SSBs are issued every month. Every tranche has a issue-specific Singapore Savings Bonds (SSB) coupon table that investors can see off the SSB website.
4 points that investors should be aware of for the Singapore Savings Bonds Coupons
Coupons Increase over Time
For each issue, coupons increase along holding period. This is unlike Singapore Government Securities (SGS) and corporate bonds where coupons stay level throughout holding period. Investors get to reap higher coupons the longer they hold the bond. This unique bond feature therefore encourages bondholders to save.
Coupon Table Locked in at Issuance
The Singapore Savings Bonds coupons are determined at the start/issue of the bond and will not change over time. Therefore, regardless of the interest rates in the future, the SSB issued today will pay coupons based on the published coupon table. Investors should not be confused with the earlier point that coupons increase along holding period.
Look at Average Returns
Given the step-up coupons, average return varies across the holding period. The longer the investor holds the bond, the higher the average coupons or returns. This information is provided together with the coupon table for each bond issue. Investors should take note of this value together with current year coupon to evaluate bond redemption.
Average Returns Mimic SGS Bond Yields
For each announced issue, SSBs will yield the similar average returns as the SGS benchmark yields for the previous month. This way, bond investors enjoy similar yield as the SGS bonds even with step-up coupons.
MAS determines the Singapore Savings Bonds coupons to provide matching 1, 2, 5 and 10-year average returns with the 1Y, 2Y, 5Y and 10Y SGS benchmark yields. For the interested, the average returns for other years are also matched with corresponding ‘benchmark’ yields. These ‘benchmark’ yields are interpolated from the 1Y, 2Y, 5Y and 10Y rates. If you wish to read more, MAS has provided a technical sheet regarding this. Else, refer to the picture below to see how the Singapore Savings Bonds coupons are determined.
Bond Yields could be Lesser than Market Rates
SGS benchmark yields are based on issued SGS bonds. As time passes, these reference bonds get closer to maturity. This means that they have shorter remaining time-to-maturity than their represented term. MAS periodically redetermines the reference bonds to ‘reset’ the time-to-maturity.
The situation worsens the longer the reference SGS bond has been acting as the benchmark. For example, on 23 Feb 2017, SGS bond NX16100F, representing the 10Y benchmark, had 9.25 years left to maturity. In an upward sloping interest rate environment, the yield of a 10-year bond issued on the same day should be higher than the 10Y benchmark. By basing on the average 10Y benchmark yield, the SSB announced in the following month would pay a lower 10-year average return than the actual market rate for a full 10-year bond. This is also true for the other benchmarks 1Y, 2Y, 5Y. And as a spline is used to interpolate for rates in between, the entire curve is affected.
The diagram below illustrates this concept using actual SGS bond data on 23 Feb 2017. This data is also summarised in a table.
|Rates on 23 Feb 2017||1||1.23||1.59||2.23|
|Time left to maturity on 23 Feb 2017||0.94||2.27||4.61||9.27|
The yield difference could between -0.1% (T = 7, 8, 9 years) to +0.05% (T = 2 years). But more importantly, except for T = 2 years, the rate curve used was under-representing the actual full-term rate every other year.
Benchmark Change Affects SSB Yields
Whenever a new SGS bond takes over the old bond as the benchmark, the benchmark will follow its yield. This handover serves to ‘reset’ the term-to-maturity error in the benchmark. The difference we saw above would narrow or even turn positive. This explains the +0.05% difference seen for T = 2 years on 23 Feb 2017. The 2Y benchmark had recently handed over to a bond.
Let’s investigate further with the 10Y benchmark rates in Feb and Mar 2017 for more illustration.
In Feb 2017, the bond closest to 10 year maturity was NZ07100S. However, it was not acting as the 10Y benchmark. NX16100F was the 10Y benchmark but it was already 9.25 years left to maturity. As such, the average 10Y yield for month of Feb 2017 was 2.27% instead of 2.35%. This was the computed 10-year average return for SSB announced in Mar 2017.
The 10Y benchmark was handed over to NZ017100S in 23 Feb 2017 so 10Y rates in Mar 2017 better reflect rates of a 10 year bond. It should be obvious that the interest rates were just slightly depressed in Mar 2017. Average yields for NX16100F and NZ07100S were 2.21% and 2.31% compared to 2.25% and 2.35% respectively in Feb 2017. However, the 10-year average return for SSB announced in Apr 2017 was 2.31% compared to 2.27%.
Buy Singapore Savings Bonds Announced in Month After Benchmark Change
Ignoring changes in the underlying interest rates, bond investors should always apply for SSBs in the month after benchmark changes. And, as there are 4 benchmarks to pay attention to, this process may become complicated.
Investors are advised to consider their targeted investment horizon to make the optimisation decision. That said, an investor preparing to park money in SSBs for the next 2 years should consider applying for bonds when the 2Y benchmark hands over. This is the easiest and most straightforward solution.
Do check out the monthly analysis I provide regarding each bond issue for more information.
Last updated: 8 Apr 2017