10-Year SGS Bonds vs. SSBs: Which Is the Better Investment for You?

04 July 2024

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When planning for financial security, investors in Singapore are presented with a variety of choices. Among these options, government-backed securities stand out as popular choices for those seeking stable returns with minimal risk. Two prominent contenders in this category are the Singapore Government Securities (SGS) bonds and the Singapore Savings Bonds (SSBs). Both offer unique advantages, but which one aligns best with your investment goals?

At first glance, SGS bonds and SSBs may appear similar - both are issued by the Singapore government and are considered low-risk investments. However, they differ significantly in their structure, returns, and flexibility. Traditionally, SGS bonds were viewed as potentially higher-yield investments compared to SSBs, but with slightly more risk. However, recent trends have shifted this dynamic. 

As of now, SSBs offer a competitive 10-year average interest rate of 3.3%, surpassing the current 10-year SGS bond rate of 3.21%. Moreover, SSBs provide additional benefits such as greater flexibility in redemption.

Understanding these nuances is crucial for making an informed investment decision. The choice between SGS bonds and SSBs isn't just about comparing interest rates; it involves considering factors like your investment horizon and need for liquidity. Whether you're a seasoned investor or just starting to explore government securities, this article aims to provide you with a comprehensive comparison of these two investment vehicles.

What are Singapore Government Securities (SGS) Bonds?

Singapore Government Securities (SGS) are essential financial instruments used by the government to manage its funding needs. These bonds come in various tenures—2, 5, 10, 15, 20, or 30 years—and are highly regarded for their stability and low risk. Their reputation stems from being backed by the sovereign credit of Singapore, making them a trusted investment option for many.

Returns and Benefits of SGS

One of the key attractions of SGS bonds is their fixed coupon rate, which is set at the time of issuance. This rate remains constant throughout the bond's life, offering investors a predictable income stream. Investors can expect interest payments twice a year until the bond matures, at which point they receive their full principal amount back.

How SGS Bonds Work

SGS bonds are denominated in Singapore dollars and are made available through regular public auctions. This primary market allows investors to purchase bonds directly from the government. However, the flexibility of SGS bonds doesn't end there. They can also be traded on the secondary market, providing liquidity for investors who might need to sell their bonds before maturity.

For those interested in investing in SGS bonds, there are two main avenues:

  1. Primary Market: Investors can participate in government auctions to acquire SGS directly. This requires a Central Depository (CDP) account.
  2. Secondary Market: Alternatively, investors can purchase SGS from other bondholders through brokerage firms. It's worth noting that prices in this market fluctuate based on supply and demand.

What are Singapore Savings Bonds (SSB)?

Introduced in 2015, Singapore Savings Bonds (SSB) are a unique investment product designed by the Singapore Government. They offer individual investors a safe and flexible way to grow their savings over the long term, combining the security of government bonds with the accessibility of a savings account.

Returns and Benefits of SSB

SSBs stand out for their combination of safety and flexibility. They feature a step-up interest rate structure, meaning the interest rate increases the longer you hold the bond, up to a maximum of ten years. This design encourages long-term saving while still allowing for early redemption if needed. As these bonds are fully backed by the Singapore Government, investors can rest assured that their principal is protected, with no risk of capital loss.

How SSBs Work

One of the most appealing aspects of SSBs is their liquidity. Unlike many other fixed-income products, SSBs allow investors to exit their investment at any time without incurring penalties. This feature provides unparalleled flexibility for savers. Interest payments are disbursed every six months, making SSBs an attractive option for those seeking a steady stream of passive income.

Investing in SSBs is straightforward and accessible. They can be purchased through major banks in Singapore, with a low minimum investment of just S$500. This low entry point makes SSBs an excellent option for a wide range of investors, from those just starting their savings journey to more experienced individuals looking to diversify their portfolio with a low-risk option.

