Making Sense of Singapore Government Securities

From July 2009 onwards, consumers can apply to purchase Singapore Government Securities (SGS) through the Automatic Teller Machines (ATMs) of certain financial institutions.  You may have heard that SGS offer consumers almost absolute security on their savings and the flexibility to trade these instruments on the secondary market.  You may have also heard that placing some funds in SGS could be one way of diversifying your portfolio in bonds.

In this column, we look at SGS as an asset class, how individual investors can invest in SGS and factors consumers should consider before deciding whether to place their money in SGS.  Do note that the term “SGS” in this article refers to both SGS Bonds and T-Bills unless otherwise specified.

WHAT ARE SINGAPORE GOVERNMENT SECURITIES (SGS) AND TREASURY BILLS (T-BILLS)?

SGS and T-bills are marketable debt instruments issued by the Government of Singapore through the Monetary Authority of Singapore (MAS).  SGS and T-bills are backed by AAA-rated credit of the Singapore Government. 

Simply put, when you invest in SGS and T-bills, you are lending your money to the Singapore Government in exchange for interest payments.  The issuer (which is the Government of Singapore) will pay you fixed sums of interest according to schedule, and return your principal on maturity. 

The minimum investment amount is S$1,000, and you can invest in multiples of $1,000.  You can invest with cash or your CPF savings. Investors can choose to hold the SGS to maturity and receive the face value; or sell SGS before maturity at the prevailing market prices in the secondary market to other investors like banks.  Do note the prevailing market prices for SGS can be higher or lower than the purchase price.

The table below illustrates the difference between SGS and T-bills.

WHY DOES THE GOVERNMENT ISSUE SGS AND T-BILLS?  

The main objectives of issuing SGS are to:

• Provide a liquid investment alternative with little or no risk of default for individual and institutional investors;
• Establish a liquid government bond market, which serves as a benchmark for the corporate debt securities market; and
• Encourage the development of skills relating to fixed income financial services available in Singapore.

Governments in other countries usually issue debt securities to raise the money needed to pay off maturing debt and finance their operating and development expenditure. However, the Government Securities Act and Local Treasury Bills Act provides that the proceeds from SGS issuance are paid into a Government Securities Fund, and outward payments from this fund are generally limited to the paying of interest and repayment of principal associated with SGS issuance only. The Singapore Government has generally operated on a balanced budget and does not need to borrow funds through the issuance of government bonds to finance its expenditure.

HOW CAN I BUY SGS OR T-BILLS?
You may purchase SGS and T-bills at primary auctions or in the secondary market.

i) At a Primary Auction

In September each year, MAS publishes on the SGS website (www.sgs.gov.sg) 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 and 1-year T-bill are published both on the SGS website and also advertised in the newspapers, while the weekly 3 month T-bill auctions are announced on the SGS website.
After the auction announcement, the most convenient way for most individual investors to submit bids for SGS is through the DBS, UOB and OCBC ATMs. Similar to an Initial Public Offering (IPO) application, you will need a valid individual Central Depository (CDP) account number and your bank account will be debited for the full bid amount at the point of application. Successful bidders will receive a statement notification from CDP, typically the next business day after the issuance date. .
Besides using the ATM, you can also continue to submit your bids through any of the Primary Dealers or Secondary Dealers who will submit bids to the PDs on your behalf, though transaction charges may be levied for manual applications.  A list of Primary Dealers is available at the SGS website.

ii) In the Secondary Market

As SGS and T-bills are custodised with CDP, you can approach the branches of any of the SGS agent banks/dealers to sell your holdings at the most competitive market price available. Transaction fees may apply. The purchase/sale of SGS will be reflected in your CDP statement.

You may also wish to note that although you can sell SGS over the counter with any Primary or Secondary Dealer, only Primary Dealers are prepared to buy and sell SGS under all market conditions. You may wish to check for the best market prices by getting quotes from multiple dealers. Prices may also change from day to day according to market conditions and you may not be able to sell your SGS for the same price that you paid for them.

WHAT ARE THE BENEFITS AND RISKS OF SGS?

WHAT ARE THE FEES AND CHARGES?

CDP will charge investors an administrative fee of 0.08% of the face value of the SGS and T-bills per annum. This administrative fee is payable and will be deducted during each coupon payment or redemption of the SGS and T-bills, and is subject to a minimum of $1.50 per deduction. Existing CDP fees will also apply for standard depository services rendered.  These include transfers, deposits & withdrawals and charge & assignment.

HOW DO I CALCUATE THE RETURNS ON MY SGS OR T-BILL INVESTMENT?

(i)  For T-bills

T-Bills do not have coupon payments and are issued at a discount. Therefore, the yield that you get upon maturity is dependent on the difference between the price paid for and the face value of the T-Bill. For example, if you pay S$95 for a T-Bill with a face value of $100 at an auction for a 1-year T-Bill, our yield to maturity or amount earned if you hold the bond for one year is = (S$100-S$95)/95 x 100 = 5.26%

(ii) For SGS

For SGS bonds, the returns due to an investor are dependent on three factors:-

• The coupon rate
• The price paid for the bond
• The capital gain / loss due to sale of bond before maturity

One common measure of returns is the yield to maturity (YTM). The YTM combines the coupon income of a bond and the capital gain or loss from holding the bond to maturity. It also considers the timing of the bond’s cash flows and interest-on-interest, although it assumes that the coupon payments can be reinvested at an interest rate equal to the YTM.

For example, assume you bought a bond with 1 year to maturity at S$95 and a face value of S$100. The coupon payment is S$4. The capital gain at maturity is S$5 (S$100 – S$95). Therefore, the total gain is S$5 + S$4 = S$9. The YTM would then be S$9/S$95 x 100% = 9.47% from present till maturity of the bond.

For more information on SGS, please refer to the list of Frequently Asked Questions  for Retail Investors on the SGS website.

This article is contributed by the Monetary Authority of Singapore as part of MoneySENSE, the national financial education programme.