Is it time to rethink Singapore Savings Bonds programme?

ARE the Singapore Savings Bonds (SSBs) that were introduced five years ago still appealing, now that the interest they pay has hit a record low? Perhaps it is time to give the programme a rethink.

The SSBs' June edition opened in May with a first-year interest rate of 0.57 per cent and an average return of 1.05 per cent per annum for the 10-year holding period. These are the lowest rates since the bonds were launched in 2015.

The interest rates for 12-month fixed deposits at some financial institutions are, in comparison, much higher than what the SSBs pay in their first year. Some are also higher than the average return for staying invested in SSBs for 10 years.

While SSBs offer the flexibility of redemption at any time without penalties or the loss of accrued interest, the fact that it would take 10 years to earn a rate that is merely on a par with that for a 12-month fixed deposit makes the SSBs unattractive.

Rates slashed

The inaugural SSB edition was issued in October 2015. SSBs are backed by the Singapore government and were designed to offer individuals a long-term, flexible savings option with safe returns. SSBs offered in any given month will pay a coupon that is linked to the daily average Singapore Government Securities (SGS) yields as published by the Monetary Authority of Singapore (MAS) in the previous month.

The low yields of the latest SSB edition are a result of a rally in SGS in April. And in the present risk-off environment, demand for SGS might continue to surge and push yields further down.

In fact, as major central banks around the world have slashed interest rates to tackle the economic impact of the novel coronavirus, the price of money seems to be headed in only one direction. At best, interest rates would stay at the present low level in the foreseeable future. In some countries, they have even turned negative.

Arguably, investors could buy SSBs and redeem them later when they want to reinvest. But the returns in the interim are likely to be dismal. For example, the second-, third- and fourth-year rates for the June edition are only 0.57 per cent, 0.58 per cent and 0.63 per cent, respectively.

While fixed-deposit rates will not be spared the axe in a low interest rate environment, cuts so far have been small. Banks are keen on maintaining their depositors - as evidenced by United Overseas Bank's offer to allow existing savers to roll over their funds at favourable rates. In the past, such rates would have been available only to those depositing fresh funds.

Moreover, some financial institutions may be less ready to lower their fixed-deposit rates by too much, especially those whose floating mortgage rates are pegged to their fixed-deposit interest rates.

Waning interest

In any case, interest in SSBs has waned. The first edition of the SSBs, paying firstyear rate of 0.96 per cent and an average return of 2.63 per cent per annum, accepted S$413.2 million worth of applications. At the time, there was an application limit of S$50,000 per issue and a holding cap of S$100,000 per investor.

Applications peaked in July 2018 at S$568 million. The per-issue limit had been removed by then. The limit per investor has been revised upwards - to S$200,000 - since February last year.

Nevertheless, for the May 2020 edition, applications totalled just S$27.8 million. The interest rate for the May issue was 0.96 per cent for the first year and 1.39 per cent per annum on average for 10 years.

The latest June edition received applications worth S$14 million.

Meanwhile, quite a few investors seem to be redeeming their SSBs. The average redemption rate of past issues stood at 17.8 per cent. The highest redemption rate has been for the February 2018 edition, at 55 per cent. The April 2020 edition already has a 3 per cent redemption rate.

Interestingly, most applications have been small. MAS data from early March 2018 showed that slightly more than half of all SSB applications were for amounts of S$10,000 or less. This continues to be true today. As of May, 47 per cent of applications were for sums S$10,000 or less.

This suggests that the SSB investors may be just as easily served by fixed deposits at licensed financial institutions, as deposits up to S$75,000 per account per institution are protected under the Deposit Insurance Scheme.

Unfavourable environment

Various reasons may explain the declining interest in SSBs. Investors may already have allocated cash for the risk-free segment of their portfolios in the early years of the SSBs' launch. They may lack the spare cash to invest in these uncertain times. Or, they may even be turning their attention to the stock market in light of the recent decline in prices.

From an economic perspective, limited resources under normal market conditions are best allocated to the highest price. Money placed in fixed deposits with financial institutions is lent out, which helps to spur the economy. Listed companies too can make use of investor cash to expand or to prepare themselves for an eventual rebound.

The government had committed to maintaining the SSB programme for at least five years from 2015. Five years on, there is a strong case for a rethink of the programme.