As compared to SGS treasury bills and bonds, fixed deposits is the more widely known product that is known to carry very little or no risk. This is because most of us are aware that the Singapore Goverment currently guarantees the money that you deposit at the bank up to a certain amount. However, not many people know about SGS. SGS has some distinct advantages which makes it a superior form of investment over fixed deposits in its class that is suitable for conservative investors.
1. Superior returns
SGS treasury bills and bonds are likely to offer a better rate of returns as compared to fixed deposits. I have attached a chart of the historical yield of SGS bonds with an average year to maturity of 2 years.
Chart taken from fundsupermart
If you take a closer look at the chart, you will realize that the yield for the SGS with an average year to maturity of 2 years.is rather attractive as compared to fixed deposits. Furthermore, the lowest yield for the SGS, which is slightly less than 1% is comparable than the yield offered by fixed deposits, which is generally below 1%. There were also instances where the yield of the SGS with an average year to maturity of 2 years is even greater than 3% and at its highest point, the yield has gone up to more than 4% before. This shows that generally, SGS treasury bills and bonds offer a better yield than fixed deposits.
2. No locked-in period
As compared to fixed deposits which has a locked-in period, SGS treasury bills and bonds have no locked-in period. You can always choose to sell your SGS treasury bills and bonds in the secondary market before maturity. However, since the price of SGS such as the treasury bills or bonds can fluctuate, there is a chance that you will make a small loss if the price that you sell your treasury bills or bonds is lower than your purchase price. If your selling price is higher than your purchase price, that will bring me to my new point.
3. Potential Gains
Since one is able to sell SGS treasury bills and bonds on the secondary market, if the selling price of your treasury bills or bonds is higher than your purchase price, you will be able to have some capital gains. However, the price of the SGS treasury bills and bonds are usually not so volatile, thus any capital gain is likely to be rather small.
As we can see, SGS treasury bills and bonds have a few distinct advantages over fixed deposits and one should seriously consider them over fixed deposits. In my next post, I will be covering on how one can go about in buying SGS treasury bills and bonds.
Posts
Hi,
ReplyDeletecan i assume that we would not see the rates of return for t-bills or bonds till we purchase them ? i was looking at the websites that you have provided for 3 months t bills and the x-year for bonds but dont see any prices for it , the discounted value for t-bills or the coupons for the bonds.
thanks
Hi,
ReplyDeleteYou are right that we won't be able to see the effective yield until the auction for the SGS is over. However, you can roughly gauge on the yield based on previous auctions for similar SGS T-bills and bonds.
I think you should be able to see it on the SGS website @ https://secure.sgs.gov.sg/apps/goto/?app=prices. Alternatively, you can go to fundsupermart.com. Click on the SGS bonds on the top toolbar. I hope it helps.
Regards,
Kay
Hi kay,
ReplyDeleteI would like your views on investing in a Foreign Currency Fixed deposit such as the aust dollar. The returns seems to be better than SGS T-bills and bonds?
If the sing/aust dollar rate comes down to ard 1.10-1.15
- an avid reader
Hi,
ReplyDeleteFor SGS T-bills and bonds, your investment capital is guaranteed by the government thus the returns are lower. As for foreign currencies FD, this is not true since the exchange rate between any pair of currencies may fluctuate. Thus, there is always a chance that the returns gained through the interest may be lower than the capital loss due to the fluctuation in the exchange rate, resulting in a net loss. Besides, there is no way of telling how will the exchange rate will turn out in the future.
Kay
Hi Kay,
ReplyDeleteI'm a noobie to the SGS and have never invested in bonds before. I have read through FAQs in SGS website and some queries remain regarding the application about new and reopened issues.
1) New application
Coupon Rate: To be determined based on the cut-off yield of successful applications
Yield and Price: To be determined at the auction
As stated above, the coupon rate and yield & Price are determined after the auction.
- If we were to apply to this new bond application through ATMs, aren't we short changed if the result of the coupon rate and yield & Price are much lower than what we expected?
eg. If we expect 1.5% but the outcome of the auction become 1%.
- Are there anyway if we could get a rought estimate of the coupon rate and yield & Price before applying them through ATMs??
2) Reopened of current issues
Taking this example in which this bond was issued previously:
Issuance date: Mon, 01 Mar 2010
Tenor: 15 years
Reopened: NY09100H
Issue Code/ISIN Code: NY09100H/SG7S30941627
From SGS issuance calender 2010, this bond will be reopened as above.
