You might be a newbie investor on the scene, looking for safer options than the volatile stock market. Or maybe you’re a bit more on the conservative side for now until you get a handle on things.
Well, those looking for low risk, reliable options can always look to government-backed bonds.
You know what the SSB is and how it works — but they’re not the only bonds on the market. If you’re looking for more low-risk options to invest and spruce up your fledgling portfolio, then you could perhaps look to the Singapore Government Securities (SGS) bonds
What’s the Difference?
SGS bonds differ from SSBs in many ways, which can be summarised as:
|Investment Duration||10 years||2, 5, 10, 15, 20 or 30 years|
|Min. to Invest||$500||$1,000|
First-off, both investment products are bonds backed by the Singapore government and have a AAA credit rating, meaning that they’re the safest types of investment on the market for Singaporeans.
To recap on bonds: It’s quite simple, invest in a bond, the bond then pays out interest (usually twice a year). Once the bond matures, the original value of the bond is returned back to you.
Noticed that we italicized original? Well, this is where SGS bonds get slightly complicated, but we will explain further below.
The biggest difference between the two is that you can only redeem SSBs via iBanking (or through an ATM), either upon maturity or before that, while you’re able to sell and trade SGS bonds on the open stock/bond market before maturity.
The open market can also be referred to as the secondary market where investors like yourself will trade between one another, unlike the primary market where bond issuers issue bonds directly to investors and institutions.
Buying SGS Bonds
Buying the SSB is straightforward: apply for them via iBanking or through an ATM. But what about SGS bonds?
The process is not quite the same — and might even be a little confusing for the average investor. This is because it involves an auctioning process for those who are investing directly from the primary market, in this case, the government.
After an investor decides on the amount to put in (in multiples of $1,000), they can apply for the auction via iBanking or through a local ATM.
How does bidding work?
When there’s an auction, there will be bidding. And this is where things can get complicated.
And with SGS bonds, there are competitive and non-competitive bids.
In a nutshell, with competitive bids, you have to bid for a target yield based on a fixed coupon — the investor who bids the lowest yield wins.
Okay, there are a few things to break down here, namely the terms coupons and yields. While both are expressed as a percentage, but both are very different.
Coupon rates are fixed by the government upon the bond’s issue and are based on the par value (or original value) of the bond — par value is the amount you can expect to get back in return upon the bond’s maturity, in SGS bonds case, par value is expressed as $100 (though the minimum investment amount is $1,000).
The coupon rate determines the annual payouts the bond will distribute. For example, a coupon rate of 2% off an investment of a bond with a par value of $1,000 dictates an annual coupon payment of $20.
In contrast, yield rates are the profits an investor can really expect. Rather than off par value, yields are derived from your actual bid.
So let’s say you submit a low-ball bid of $900 on a bond with a par value of $1,000. But remember, the coupon payment is fixed at $20, this means if you win, you’re receiving a 2.22% yield ($900 divided by the $20 coupon), which is good of course.
Of course, the inverse is also true, if you bid $1100, your yield shrinks to around 1.8%.
So in a nutshell, if you bid up the price, you get a lower yield. This is why the lowest-yielder wins in the bidding process.
But what is too high or too low a yield to bid for? Well, this is the difficult part. This is the realm of the big boys, banks and financial institutions that can crunch complex numbers and understand the general investment climate to be able to arrive at a targeted yield.
Therein comes the easier route, non-competitive bids: where you simply accept the yield set by the most-competitive bidder.
If either bid is successful, the bonds will be transferred into your central depository account within three business days.
What if you don’t want the uncertainty of a non-competitive bid? In other words, you’re afraid that the most competitive bidder, for some reason or another, is bidding the yields low (or even negative!?) — and you have to accept whatever the auction throws up.
Well, there is another option that is more transparent: the secondary market.
The Open Market Route
Forget auctioning if you want to know exactly what you’re paying for — the secondary market is a more straight forward option.
As mentioned, SSBs cannot be traded on the stock market, but SGS bonds can — just like stocks and shares.
But how do you figure out which one to buy? How do you assess them to see which one is worth your investment?
Well first, you have to know where you can look for market data, this can be usually found on your investment broker’s platform, or you can also use MAS’s bond calculator. Here, you can find details of previously issued government bonds, including the original coupon rates, the latest closing prices on the secondary market — and based on the secondary market prices, the calculator spits out the yields you can expect to receive.
(1) Annual yield
Of course, the most important thing to assess with any investment is your profit, and as we went through earlier, annual yield refers to the actual returns you’ll get on your investment each year.
So here it’s simple, the higher the yields the better.
(2) Below par
Par value, as we have also mentioned, means the real maturity value of the bond, in SGS bond’s case, expressed in multiples of $100. So if you find a bond selling on the market at a price of $90, this means the bond is priced below-par.
Because the par value will be returned at maturity, so if you manage to pick up a bond with a total par value of $1,000, but at the lower price of $900, you can expect a profit of $100.
This ‘bonus profit’ is on top of the annual yield you would receive from the bond.
Because of the ability to be traded on the market, there might be opportunities to find SGS bonds that are priced lower (or higher) on the stock market than what was originally issued on the primary market.
But this does not mean below-par bonds are an automatic buy, if you see a swath of low-priced SGS bond, it could just mean that newer SGS bonds being issued on the primary market have better coupon rates or yields compared to older bonds and bills — and the prices on the secondary market have to drop to stay competitive with the new bonds-on-the-block.
Or perhaps, investors could be selling their bonds at a discount to pull money out of the bond market quickly, in order to redeploy their capital into a roaring stock market.
As you can see, it’s SGS bond investing is not so straight forward, and you have to understand the investment market holistically to be an effective investor in SGS bonds!
(3) Dirty vs Clean price
If you clicked on the MAS link above, you might have come across the term ‘dirty’ price.
While this does not really factor into calculations on whether a bond is worth investing in, but it’s still a term fledgling bond-investors should get familiar with.
The term refers to the accrued interest that a buyer has to compensate the seller for the upcoming coupon disbursed by the bond. As such, the dirty price rises when the bond is traded closer to a bond payout date, as more accrued interest has been ‘stored up’.
The ‘clean’ price refers to the price of the bond without any compensation of accrued interest, so keep in mind if you are purchasing a bond off the secondary market. The dirty price is the actual price you will be paying in cash.
But if the terms coupon and par value are too confusing, then you’re probably better off just sticking to the simple SSBs — which actually references 1, 2, 5 and 10-year SGS bonds as a benchmark to compute its interest rates. In addition, early redemption for SSBs is easily done via iBanking/ATMs and not on the stock market like for SGS bonds.
However, the trade-off is that you cannot make a profit off the price fluctuations in the secondary market.
This is exactly why SSBs were created, to give Singaporeans access to bond-investing — without its complexities.