Fixed deposits beat out Singapore Savings Bonds

RETAIL investors' interest in Singapore Savings Bonds (SSBs) has waned in recent months, likely due to competition from banks offering higher rates for fixed deposits, DBS Group Research said on Thursday morning.

The total applied amounts for SSBs during May and June were S$274.5 million and S$275.4 million respectively, down from more than S$400 million previously in February, March and April.

At first glance, this drop in demand for SSBs may seem odd, said Eugene Leow, rates strategist at DBS Group Research.

"Interest rates in the US, and consequently Singapore, have been falling as the market starts to price in expectations that the US Federal Reserve will cut interest rates, and the option to lock in higher returns especially compared to savings deposits should entice retail investors," Mr Leow noted.

One plausible reason is saturation in investor appetite, but he said this is unlikely because the amount of outstanding SSBs stands at S$5.5 billion, which is still small compared to the total deposit base.

Instead, higher fixed-deposit rates from banks may have contributed to the lower demand for SSBs, Mr Leow said.

Some banks are offering promotional rates ranging from 1.7 to 2 per cent for 12-month Singapore-dollar fixed deposits - above the 1.68 per cent paid by the latest SSB for the first year.

Maybank has been offering a 2 per cent promotional rate since May 1, for its 12-month Singapore-dollar fixed deposits with a minimum of S$20,000 deposited.

Current promotions lasting the month of July include CIMB Bank's 12-month fixed deposits which offers 1.85 per cent for online placements of at least S$10,000; UOB's 1.7 per cent rate for a 10-month tenor with at least S$20,000; and Standard Chartered's 1.7 per cent rate - or a 1.8 per cent preferential rate for priority-banking customers - for its 12-month fixed deposits with a S$25,000 minimum placement.

OCBC is also offering 1.7 per cent for a 12-month Singapore-dollar placement of at least S$20,000.

In contrast, the latest SSBs to be issued on Aug 1 will pay 1.68 per cent at the end of its first year - down from last month's 1.93 per cent rate for SSBs issued on July 1. Applications for the Aug 1 SSBs will close on July 26. The minimum investment amount is S$500.

The 1.68 per cent interest is "quite low", seeing as savers typically don't place their funds beyond the first year and seek "very short-term" investments, Mr Leow told The Business Times on Thursday.

In the coming months, demand for SSBs could ease further if short-term yields continue to fall below 2 per cent, which appears to be a key hurdle rate for investors, he said.

"Savers are quite savvy; I've heard of professional fixed-deposit rollers who go from one bank to another (in search of higher fixed-deposit rates)," Mr Leow added.

As banks sought funding, the amount of fixed deposits has increased by S$13 billion since the start of the year, he pointed out.

"Tightness in the banking system is also reflected in the widening spread between the six-month swap offer rate, or SOR, and the six-month Sibor (Singapore Interbank Offered Rate)," he said.

Since end-May, the six-month SOR has fallen by 28 basis points, in part reflecting the Fed rate cut expectations in the immediate few months. In comparison, Sibor has been practically unchanged.