Savings bonds may put fixed deposits at risk

Singapore

THE launch of the Singapore Savings Bonds (SSB) in the second half of this year could be a win for retail investors but a loss for banks' fixed deposits, industry observers said.

The Monetary Authority of Singapore (MAS) on Monday announced details of the new bond programme, which was first mentioned by Senior Minister of State for Finance and Transport Josephine Teo on March 26.

The proposed bonds offer an unusual combination of features. The 10-year bonds may be redeemed at any time. Their coupon will step up every year such that the to-date average interest of the bond at any time will match a Singapore Government Security that was bought at the start of the bond and that matures in the current year. Investors are therefore incentivised to hold the bonds for as long as possible, but are not punished for early redemptions.

The new bonds are not meant to directly benefit major wealth managers or corporations. Only individual investors may buy the non-tradable bonds, which will be sold in S$500 denominations, with a participation cap yet to be determined.

Additional details on how to apply for the bonds will be released later.

Financial advisers and fund managers were quick to describe the bonds as a better alternative to many of today's fixed deposit products offered by banks.

The early redemption feature offers more flexibility than fixed deposits, for which investors typically forfeit any interest for early withdrawals; and the longer tenure is more efficient than fixed deposits, which rarely last more than a few years.

"It's quite irritating always having to shop around different banks every time you have to roll over (a fixed deposit)," Pilgrim Partners Asia fund manager Brian Tan, who used to be a financial adviser, told The Business Times. "You can put almost all your non-daily usage cash into the bonds."

M Salim, chief executive of First Principal Financial, added that having the backing of the Singapore government, as opposed to a bank, also made the bonds safer than fixed deposits. "I don't see any downside compared to fixed deposits," Mr Salim said.

But CIMB head of research Kenneth Ng argued that banks can and often still offer better rates.

If offered today, the bonds might offer 0.9 per cent yields in the first year, stepping up to about 3.3 per cent in the 10th year, assuming that a 10-year Singapore Government Security yields 2.4 per cent right now.

"Today, some foreign banks are already offering fixed deposit rates that are as high as 1.64 per cent on the three, six, or 12-month deposits," Mr Ng said. "So for the rate-sensitive depositors, this will not be convincing for them to make the switch."

Mr Ng also noted that banks are not strangers to competition.

The amount of fixed deposit monies in Singapore "has been shrinking for a while" with banks' Singapore -dollar loan-to-deposit ratios drifting towards 100 per cent.

"Higher deposit rates will, in theory, equate to higher funding costs for the banks," Mr Ng explained. "In an environment where the banks cannot price up their loan yields due to competition, net interest margins will narrow and this is negative for banks' margins. However, in reality, stiffer deposit competition has been around for a while, and banks are not seeing poorer margins because they have priced up loans as well."

The local banks did not comment directly about the impact on fixed deposits.

Gemma Tay, United Overseas Bank's head of deposits, investments, and insurance strategy, said the savings bonds' low minimum investment sum of S$500 will encourage those who have just entered the workforce to start saving and investing for the long term, but the bank declined to comment on the comparison between its fixed deposit and the SSB.

Vasu Menon, vice-president at OCBC Wealth Management Singapore, said the SSB is a good investment for those with idle funds, and also offers equity investors an avenue to diversify their holdings to reduce investment risk. OCBC declined to comment at this stage on the impact on its fixed deposits.

Jeremy Soo, managing director and head of consumer banking group (Singapore) at DBS Bank, said the SSB may be an "ideal addition" to the portfolios of investors who are attracted to bonds' stable yields but deterred by their traditionally high minimum investment amount.

A DBS spokesman also told BT that the savings bonds will be "a good, strong complement" to the bank's offerings, and that fixed deposits and SSB "have their own unique features and are designed for different investment needs". DBS/POSB fixed deposits allow for a wide range of tenors and deposit sizes, and customers can also diversify their portfolios by having fixed deposits in different currencies, the spokesman said.

Observers also stressed that the new bonds cannot fill every investment need.

Mr Salim said ease of use will be an issue for older investors, who might find the bonds too difficult to handle.

The returns on the bonds are also relatively low - not a surprise given its low risk profile.

"This is a good risk reduction tool, but it's not something that you can rely on to beat inflation," he said.

INFOGRAPHIC: New bonds, old comforts