Guide to Singapore Government Securities (SGS) Bonds
Introduction
“When you invest, you buy a day you do not have to work.”
One of the main factors in success is investing in oneself. You should devote your time, energy, resources, and actions to projects and ventures that will pay off in the long run.
How should we start if we are brand-new to the world of investing and do not want to take on the risk? Why not start and broaden your investment portfolio with Singapore Government Securities bonds?
By the way:
When was the last time you've done a proper Investment plan or reviewed your investments?
In Singapore, having a proper investment plan could spell the difference between a rich quality of life for you and your loved ones and a not-so-good quality of life...
And people are starting to realise this.
What Is SGS?
Singapore Government Securities bonds are tradable government debt securities that pay a fixed interest every 6 months.
To invest in Singapore Government Securities bonds, you are required to be above 18 years old. You will also have to invest a minimum of $1,000 and in multiples of $1,000.
Singapore Government Securities bonds are issued through uniform-price auctions, which are held according to the annual issuance calendar. Both competitive and non-competitive bids are accepted.
You may choose to invest using cash or funds from the Central Provident Fund Investment Scheme (CPFIS) or Supplementary Retirement Scheme (SRS).
Until the bond matures, you can get a regular, consistent income twice a year (every six months) from the month you purchase Singapore Government Securities bonds. Singapore Government Securities bonds are debt securities issued by the Singapore government.
You receive the main amount, or your initial investment when the bond matures.
The MAS initially issued Singapore Government Securities bonds in 1998 as part of its initiatives to establish Singapore as a global debt centre by providing banks with risk-free assets for their liquid asset portfolios.
Simply put, when you buy Singapore Government Securities bonds, you are lending money to the Singaporean government, and you will receive interest based on how much you invested.
How Do SGS Bonds Work?
Singapore Government Securities bonds are available for sale, and their price changes over time since it depends on the environment's interest rate conditions.
Bonds issued by Singapore Government Securities have maturities of 2 to 50 years and a fixed interest rate.
When assessing a bond, it's crucial to take note of its coupon rates, tenure, frequency of payments, years to maturity, and yield to maturity.
Let’s break down the definition of each of these terms:
Tenure: Tenure refers to the maximum period of a bond over which you will earn your coupon payments.
Frequency of payments: SGS bonds make coupon payments semi-annually.
Years to maturity: Years to maturity refer to the number of years left on the bond before it expires.
Yield to maturity: At the time it is purchased, a bond's yield to maturity and its coupon rate are the same. As economic conditions change, investors may demand the bond for more or less. As the price of the bond changes, the yield to maturity will change as well.
Coupon rate: The coupon rate of a bond determines how much you’ll receive in interest for holding the bond to maturity.
For instance, if you were to invest $1,000 in Singapore Government Securities bonds with a 2% annual yield rate, you would receive $20 in the form of two coupon payments ($10 each) each year. Until the bond matures, these payments will be made every six months.
If the coupon rate stays the same, you will receive more interest for Singapore Government Securities bonds with a longer tenure.
Relationship between bonds and interest rates
To understand how SGS bonds work, a quick lesson on how bonds work is important.
Bond prices will decrease as interest rates increase. Bond prices will also rise if interest rates fall.
So, while calculating a bond's return. You must be aware of the coupon payments you will get during the bond's lifespan as well as any possible capital gains or losses if the bond's price rises or falls from the amount you originally paid.
With this knowledge, there are other ways that you can profit off bonds apart from holding them.
For instance, you may be able to sell a bond for a profit if its price rises over its par value, but you would forfeit the coupon payments you would have received if you had kept the bond. You will have gained money if the number of your coupon payments is less than the capital gain from the sale of your bond.
Is the price fluctuation something you should be concerned about? You would not stop receiving your fixed interest income during the bond's lifespan so there’s no need to worry about price fluctuations if you’re a conservative investor.
Types of SGS Bonds
Singapore Government Securities bonds can be divided into three categories: Singapore Government Securities (Market Development), Singapore Government Securities Infrastructure, and Green Singapore Government Securities (Infrastructure).
The Singapore Government Securities (Market Development) bond category, whose primary goal is to expand the domestic debt market, is the most typical one you will come across.
The Green Singapore Government Securities (Infrastructure) focuses on ecologically friendly projects, whereas the other forms of Singapore Government Securities (Infrastructure) Bonds are used to finance significant, long-term infrastructure.
How to buy SGS Bonds
Purchasing Singapore Government Securities bonds requires an auctioning procedure for investors coming from the main market, in this example, the government, who are making direct investments.
An investor can apply for the auction via iBanking or at a nearby ATM once they have decided how much money to invest (in multiples of $1,000).
There are both competitive and non-competitive bidding on SGS bonds.
In essence, when there are competing bids, you must bid for a target yield based on a predetermined coupon; the investor who bids the lowest yield wins.
Although both the concepts of coupons and yields are stated as percentages, they are substantially different from one another.
Coupon rates are established by the government at the time the bond is issued and are dependent on the par value, also known as the initial value, of the bond. The bond's annual payments are determined by the coupon rate.
