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Singapore savings bonds: maiden S$1.2b issue

10-year compounded annual return of 2.63 per cent if held to maturity

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The Monetary Authority of Singapore (MAS) said on Tuesday SSBs are not allocated on first-come-first-serve basis. Instead, they are allotted after all applications have been collected, in a way that distributes the bonds as evenly as possible to maximise the number of successful applicants.

Singapore

FOR long term savers, the maiden issue of the long awaited Singapore Savings Bond (SSB) will generate a compounded annual return of 2.63 per cent at the end of 10 years.

The interest rate steps up gradually in line with the holding period, starting from 0.96 per cent at the end of the first year. On the fifth year, for instance, the nominal interest earned based on two coupons paid that year will be 3.25 per cent. The effective return per year on a compounded basis will be 2.01 per cent. At the end of the 10th year, the nominal interest earned will be 3.7 per cent. The effective return per year on a compounded rate will be 2.63 per cent.

The maiden issuance is for S$1.2 billion. Applications, which opened on Tuesday at 6pm, close on Sept 25 at 9pm. Interest payments will be made every six months. Interest rates for SSB are calculated using the market-determined rates of Singapore Government Securities (SGS).

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The Monetary Authority of Singapore (MAS) said on Tuesday SSBs are not allocated on first-come-first-serve basis. Instead, they are allotted after all applications have been collected, in a way that distributes the bonds as evenly as possible to maximise the number of successful applicants. If the issue is over-subscribed, those who applied for larger amounts may not get the full amount applied for. The allotment results will be announced on Sept 28.

The full application amount will be deducted at the time of application, and interest is earned after the bond is issued on Oct 1. Any application amount in excess of the allotment will be refunded to investors by Sept 29.

"A new savings bond will be issued every month for at least the next five years, so there is no need to rush for the first issue. Depending on demand, up to S$4 billion of savings bonds could be issued in 2015," said MAS.

The interest rates of each SSB issue are calculated based on the average SGS yields of the previous month. There may be some adjustments to maintain the "step up" feature of the interest rate if market conditions do not allow it.

For example, the average return of SSB for five years should match the average return per year of holding SGS of similar tenor.

There are two exceptions to this. One is small rounding differences of up to +/- 0.03 per cent that may arise in the computation of average returns for SSBs.

The second is that the shape of the SGS yield curve may not allow interest rates to step up. This occurs when the yield curve is convex or inverted. A convex curve means the coupon dips slightly before sloping up towards maturity. An inverted curve means the coupon is higher in the earlier years. If these occur, the yield of the SSB may be "redistributed" to allow a more even distribution of interest rates. For the Oct 1 issuance, an adjustment was made to the interest rate to maintain a step-up feature. The interest rate in Year 5 was adjusted downward slightly and redistributed to later years.

There is a monthly redemption window, typically on the first to the fourth business day of the month. The proceeds will be paid in the following month.

SSBs have no price volatility. Investors can withdraw their full principal and are free to reinvest it in future issuances should interest rates rise.

Investors may apply through DBS/POSB, UOB and OCBC, or through DBS/POSB's internet banking portal. A $2 transaction fee will apply for each application. This fee will not be refunded for unsuccessful or partially successful applications.

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