Today's article will be on government
securities, the reason why i got interested into this part of the
investment spectrum (i usually go for equities) is because i
suddenly found myself holding a lot of cash. Cash that are rotting
away in my saving bank account like adolescent teenagers gathering
around computer game shops, wasting their time away playing online
games.
Then the question strikes me... what am i to do with this sum of
money that i was soo blessed
with? I couldn't just leave it idling around my account and let
inflation eat it's value away, year after year, day after day.
Plus, i needed the money to pay off the upcoming loans
and other study fees for the next few years to come.
Liquidity and length of investment therefore have to be given
top priority here.
So, how can one earn better returns without being exposure to any
big or even systemic risks and yet have the privileged to use the
cash at any given time ?
For the general public out there, many people
will assume such an investment exist only in forms of Fixed
Deposits offered by our local banks. However, in my opinion, Fixed
deposits instrument do not offer very good interest rates (returns)
at all! In fact if you take a quick look at the facts below, (to
keep with consistency, we shall only look at 1 year rates, capping
it at 50k)
Visit
http://singaporesearchsite.com/singapore-tips/fixed-deposit-interest-rate/
for full chart
you will find that no
yearly Fixed deposit rate reach above 1%, the most is offered by
RHB at 0.935% with a 50k deposit. Now this fact alone, proves one
point. That Fixed deposits gives out F***ing disgusting returns,
and it makes me want to throw my shoes at them.
So is there a better alternative? One that is
as safe, if not safer then a
fixed deposit that gives better returns ?
Like choosing between Gold and Copper, the
Singapore government securities also known as (SGS) is definitely a better alternative as
compared to a FD and not many people know because the banks in this country keep so
silent about.
So lets start with the basics, what
is ?SGS
SGS are marketable debt
instruments issued by the Government of Singapore through the
Monetary Authority of Singapore (MAS). These debt instruments can
be in the form of either Treasury bills or bonds. The Singapore
Government is obliged to pay the holder of the Treasury bill or
bond a fixed sum of money on the maturity date of the security.
Thus, when you buy SGS, you are
lending your money to the Singapore Government. Although
SGS cannot be cashed in before
their maturity dates, investors can always sell them in the
SGS market. SGS primary dealers are prepared to buy and
sell SGS at any
time.
So the next question is
why does the government issue these
instruments?
They do so because of the following
reasons
1)Provide a liquid investment alternative with little or no risk of
default for individual and
institutional investors;
2)Establish a liquid government bond market,
which serves as a benchmark for the
corporate debt securities market; and (simply means, other
companies uses this rates as a comparison to give out their own
loans and bonds, wonder why banks don't follow
suit?)
3)Encourage the development of skills relating
to fixed income financial services
Available in Singapore.
SGS's
investments
are for?
People who have lots of spare cash, either
waiting to invest (but still don;t know what to invest) or need to
use the money in the near future. Earn extra interest given the
amount of short time.
People who do not want to be exposed to
systemic/market risks, people who want to invest in very very very
safe investments.
People who likes the feeling of the government
owing them
money.
People who wants to diversify their
portfolio, instead of holding
cash or putting in FD , this is a better
alternative.
Types of instruments offered by
SGS
T-bills: They are
short-term securities that mature in one year or less from their
issue date. T-bills are bought and sold at a price less than their
face (par) value, and when they mature, the Government will pay the
holder of the T-bill an amount of S$ equivalent to the face value
of the bond. Therefore, the interest earned on the T-bill is the
difference between the purchase price of the security and its face
(par) value. The Singapore Government issues 3-month and 12-month
T-bills. For example
Issue code: BQ08150N
3mth T-bills is sold at $0.98 per unit. You bought 1000 units,
therefore you spent $980. After three mths, the government will
return you a full $1000, this $1000 is known as the "par value" and
is 100% guaranteed by the government. Thus your profit is $20. So
if you want to calculate the yields (how much you got back as a
percentage) $20/$980*100%=2%
Bonds:They are debt
securities that pay a fixed rate of interest (called the coupon),
usually every six months, for the life of the securities and then
their face (par) values on redemption on maturity. In Singapore,
SGS bonds are issued with maturities of 2, 5, 7, 10 and 15 years.