Yield rates, on the other hand, represent the earnings an investor might anticipate. The returns are computed from your actual bid rather than from the par value.
In conclusion, a higher bid results in a lower yield. Due to this, the lowest yielder always prevails in a bid.
Moving on to non-competitive bids, you just accept the yield determined by the most competitive bidder in non-competitive bids.
The bonds will be placed into your central depository account within three business days if either bid is successful.
What happens if you do not want the risk associated with a non-competitive bid? In other words, you have to take whatever the auction offers because you are worried that the most aggressive bidder is, for whatever reason, offering low (or even negative!) returns.
The secondary market is another choice, and it is more transparent. It is otherwise known as the open market route.
SGS Bonds vs Singapore Savings Bonds
For investors wishing to place their money in an investment for up to 10 years, the Singapore Savings Bond (SSB) will be a good choice.
Lengthy-term investors who want to invest their resources over a longer period can choose to invest in SGS bonds.
For SBS, the minimum investment for individuals with lower cash on hand is S$500 as compared to SGS bonds’ minimum investment of S$1,000.
Regarding how prices and rates are set, SSBs are more predictable since the MAS sets the interest rate each month while SGS are auction based.
Advantages Of SGS
Fully Supported By The Singapore Government
SGS bonds are safer and more stable than company-issued bonds and the stock market. Given the high likelihood of getting your initial investment back, this is a sensible and secure approach to diversifying your investment portfolio.
Earn Consistent Interest
From the month you buy the bond until the day it reaches its maturity period, you will get dividends twice a year. In contrast to other investments where the profits are not guaranteed, the payouts are more consistent and fixed.
Additionally, the returns on bonds increase the longer you hold them. The interest you receive from the bond grows throughout your ownership until it matures.
Exempt Taxes
Investors in Singapore Government Securities bonds may be eligible for a tax exemption on their investment.
This implies that you may put extra money in your pocket because you would not have to worry about paying taxes on your Singapore Government Securities bond investments. This is an important factor to take into account while preparing your taxes.
Disadvantages Of SGS
Long Period Of Maturity
Singapore Government Securities bonds mature in two to thirty years. You must hold it in your portfolio for a longer period or pay the associated opportunity costs if you want to get the full value.
Potential Capital Loss
Selling it through secondary markets if you need the money could result in a loss if you do so below par value or the price you paid.
Always make sure you have adequate emergency cash and insurance coverage to protect your investments and your family.
Requires A CDP Account
The purchasing and selling of Singapore Government Securities bonds require a CDP account. Only Singaporeans and permanent residents who are 18 years old and older may open CDP accounts.
If you currently have or are eligible for one, this might not be a disadvantage for you, but this requirement may impact some people.
Are SGS Bonds A Good Investment?
The Singapore Government, which has an "AAA" credit rating, fully guarantees Singapore Government Securities bonds. As a result, investing in Singapore Government Securities bonds carries the least amount of risk possible.
Only Switzerland and a handful of other nations have the same "AAA" credit rating.
The Singapore Government Securities bonds may be among the safest items on the market because of their high rating. Hence, Singapore Government Securities bonds are a good investment.
Fixed income assets, such as SGS bonds, are always required. You must have stable, dependable sources of revenue.
As such, it is vital to maintain a diverse portfolio, and SGS bonds are one tool for doing so while lowering risk.
Are SGS Bonds Right For Me?
If you have a large sum of money and additional cash to invest, you may want to consider holding it in Singapore Government Securities bonds to lock in the (current) high-interest rate.
This is especially so if you have a long investment horizon (5 to 10 years typically, depending on the tenor of the particular Singapore Government Securities bond).
Whether Singapore Government Securities bonds are right for you depends on your risk profile. Singapore Government Securities bonds are seen as having minimal risk because of their predictable cash flow.
You might only want to devote a modest amount of your portfolio to SGS Bonds if your risk tolerance is strong.
If you're still on the fence about whether to invest in SGS bonds, it might be smart to work with a financial professional.
Contrary to their reputation for pushy sales tactics, financial advisers help new investors cut through the noise. They can arrange your investments and build a financial plan that helps ensure you will sustainably meet your financial goals.
With regards to investment planning, they do the following:
Identify your current life stage
Identify your goals, needs and wants
Find out how much you will need for each need, wants, and goals
Plan how you can achieve these goals
Build and optimise your financial investments
To help you take control of your personal finance, Techiya offers a free comprehensive and personal financial assessment worth over $200 for individuals, don’t miss out on this!
How Do You Choose Which SGS Bonds To Invest In?
Before making a choice, you must complete your due diligence and research.
We advise you to examine and gain access to market data from places like the platforms used by investment brokers and the MAS bond calculator.
This will give you access to government bonds that have already been issued and their initial coupon release prices, most recent secondary market closing prices, and anticipated yields based on the secondary market. Moreover, you can base your decision on your risk profile and personal financial goals.
Conclusion
We truly hope that you were able to learn something interesting and useful about Singapore Government Securities bonds. They are a secure long-term investment option that provides advantageous features that are difficult to find in higher-risk investments like equities.
Before making any investments, we firmly encourage you to evaluate your investment goals and perform your due diligence.
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