How is the interest rate calculated for Singapore Savings Bonds (SSB) and why is it increasing?



As investors, we seek alpha – ie excess returns – on our investments. Whether it’s for our short-term goals or for our retirement needs in our golden years, we want to grow our wealth as much and as quickly as possible.

However, the current high inflation environment and resulting interest rate hikes, coupled with ongoing geopolitical tensions and supply chain disruptions, have prompted some investors to seek out Singapore Savings Bonds. (SSB) as a safe haven and shelter from market volatility.

In fact, demand for SSB has steadily increased in the first half of 2022, with a record $2.4 billion in requests received for the August 2022 issue (GX22080V), which had an offer approximately $700 million. For context, the August supply size is more than four times the January 2022 supply size of $150 million.

The reason for this increased demand for SSB is simply that the first-year interest rate and ten-year average rates have steadily increased, peaking at 2% and 3%, respectively.

You can then wonder if you missed the boat or if there will be higher-yielding SSBs in subsequent shows. To answer this, we will explain how the interest rate for SSB is derived and why it is rising now.


Summary of Singapore Savings Bond Features

Before diving into the article, let’s first recap the unique features of Singapore Savings Bonds (SSBs) compared to other types of Singapore Government Securities (SGSs).

Similar to other SGS bonds and treasury bills (T-bills), Singapore Savings Bonds (SSB) are issued and fully guaranteed by the Singapore government, which has the highest ‘AAA’ credit rating, this which means a low risk of default.

However, unlike other bonds, SSBs are different in that they are issued over a flexible 10-year term, allowing you to redeem your investment in any given month until loan maturity without any penalty. In addition, interest or coupon rates on the SSB are derived based on the long-term average SGS yields of the previous month.

Finally, the SSB has an interest rate ‘step-up’ feature whereby the initial interest rates, which are fixed and locked in for each issue, will increase over time until the maturity of the obligation.

Read also : [2022 Edition] Complete Guide to Buying Singapore Savings Bonds (SSB)

How is the coupon rate for SSB calculated?

First, we need to understand that there are two components to the composition of SSB coupon rates. One is the SGS benchmark yields, and the other is based on the progression characteristic of the savings bond.

SSB coupon rates are compared to SGS yields

Coupon rates for each SSB issue are pegged to long-term yields, specifically the one-, two-, five- and ten-year Singapore Government Securities (SGS) benchmark yields. These benchmark yields are calculated on the basis of the simple average of the respective daily SGS benchmark yields for the month preceding the public announcement of the issue.

Simply put, an investor’s average annual compound return over a holding period (eg 5 years) should equal the yield to maturity of a corresponding SGS (eg 5 year SGS). To illustrate, we compare the coupon rates for the September 2022 issue (GX22090Z) to the August average daily SGS benchmark yields.

Based on the table above, we can see that the compound rates we can receive from SSB are at or near the previous month’s average daily SGS yields for the corresponding holding period.

A possible exception where this might not be the case is due to small rounding differences of up to +/- 0.03% that may occur in the calculation of average returns for SSB.

SSB coupon rates may be adjusted to maintain tiered interest functionality

A second scenario that may affect SSB coupon rates is where the benchmark SGS yields do not allow the particular SSB issue to have a monotonically increasing step interest characteristic (i.e. that implied coupon rates based on benchmark SGS yields may decline over some or all of the tenor of the issue).

This occurs when some or all of the longer-term benchmark yields are lower than the shorter-term benchmark yields (i.e. an inverted yield curve); or where a particular benchmark yield is much higher than the one immediately preceding it, but not much lower than the one immediately following it (for example, the five-year yield is much higher than the two-year yield, but not far below the ten-year yield). This is called a “highly convex yield curve”.

In such a scenario, the Monetary Authority of Singapore (MAS) may lower coupon rates by the minimum amount necessary to maintain an increasing progressive coupon schedule. In other words, coupon rates might be lower in the early years, but would eventually increase in later years while taking into account the time value of money based on risk-free discount rates. . This is done to encourage long-term savings, which is also the intention of the SSB.

Therefore, although you may be affected by a lower average compound return in the short term, this will not affect the return of the SSB issue if you hold it to maturity. The average compound coupon rate of the SSB would always be equal to the ten-year benchmark yield.

Also Read: 5 Reasons Why It Makes Sense to Invest in Singapore Savings Bonds (SSB) in 2022

Why are SSB coupon rates increasing?

SSB coupon rates are rising simply because benchmark SGS yields have also risen in 2022.

The United States’ central bank, the Federal Reserve (Fed), has raised interest rates sharply since the first of 2022 to stifle its high rise in inflation. Singapore, as a small open economy, uses the exchange rate instead of the interest rate as its primary policy tool. Therefore, its interest rates are influenced by global interest rates, particularly those of the United States.

Therefore, SGS yields can be expected to follow a similar trend to US federal funds rates, which in turn would affect SSB coupon rates. Going forward, we might expect SSB coupon rates to rise or stay high in a rising interest rate environment.

Read also : Dealing with inflation in Singapore: what can MAS do (and at what cost)?

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