Treasury bills(T-bills) and Singapore Savings Bonds(SSB) are government securities fully backed by the Singapore government.
What are Treasury bills (T-bills)
T-bills are short-term Singapore Government Securities (SGS) issued at a discount to their face value. T-bills are either 6-month or 1-year in tenor.
Investors pay the discount to their face value upon a successful application and receive the full face value at maturity. For example, in a 6-month T-bill with a 3.8% yield, with a face value of $1,000, the price is $981.05.
What are Singapore Savings Bonds (SSB)
SSBs are bonds with a maturity period of 10 years. The unique nature of the bonds are that you can always get your investment amount back in full with no capital loss when you wish to withdraw the bonds.
You can choose to exit your investment in any given month, with no penalties, this means there is no need to decide on a specific investment period or exit timeline at the start.
Coupon payment is made every 6 months and when you wish to get your investment amount back, you will be paid not only your capital but also any interest accrued since the last payout till to date.
For example, if you applied for a SSB in December and the issue date is in January, The coupon will be made in June and January. If you apply to withdraw in September, the capital will be paid at the start of October together with any coupon accrued from July till September. This means it is a highly efficient investment.
Where should you park your money?
Here there are a couple of considerations before you decide where to park your money
Tenor of product
A longer tenor provides for more clarity. Looking at the snapshot below, the SSB that will be issued in September provides for an average return of 3.1% per year over 10 years with the first 6 years at 3.06%.
The SSB has a much longer tenor than the T-bill which is only 6 month or 1 year long.
Interest rates
The last 6-month T-bill issued on 20 Aug had a cut off yield of 3.34% while the last 1-year T-bill issued on 30 Jul had a cut off yield of 3.38%.
The yield for the SSB is lower now than the shorter term T-bills, however there is more certainty as there is a 3% return for next ten years.
Both the SSB and T-bill still offer a yield of more than 3%. However, T-bills have substantial reinvestment risk as the prevailing view is that interest rates have peaked and are just waiting to come down. Therefore, yields could drop when current T-bills mature, and investors who wish to reinvest into the next T-bill may have to settle with lower yields at that point in time.
A feature of bonds is that when interest rate falls, bond prices increase to adjust for the required rate of return or yield that investors require as coupon payments remain unchanged.
The disadvantage then for SSB in a falling interest rate environment is that there is no capital gain as the SSB is not traded on the open market.
How about Singapore Government Securities bonds
Just like T-bills, SGS bonds pay a fixed rate of interest, with longer maturities, ranging from 2 to 50 years. Looking at the current yield curve, all SGS bonds all now below 3% for tenors 2 years up to 30 years. This means that comparing to SSBs, SSBs provide for a higher yield, but SGS bonds can be traded and have the possibility of capital gain (or loss).
How about Corporate bonds?
Corporate bonds are issued by companies and provide for higher returns as the default risk is higher compared to sovereign bonds that are issued by the Singapore government or one of its related entities.
With a higher coupon rate at the onset, should interest rates come down substantially, there is room for significant capital gains for these corporate bonds.
Additionally, the bonds issued at the start are priced based on the credit risk then. Should the company see its credit risk improve and possibly even secure an improved credit rating from the credit agency, the price of the bond will increase even more as investors would demand for a lower yield. On the flip side, if the company’s default risk increase as its credit profile weakens, the price of the bond will decline and there could also be a risk of non-payment of coupons. Effectively, investing in corporate bonds would not be risk free unlike the T-bills, SSBs and SGS bonds.
Conclusion: which should you pick?
The longest tenor provides for the most certainty but if interest rates increase, the investor would be trapped the longest and incur the largest capital loss. As the current yield curve is flattish with downside risk in this current interest rate environment, entering into a long tenor bond could lead to upside potential both from coupon payments and capital gains.
For investors with larger risk appetites, corporate bonds would be the asset class to look at. Should interest rates fall, these investors could quickly lock in gains and switch to other investments.
For investors seeking no capital loss, SSBs would be the asset of choice. With the added flexibility to exit with a full return of capital and even accrued coupon payments, albeit with a short waiting period, SSBs would be a suitable option for investors who want to be paid to wait while waiting for opportunities in other asset class. This flexibility makes SSBs our preferred option amongst the available options.
SGS bonds exhibit a similar profile but with slightly lower yields. However, there is a small risk of capital loss if interest rates rise.
T-bills, with their short tenor, would leave investors high and dry after maturity, making them less favourable in our view.. However, there is always another perspective to consider. While the US Fed has indicated that it would start a rate cut cycle from September, interest rates have remained elevated in recent years. Currently, there is no indication of substantial reductions in rates, with analysts expecting the US rates to be reduced by only 1% to 2% over the next 12-24 months. Corresponding interest rate reductions in Singapore are expected to be even smaller.
With potential rate cuts on the horizon, bond returns are likely to decrease. If you want to discover strategies for achieving stronger returns in this changing environment, our trainers can guide you in one of our investing courses. Learn more here.