Investor interest in the Singapore Savings Bond (SSB) has been at fever pitch, with demand outstripping the amount offered for the past four issuances, from June to September 2022. This comes at a time of a weakening economic backdrop caused by rising interest rates in the US and more geopolitical tensions dampening international trade.
Popular investments like stocks, bonds, and cryptocurrencies have generated mixed results since the start of the year. On the other hand, the SSB, which is backed by the Singapore government, offers capital protection against the coming storm that is ahead of us.
With 1-year rates on the SSB at an all-time high and the average 10-year returns also above 2.5%, which of these two rates should you consider when investing in the SSB?
Why SSB Coupon Rates Are Rising?
To tame its highest inflation in 40 years, the Federal Reserve (Fed) first turned hawkish in March 2022 by increasing the Fed fund (short-term) rates by 0.25%, up from close to 0%. This was followed by another three rounds of interest rate hikes to reach the current 2.25%-2.5% range.
Here in Singapore, our Singapore Government Securities (SGS) yields take reference from the global interest rates, which are largely influenced by the Fed’s actions. The SSB coupon rates, in turn, are pegged to the long-term SGS rates, specifically, the 1-year, 2-year, 5-year, and 10-year SGS yields. Hence, as global rates rose from April, so did the SSB (1-year and 10-year) coupon rates.
The table below shows the changes in the rates for the 1-year, 10-year, and 10-year average returns from January to October 2022.
From the table, we can see that investor demand for SSB started picking up from the March 2022 issuance. Demand started to exceed supply when the 10-year average returns went above 2.5% from the June 2022 issuance. This might be an important interest rate yardstick for investors as it’s our CPF Ordinary Account floor rate.
Another observation seen from the SSB Table is the investor demand for the August and September issuances. The August issuance has a lower 1-year return of 2% and a higher 10-year average return of 3% compared to the September issuance, which has a 1-year return of 2.63% and a 10-year average return of 2.8%. Despite the higher 1-year rate for the September issuance, investor demand was much higher for the August issuance, which had a higher 10-year average return.
Nevertheless, this may not be conclusive as there is an individual limit of $200,000 for the SSB. It’s possible that many people didn’t apply for the September issuance because they’ve reached their limit.
Short Term Rates VS Long Term Rates
The short-term interest rate is the rate at which short-term government paper, like the 6-month and 1-year Treasury bills, is issued. The yields on short-term bonds are usually lower than those on long-term government debt securities like the SGS, which have the same credit quality.
Its low yield reflects the lower interest rate risk given the shorter maturity period compared to the longer-dated debt, which compensates investors with a higher yield. This typical relationship between short-term rates and long-term rates is depicted as a “normal yield curve.”
When the relationship between the short-term rates starts getting closer to the long-term rates, the graph will start to flatten and will be depicted as a “flattening yield curve”.
On the other hand, when the short-term rate is higher than the long-term rate, the relationship between the two rates would be known as an “inverted yield curve”. Since bond prices and interest rates go in the opposite direction, the higher market interest rates will cause the price of fixed-rate long-term bonds to go down.
SSB Serves Both Short-Term And Long-Term Investors
The SSB is a unique bond product in that it serves both short-term and long-term investors. Though a SSB is issued over a 10-year tenor, investors can redeem it at any time while earning pro-rated interest without any penalty.
Nevertheless, the SSB is meant to encourage long-term savings. The monotonically step-up rate feature of the SSB ensures that investors who hold longer get higher coupon rates. This may be effected by lowering the coupon rates in the short-term by the minimum amount to maintain an increasing step-up coupon schedule.
As such, investors who prioritise liquidity and capital protection by keeping their funds in fixed deposit accounts may look at the SSB’s 1-year coupon rate as their investment consideration. Otherwise, investors should be looking at the 10-year average return as the return they could get on the particular SSB issuance. This would be more reflective of the product for comparison against other instruments like Treasury bills (T-bills) and other longer-dated SGS bonds.
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