with no penalty fees or transaction cost. This means that if you invest your money in SSBs, it will not be locked up and you will get your principle and returns back in full if you want to sell your bond holdings.

One of the key attractions of Singapore Savings Bond to those who want a safe low risk investment is that it is not traded and thus has virtually no duration risk. Even though it has a maturity of 10 years, SSB can be redeemed at any point in time with no significant bid ask spread or early redemption penalty. Given that it is not traded, the bond is not priced in the secondary market and thus does not expose its investors to duration risk.