Singapore Savings Bond versus OCBC 360

Singapore Savings Bond is a new type of government bond that was launched by the Monetary Authority of Singapore in 2015. The bond is considered to be a safe and flexible product that allows Singaporeans to meet their savings and investment needs.

However, demand for Singapore Savings Bonds had been lacklustre in the initial years, presumably because products like OCBC 360, had been giving it a run for its money (literally). Nonetheless, recent developments had caused Singapore Savings Bond to be very attractive. And that led to a change in my view of this bond.

In my previous article on Astrea IV bonds, I shared that I am not ready for fixed income at this stage of my life yet. My stance has not changed. Basically, my family is looking at a safe financial product to store our emergency fund. Thus, we are looking at Singapore Savings Bond from the perspective of wealth protection, rather than wealth building.

In this article, I will share my insights on how Singapore Savings Bond can play a part in strengthening your wealth portfolio through passive income and how it fair in comparison to the popular OCBC 360 account.

Locked-in Interest rates

The first criteria for my family is safety when it comes to managing our emergency fund. Conventional government bonds fulfil this requirement but the yield is pretty low and the volatility of the interest rates would impact the bond price in the secondary market. In 2014, OCBC bank launched the OCBC 360 account which offers an incredible 3.05% (upon meeting certain criteria like salary credit, online payment and spending), we were sold.

Rated as one of the strongest banks in the world by Bloomberg in 2015, we are also convinced that our savings are safe with OCBC 360.

However, good things don’t last forever. Shortly after the launch, there were two changes for the interest rates of OCBC 360. As of 20 June 2018, the total interest rate for the first $70,000 per annum is 1.85% (excluding the maximum 1.2% if you invest using the OCBC 360 account).

Furthermore, there is a need to meet a few other requirements before the interest would be paid out monthly to the account. Nevertheless, in the context of the current low interest rate environment, the interest rates of OCBC 360 remain quite decent, though I find the change in interest rates within such a short span of time quite annoying.

What I like about Singapore Savings Bond is that the interests will be locked-in upon subscription. At the beginning of each month, Monetary Authority of Singapore (MAS) will announce the interest rates for the entire 10-year term of that Savings Bond issue. The fixed interest rates enable visibility of the returns for my emergency fund and remove uncertainties that come with changing interest rates.

Investors can rest assured that once a Singapore Savings Bond is issued, interest rate changes will have no effect on the bond’s value. This is because Singapore Savings Bonds are fully guaranteed by Singapore government. You can always get your full principal value back if you decided to redeem the bonds with the government. Because of this, I am assured that my money is in safe hands and can sleep well at night.

Liquidity

The best feature I like about Singapore Savings Bond is its liquidity. You can redeem the Savings Bonds at any time, without incurring any penalty. Redemption can be done easily through ATMs or internet banking. The period for redemption starts from 1^st business day  of each month and closes on the 4th last business day of the month. Redemption proceeds will be paid by the end of the 2nd business day of the following month. There is a transaction fee of $2 per redemption request.

To be honest, I struggle to find similar product in the market that offers such above market-rate interests and flexibility. Although Singapore Savings Bonds are not transferable, I like the fact that they are fully backed by Singapore Government. This means that you can sell the bonds back to the government at any time.

Lucrative Yield

Unlike OCBC 360 account which gives out a fixed interest rate with various conditions being met, the returns of Singapore Savings Bonds are in the form of step-up interests. Initially, you will receive less interest but the longer you hold the Savings Bonds, the higher the effective returns. The interest rates of each Savings Bond issue are based on the average Singapore Government Securities (SGS) yields the month before applications for that issue open. However, these interest rates will be locked-in when you subscribe.

According to the Singapore Savings Bonds’ website, “if you hold your Savings Bond for the full 10 years, your return will match the average 10-year SGS yield the month before your investment. In the last 10 years, the 10-year SGS yield has been between 2% to 3% most of the time”.

Since the start of 2018, Singapore Savings Bonds had been selling like hot cake as there had been five oversubscriptions (February, April, May, June and July 2018). The increased in demand led to MAS to increasing the monthly issuance size of the Singapore Savings Bond programme from $150 million to $200 million from this month.

Interesting, the average annual return for the July tranche has increased and from the 2^nd year onward, the average annual return will surpass OCBC’s 360 interest rate of 1.85%.

Table 1: Coupon Payment Schedule of GX18070N

Quantity Ceiling

If there is an oversubscription, the Singapore Savings bond will be allocated according to “Quantity Ceiling”. Under such scenario, there will be a cut-off amount. Should your application be equal to or below the cut-off amount, you will receive the full amount you applied for.

To illustrate, there is an oversubscription for the July 2018 bid. Thus, those who applied for $12,500 or lower were fully allotted. Applicants who applied for SGD 13,000 or higher were allotted either $12,500 or $13,000.

Conclusion

Both OCBC 360 and Singapore Savings Bond have their investment merits. Wealth builders can consider diversifying some of their funds in the Savings Bond, taking in the fact that it is safe, very liquid and offers reasonably high yields. Going forward, with interest rates expecting to hike in the coming months, I think the annual average returns for Singapore Savings Bond will likely to rise as well.

Of course, one should not just look at a financial product solely from the yield perspective. There is a need to factor in your family needs, appetite and investment goals as well. In this regard, start to strategize and ask yourself if Singapore Savings Bond is aligned to your overall wealth strategy. Till then, enjoy the ride.