Singapore Government Securities

The Singapore Government Securities (SGS) market has grown considerably over the last few years in line with the government's efforts to develop Singapore's capital market. It is now a S$64 billion market. Curiously, not many Singaporeans are familiar with the SGS market, much less invested in it. For portfolios that consist mainly of equities, properties and bank deposits, fixed income instruments such as SGS can be an important risk diversifier. In this column, we look at the unique nature of SGS as a saving and investment instrument and how individual investors can invest in SGS.

WHAT ARE SGS BONDS?

SGS are debt instruments issued and guaranteed by the Singapore government. They have a triple-A local currency debt rating, the best credit rating in Asia. There are 2 types of SGS: T-bills and bonds. T-bills are short-term securities that mature in one year or less from their issue date. They are bought and sold at a price less than their face (par) value and the Government will pay the holder of the T-bill the face value of the bond when they mature. SGS bonds have tenures of up to 15 years. They pay interest every half a year in the form of a coupon payment and return the face value of the bond at maturity. For example, if an SGS bond has a coupon rate of 3.8%, for every $1,000 face value, the investor will get $38 each year in the form of 2 coupon payments of $19 every 6 months until the SGS bond matures. At maturity, the investor will receive the S$1000 face value.

SGS have a few advantages over bond funds and other investment instruments such as structured deposits and guaranteed funds. First, they allow you to lock in a fixed rate of return over the tenure of the bond. The tenure can range from a few months to 15 years.  This return is the bond's yield, which will be discussed further in the next section. Second, coupon payments from SGS bonds generate periodic cash flows before the SGS matures.  This is attractive to investors who are saving for future outlays such as education or retirement, but who also want some periodic income stream in the interim. Interest income from SGS is also tax exempt.

HOW TO MEASURE RETURNS FOR BOND INVESTMENTS?

In making any investment decision, one of the most important factors considered is the returns that you can get. For stocks, the return will be the difference between the price that you bought and sold plus dividends, if any. Unlike stocks, bonds have a maturity date at which the face or par value of the bond is paid to the investor. In addition, the investor will also receive a fixed payment periodically as specified by the coupon rate of the bond. 

If an investor holds a bond till maturity, his return is approximately the bond's yield to maturity. This measure takes into account all the future cash flows such as the coupon payments, income from reinvestment of coupon payment, and par value that the investor will get from the bond, as well as the price paid for the bond. If the price is exactly equal to the par value, the yield to maturity equals the coupon rate. The higher the price, the lower the yield.

For example, take a bond that matures in 10 years and which is currently priced at $1000. Coupon payments are made annually at 3.80% of the $1000 face value, which means that $38 is paid to you annually. The face value of the bond will be returned to you after 10 years. Since the coupon that you get annually is $38 and $1000 will be returned to you at the end of 10 years, your annualized yield to maturity would be 3.80%.

If the same bond is purchased at a higher price of $1050, the investor will continue to be paid an annual coupon payment of $38 and the same face value of $1000 when it matures. However, the yield to maturity will be lower at approximately 3.21% due to the higher purchase price. Conversely, when the bond is purchased at a lower price, the yield to maturity would be higher. The yield is only a good approximate of return if the bond is held to maturity. Should the investor liquidate the bond before that, he is subjected to fluctuations in the price of the bond.

HOW CAN INVESTORS PARTICIPATE IN AUCTIONS OR PURCHASE SGS?

Investors may buy SGS in the primary market through MAS auctions or in the secondary market through a primary dealer bank (A list of primary dealer banks is available on the SGS website at www.sgs.gov.sg). In September each year, the Monetary Authority of Singapore (MAS) publishes on the SGS website an issuance calendar specifying the bonds that would be auctioned the following year and the dates of the auction. In addition, MAS auctions a 3-month T-bill every Monday. Notices announcing the bond auctions are published both on the SGS website and also advertised in the newspapers.

If you wish to participate in the auction, you need to open accounts with and submit your bids through a primary dealer or through any secondary dealers who will in turn submit bids to the primary dealers on your behalf. Banks typically do not charge for this service. You may choose to bid competitively (i.e. submit a minimum yield above which they are willing to buy the bond) or non-competitively. 

To purchase SGS in the secondary market, investors also need to open an SGS trading account with a primary dealer bank. With this account, investors can then purchase SGS over the counter with these banks. As SGS are scripless, ownership of SGS is reflected as a book entry in the investor's account with the bank. Investors can also sell SGS over the counter with any primary or secondary dealer. However, only primary dealers are prepared to buy and sell SGS under all market conditions. Prices may change from day to day, and it is important to know that investors may not be able to sell their SGS for the same price that they paid for them.

HOW TO FIND OUT MORE?

MAS announced the auction of new 10-year SGS bonds on 21 June 2004. The deadline for submission of bids for the auction is 12pm, 28 June 2004. Investors can find out more about SGS on the website www.sgs.gov.sg

GLOSSARY

Debt instrument - Any document that represents a loan such as a bill note, bond or commercial paper.

Face (par) value - The value of a financial instrument. It is the amount  which a financial instrument can be redeemed for cash at maturity. The interest is calculated on face value. Also called par value or nominal value.

Coupon - A security's annual rate of interest, expressed as a percentage of a security's face value.

Bond funds - Investment funds invested in fixed-income instruments.

Yield to maturity - The percentage rate of return paid if the security is held to its maturity date. The calculation is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the security is reinvested at the same rate.

Secondary markets - Exchanges and over-the-counter markets where securities transactions take place after the initial distribution.