SSBs are welcome but other bond initiatives may be more promising

SAVERS in Singapore will applaud the impending launch of the Singapore Savings Bond (SSB) programme. It is the latest of a series of recent initiatives aimed at expanding retirement savings options. Earlier this year, for instance, the Budget unveiled enhancements to the CPF targeted at older workers. These include a higher salary ceiling for the CPF, higher contribution rates and higher interest rates. There is also a higher contribution cap for the Supplementary Retirement Scheme. Elsewhere in the bond market, two new frameworks are to be introduced shortly to make corporate bonds more accessible to retail investors. The Bond Seasoning Framework allows corporate issuers to resize wholesale bonds into smaller lot sizes after a six month period, after which the resized lots can be sold to the retail market. And, the Exempt Bond Issuing Framework allows issuers who satisfy more stringent criteria to offer bonds directly to individuals without a prospectus.

Clearly, these measures tap investors' appetite for yield which shows no sign of ebbing, as interest rates remain very low and staying in cash would hurt a portfolio should inflation rise. The SSB programme, in particular, will appeal to the majority of savers with a fairly low risk profile, who still want yield in excess of deposit rates but do not want any volatility. There are a number of features that will ensure a warm - even overwhelming - reception for SSBs. One is their accessibility and liquidity. There is likely no bid/ask spread that normally applies in bond transactions. Investors can exit anytime without penalty and get their capital back plus an interest rate that roughly corresponds to the comparable Singapore Government bond. There is no price risk and virtually no credit risk. It is likely, however, that individual subscriptions will be capped, and the big question is whether the cap will be meaningful enough in the context of a portfolio.

There is arguably a place for SSBs in a portfolio, despite a low indicative yield of 2.1 per cent over 10 years, based on the current yield of the 10-year Singapore Government bond. With no price volatility, it serves as a diversifier, helping to dampen overall portfolio risk. Investors, however, will have to bear a number of factors in mind: One, SSB is effectively a cash equivalent and thus, it may not keep pace with inflation. Hence, over-allocation into SSBs runs the same risk of a loss of purchasing power if inflation trends up. Two, the offer of such a low risk alternative should not lull investors into abdicating their responsibility to do their homework. The risk/return profile of any asset is, after all, best viewed relative to other assets. There are arguably more attractive alternatives in corporate bonds, for instance, where investors are better rewarded for inching up the risk scale, not just in terms of additional yield but also through potential price appreciation. Three, the indicative yield of SSBs - and of any other bond - depends on investors' ability to reinvest the coupons at the same rate of return.