Evaluating Long-Term Government Securities: 10-Year SGS Bonds vs. SSBs

Singapore Government Securities (SGS) and Singapore Savings Bonds (SSB) offer unique benefits tailored to different investment needs. SGS bonds are tradable, offering flexibility in market participation, while SSBs provide unmatched redemption flexibility, allowing investors to cash out monthly without penalties. When comparing both, we can look at:

  • Flexibility: SSBs can be redeemed any month without penalty, offering exceptional liquidity. SGS, although tradable, may incur losses if sold before maturity.
  • Interest Rates: SGS bonds have a fixed interest rate throughout their tenure. In contrast, SSBs feature step-up rates that increase the longer the bonds are held.
  • Investment Minimums and Accessibility: SSBs can be purchased for as little as S$500, making them more accessible, while SGS bonds require a minimum of S$1,000.
  • Funding Options: SGS can be bought with CPF OA funds, while SSBs can be purchased using CPF SRS funds.
FeatureSGS BondsSingapore Savings Bonds
Available Tenure2, 5, 10, 15, 20, 30, or 50 yearsUp to 10 years
Interest PaymentFixed coupon; paid every 6 monthsSteps up each year; paid every 6 months
Minimum InvestmentS$1,000S$500
Maximum InvestmentNone; up to allotment limit for auctionsS$200,000
TradabilityYes, on SGX; At DBS, OCBC or UOB main branchesNo
Early RedemptionNo, only at maturityAnytime, no penalty
Use of CPF/SRS FundsCPF: Yes, SRS: YesSRS: Yes, CPF: No

Interest Rates: SGS Bonds vs SSBs

SGS bonds feature fixed interest rates and are available in tenures from 2 to 50 years. In contrast, the interest rates for Singapore Savings Bonds (SSB) are directly linked to the yield to maturity of corresponding SGS bonds. For instance, the interest rate for a 10-year SSB is typically set to mirror the yield of a 10-year SGS bond. This method ensures that SSBs provide returns comparable to similar duration government securities.

However, the most recent SSB issue offers a 10-year average return that varies slightly with the SGS bonds at 3.3% and around 3.2% respectively.

Why does the Yield Vary?

  • Timing: SSB rates reflect the previous month's SGS yields, introducing a delay that might cause discrepancies.
  • Averaging: SSB rates average the yields across multiple SGS maturities, which can smooth out the effects of short-term market fluctuations.
  • Step-up Structure: SSBs employ a step-up interest rate structure that can lead to different effective yields compared to the fixed rates of SGS.
  • Market Conditions: Rapid changes in market conditions can lead to temporary differences in yields between the two types of bonds.

What are the Risks of the 10-year SGS Bonds?

Although SGS bonds are fully backed by the Singapore Government and considered safe, they are not without risk. Like all bonds, SGS are subject to market fluctuations and interest rate risks.

Interest Rate Risks

Interest rate risk is a primary concern with SGS bonds. If interest rates rise, the market value of existing bonds typically falls, potentially leading to capital losses if the bonds are sold before they mature. This risk is more pronounced for bonds with longer maturities, such as the 10-year SGS.

Market Volatility

SGS bonds can also experience price volatility in the secondary market. If you need to sell a bond before its maturity, you may receive less than its par value, especially in a rising interest rate environment. This potential for fluctuation underscores the importance of holding bonds to maturity, particularly for those not seeking short-term gains.

To illustrate how prices of SGS bonds can change, consider the 10-year SGS bond NX18100A, which was initially issued in May 2018. Recently, its trading price on the SGX was recorded at 93.5. This is notably lower than its initial issuance price back in 2018.

Liquidity Concerns

Another significant risk associated with SGS bonds is liquidity risk. Although these bonds can be traded on the Singapore Exchange (SGX), they generally exhibit less liquidity compared to more frequently traded assets like blue-chip stocks such as DBS.

For instance, trading volumes for the 10-year SGS bond NX18100A show limited activity on most days. This lower trading volume indicates that selling these bonds quickly in the market could be challenging, potentially affecting the price received upon sale.

Deciding on Investing in SGS Bonds or SSB

Singapore Savings Bonds (SSBs) and Singapore Government Securities (SGS) offer two distinct approaches to safe, government-backed investments, tailored to different investor needs and preferences. However, the choice between SSBs and SGS should be guided by the investor's immediate liquidity needs, investment horizon, and risk tolerance. While SSBs offer more flexibility and potentially higher yields for short-term goals, SGS bonds provide a conservative and structured investment pathway for those planning for the longer term. 

SSBs are particularly appealing for individual investors due to their liquidity and flexibility. They allow investors to withdraw their investment at any point without a penalty, and feature a unique stepped-up interest rate structure that increases returns the longer the bonds are held. This makes SSBs an excellent choice for personal financial planning, providing a combination of accessibility, incremental growth in interest, and capital protection.

Investors should carefully consider their financial goals and the economic environment, particularly interest rate fluctuations, which could impact the returns on these bonds.

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