Looking at the coupon rate for this issue, coupon rate: 3% Daily price: S$97.5
My questions:
- Is this bond reopened as another 15 years bond or for the remaining period of the bond maturity ?
- What will be the buying price if this is reopened if i apply it through ATMs? $100 or $97.5?
- Does the coupon rate 3% still remained?
Thks
Hi James,
ReplyDelete1) Don't be too concerned with the coupon rate. The most important thing is the yield. Coupon rate is based on the face value of the SGS while the yield is based on the price which you actually paid for the bonds. The yield of the bonds should be quite close to the bonds of similar maturity period. As such, if you are bidding for a 5 years bond which is newly issued, you should expect the yield to close to existing bonds which has around 5 years to maturity. You can look at fundsupermart.com for such data although I do think there are better sources out there. Click on SGS bonds under the heading and you can see the various yields of all the bonds that have been issued.
2) The bond will be reopened for the remaining maturity period. Your buying price will depend on the yield which will depend on the results of the auction and the coupon rate will still remain. Bear in mind the coupon rate is 3% based on the face value of $100 and that means you will get $3 for every $100 of SGS bonds you are holding But your yield based on an assumed buying price of $97.50 is $3/$95.70*100 = 3.08%. The face value is not the buying price. The buying price will depend on the market condition.
Kay
Hi Kay,
ReplyDeleteThanks for your prompt reply. Look's like the SGS bonds is not attractive at the moment with a 10 to 20years bonds averaging only 3%.
Hi James,
ReplyDeleteI agree with you. Equities are slightly more attractive than bonds at this point of time.
Kay
Hi Kay,
ReplyDeleteI have some questions regarding the recent SGS 7years bonds issue.
From SG - LCY Government Bonds market data, the yield for 7 years bonds is at 1.67% p.a (price at $106.19).
However, from the results of auction of taxable book-entry Singapore Government Bonds to be issued on 01 April 2010, the Cut-off Yield & Price for a 7 years bond is at 2.38% p.a (price $100)
1) Why is there a different in % p.a between the two?
2) Isn't it better for a person to sell off the 1.67% p.a (price at $106.19) to gain some profits and buy into the 2.38% p.a (price $100)???
Thks
Hi James,
ReplyDeleteCan you show me the link to get the SG - LCY Government Bonds Market data ? Thanks.
Kay
Hi Kay,
ReplyDeleteThis is the URL
https://secure.sgs.gov.sg/apps/goto/?app=dailyPrices
Hope you could clarify. I'm still a noob with this.
Thanks and many good years ahead.
Regards.
Hi James,
ReplyDeleteI'm not particularly sure on this but here is my guess on this. I looked at the daily SGS prices for the past few days. On the 26th of March which was on Friday, the yield was still at 1.67%. The following market day would be on Monday. On Monday, which was was the 29th of March, the results of the 7 years SGS bond was announced and the yield of this SGS bond was also revealed. As such, this was the new yield which the market was willing to pay for a 7 years SGS bond and thus there was a change in the yield. For your 2nd question, that would not be possible since there is no way of predicting the results of the yield for the 7 years SGS bond. What if the results of the yield is even lower than 1.67% ? You will probably be sitting on a loss then.
Kay
Hi Kay,
ReplyDeleteThanks for sharing.
Looking at both date 26 and 29 Mar 2010, it "seems" that that there is a sudden increase in % points after the announcement.
My concern is the opposite/reverse may happen (sudden drop in % points) as well for investors who have applied for the auction on 22Mar10.
Regards.
Hi James
ReplyDeleteAllow me to explain: the previous 7Y SGS bond only had just over 5yrs left to go before maturity whereas the newly launched 7Y is a "true" 7Y which matures on 1 April 2017. So this wasn't so much a "jump" in yields as the old 7Y benchmark was trading closer to the 5Y yield, whereas the new 7Y will have a higher yield as you move further along the yield curve. This also answers your second question - it's not possible to arbitrage between the 2 bonds because they are not comparable in tenor. You could make a case for selling the old benchmark and buying the new benchmark (and vice versa for that matter) if you had interest rate views about the likely direction of rates in the 5 - 8Y section of the curve.
Hi Hobbes,
ReplyDeleteThanks for the detailed explanation. This is very helpful indeed.
Kay