January 16, 2019

Ben

It’s been a while since the last post. Have been busy with work, went on a holiday and reformatted my computer. Setting up everything again after the reformatting is/was quite tedious and I procrastinated. But here we are again.

I’ll be combining the Jan and Feb editions of the SSB in this post.

This is a monthly series where I do a comparison of the current issue of the Singapore Savings Bond (SSB) against the past SSB issuances over the last ten years.

MAS has been issuing the SSB every month for over three years now, and many Singaporeans will have heard of it before. They have even started advertising at bus stops and MRT stations. Here are the key benefits:

(Virtually) Risk Free: Backed by Singapore Government with AAA credit rating

(Almost) No Fees: There’s only a $2 fee when buying or selling

Capital Guaranteed: You will not lose your capital (except the $2 fee)

Relatively Liquid: Whenever you redeem (sell) your bonds, the money will be credited to your account on the first business day of next month

Low Capital Requirements: Minimum investment of $500

As always, there are some drawbacks:

Holding Limits: Each individual can only own a total of $200K of SSB, and no more than $50K for each bond.

Subscription Limits: There is a subscription limit for each bond. If it is oversubscribed (too many people buying), you may not get the full amount that you want.

Low Returns: As this is a safe bond, it provides low returns

One of the unique things about it is the step up interest, where the interest given increases every year you hold onto it. Since the interest on the bonds vary every month, you can ‘roll over’ your previous subscriptions. This means redeeming a previous bond issuance and buying the current issuance. This means that you get higher interest on your money for free!

You can even roll over your bonds even if you have hit the 200K limit.

Again, there are some caveats:

Excess Cash: Since the redemption proceeds are only credited next month, you need to have enough money lying around to buy the bond

Over-subscription Risk: If the bond is popular, you might not get all the amount you want. Popular bonds are usually the ones with higher interest too

Personally, I keep some of my emergency funds in SSB to hedge against inflation and have rolled over it once. Since the amount was relatively small, I was able to get the full amount.

Feb 2019 Singapore Savings Bond

Year from Issue 1 2 3 4 5 6 7 8 9 10 Interest (%) 1.98 1.98 1.98 2.09 2.16 2.21 2.30 2.38 2.46 2.53 Average Compounded Return per year (%) 1.98 1.98 1.98 2.01 2.04 2.06 2.10 2.13 2.16 2.20

Note that the yield curve is flattening, i.e short term and long term interest rates are converging.

Before we start, there is one assumption that I made during the analysis. The interest gained is not reinvested. This means that the value of later payments are over stated due to the time value of money/inflation. I’ve made this assumption because it is impossible to reinvest the money in the same edition of the bond.

Interest is paid every 6 months, and redeeming a bond early will give you a pro-rated interest on a per month basis.

Here’s a link to the actual spreadsheet.

Here’s how to read the table. The first column (Column A) is a list of all the bonds issued so far, and the date is the issue date of the bond. The first row (Row 1) shows every month from now on.

The values show the cumulative interest gained per $1000 invested if you redeem on that month. The calculation starts from next month onward, and previous interest payments are not included in this value (every bond starts from $0).

The second row is this month’s SSB issuance, and is the baseline for comparison. Let’s compare 2 bonds with a holding period of 4 months (Feb 2019 to May 2019).

If you own $1000 worth of the Jul 2018 issue of SSB and redeem it on May 2019, you would gain a total of $5.73 of interest for holding it from Feb 2019 to May 2019. You can find this value by finding “2-Jul-18” on the left and “May-19” on the top.

Now you can compare this value to the current issuance (Feb 19). If you hold $1000 of the Feb issuance from Feb 2019 to May 2019, you would gain $6.60 of interest. You can find this value by finding “1-Feb-19” on the left and “May-19” on the top.

This means that if you plan to hold your SSB until May 2019, you would gain $6.60 – $5.73 = $0.87 more interest if you ‘roll over’ your bond. However, note that there is a $4 fee for rolling over ($2 for buying and $2 for selling). So, you would only gain if you roll over more than $1000 * $4 / $0.87 = $4597.70 (round it up to $5000) worth of bonds.

The table is colour coded. Green means that you gain more interest for rolling over. Red means that you lose interest for rolling over. White means the interest is the same.

Thoughts

This month’s bond has pretty good short term interest rates (1 year +), but poor long term interest rates.

As usual, we should not roll over the older bonds (Roughly Oct 15 – May 16). This is intuitive because once the bond is a few years old, the interest has stepped up considerably.

Last month’s bond was one of the ‘good’ bonds, and is better than this month’s bond for every period.

Thanks for reading!