Singapore Savings Bonds – optimizing their effectiveness

I previously blogged about the benefits and how to get started with Singapore Savings Bonds (SSB), which are a terrific way for Singaporeans to invest their money in – even aunties and uncles can beat inflation!

Recently, there’s news that the government has plans to increase the deposit limit to $200,000 starting February 2019 – up from $100,000 previously – and that is great news for some of us who have lots of spare cash lying around! Of course, if you’re just a recent graduate like me, it is most likely that you wouldn’t have that much cash in the bank. Given this scenario, and other investment options out there, where and how would the SSB fit in our investment strategy?

Let’s find out in my analysis below.

SSB Short Term (1Y) vs Long Term (10Y) average yield

From the chart, we see that both short term and long term yields have been trending up in 2018, and are expected to trend higher into 2019 following US Fed rate normalization. Short term rates have fluctuated more wildly, but the changes in rates have fallen quite a bit since the start of the year.

In Singapore, or LT yields have remained consistently higher than ST yields, with an average spread of 0.73% between the two. However, since September, the spread between the 1Y and 10Y SSB is close to 0.68%, and is expected to narrow with an expected flattening of the yield curve.

What does it mean?

Over the past year, we see investors increasingly cautious about the economy after a decade-long bull market in the US, trade war concerns and oil price woes. As the US Fed normalizes the economy by raising interest rates (after almost a decade of zero interest), borrowing gets increasingly expensive and companies invest less, reducing aggregate demand and slowing the economy before it overheats. With US short term yields being more sensitive to changes in interest rate policy, this potential yield curve inversion in the US might trickle down to Singapore.

For investors like us, knowledge of this can help us understand how much of SSBs to buy and when to buy them.

Traditional bonds offer portfolio hedging but recent data proves otherwise

Traditionally, bonds yields show an inverse correlation with equity yields, so they help stabilize a portfolio with less crazy fluctuations. However, a chart from MSCI shows the increasing softening of diversification benefits offered by bonds in recent years.

The increasing positive correlation hints that equities and bonds tend to move closely together, amplifying fluctuations in the portfolio.

But SSBs are not traditional bonds

However, SSB characteristics are slightly different, as their prices and yields do not change after issuance and hence, unable to assist in portfolio rebalancing. They are not traded in the secondary market so investors cannot determine the market price for them.

They function somewhat like money market funds or emergency with a step-up interest ladder that generates a little bit of yield.

The big question…keep cash or deposit in SSB?

With interest rates on savings accounts rising, it is sometimes a challenge to see which is a more attractive option to put your money in but here is my take –

Keep minimal cash (mostly emergency cash) in savings accounts, as they generate little yield. Their primary benefit come from convenience.

If future short-term interest rates are expected to rise further, a bond ladder – ie. staggering your SSB purchases – can help alleviate the concerns of buying at the wrong time. This allows you to buy SSBs progressively at higher yields. However, this must be balanced out by monitoring long term SSB yields if you’re planning to hold the SSBs in your portfolio for a long time.

Furthermore, since you cannot predict when is the best time to buy SSBs at the highest possible yield, it’s advisable to stagger your purchases over a few months.

When do you sell your SSB?

If you’re planning for retirement, it is prudent to take a long-term investment strategy and avoid buying/selling too frequently. However, sometimes if you can repurchase the bonds at a more attractive yield, you should! For example, SSBs issued in early 2017 were offered at merely 1.XX% yields – repurchasing new SSBs now would make more sense even after considering the step up interest.

If other investment options become more attractive, then selling some would make sense – remember, SSBs’ yields only help to keep in line with inflation at best and are not an effective way alone to grow wealth.

Final thoughts

If you made it this far, congratulations! While it might be a little difficult to grasp the finer understandings of SSBs, knowledge of how they work can help you save  thousands of dollars worth of commissions in the years ahead.

1 comment

Leave a Reply

You May Also Like