And if you are wondering what is the meaning of securities, simply
go look up the dictionary.
Visit
http://www.sgs.gov.sg/pub_guide/faqs/publ_faqindinvestors.html#4
for more examples
Is SGS T-bills
better then short term Fixed Deposits?
Just to keep things
simple, looking at only 3 mths FD vs 3mths T-bills rates. On
average FD 3mths rate is 0.35% vs 3mths T-bills rates of
0.56%-0.675%. Then some of you might wonder the difference between
the current rate of T-bills and FD is not much, only 0.34%
difference. Consider this , a difference of 0.34% of $1000 is
$3.40, if you have $100,000 the difference is $340, likewise
$1million is $3400 for every 3 mths. Plus rates in T-bills last
year was a whooping 2.1% for a 3mth deposit.
What
determines the yield rate?
The yield rate is
determined by a few factors, factors like the SIBOR/
Domestic Interbank Rates/ the amount you bid, the outcome of the
bidding/ and many other factors that are interlinked between the
world's markets.
HUH? Got
bidding arh?
Yes, that whats makes investing in
SGS fun. The bidding will involve competing for the amount of yield
(returns) you want to get. Say for example, you want a return of
1.25%, then in your application, you state that you want to bid at
1.25%. However, the higher your bid, the chances of you getting the
bill is lower, because other people might bid at 1.1% or 0.90% and
in this case, they will get the bill first (priority is given to
the lowest bidder). Take note also that if your bid is above the
"cut off bid" say at 1.09% (lol) you get nothing.
Then again, you can
try bidding again for another T-bill issue, (the government issues
T-bills on a weekly basis). There are soo many T-bill issues, that
one might wonder which one to pick, but according to my interview
with the SGS lady on the phone, she says it will depend on your
holding preferred period like how long you want to hold for say
3mths or 6mths or 1 year, the yield will then depend on your luck
and the outcome. And if your not comfortable bidding and finding it
too troublesome, apply for non-competitive bid which will give you
the best outcome of the bids provided the T-bill has a uniform
pricing function.
So how to
apply?
Simple! Go to any of
your local bank like DBS/UOB* , walk towards the "can i help you?"
table and talk to the lady. Tell her you want to apply for
Government T-bills. The lady will kindly usher you to a
relationship manager , that's where you have to be careful, because
many banks do not encourage this type of investment, they will
probably suggest you to buy their structured products for better
returns. Note also that they wouldn't be able to or not willing to
answer your questions regarding SGS products because its not under
their bank's products. So if you survive their persuasions to buy
their products, they have no choice but to issue you a form, thats
where your IC comes into play. Have also you bank account no.
ready, the process of creating your very own SGS account is at
hand.
(Takes about 5 working
days). Once your account is done up by them, they will issue you
another form, which is the bid form, where you indicate which type
of T-bills or bond you want to invest in? What yield you want to
bid? Which Issue code? Competitive or non-competitive? Etc. So
before you apply for the bid form, make sure you know what type of
Bills or bonds you want, how long you want it to be, and what kind
of returns you expect from etc.
Any trouble like don't
know, what the hell I'm talking about, feel free to call up the
nice SGS lady at Tel: (65) 6229-9150 or email them at
[email protected].
Another alternative is
to open an account with POEMs visit
http://singapore-fixed-deposits.blogspot.com/2008/03/treasury-bills-your-alternative-to.html
for more
information.
What other
people say about SGS
"Under the current
market turmoil, there are still some safe havens for your
investment monies. Besides Singapore
Treasury
Bills, Singapore
Government Bonds are also one way to
invest
in relatively safe assets.
The MAS’s recent auction for its 5
year
Singapore Government bonds yields 2.65% per annum
which is higher than even the
highest fixed
deposits promotions by the banks. This is one area for
consideration for those risk adverse
investors.
Definitely safer than Structured Products such as Lehman Minibonds
or DBS High Notes 5 series.
T-bills are short-term securities that mature in one year or less
from their issue date. T-bills are bought and sold at a price less
than their face (par) value, and when they mature, the Government
will pay the holder of the T-bill an amount of S$ equivalent to the
face value of the bond. Therefore, the interest earned on the
T-bill is the difference between the purchase price of the security
and its face (par) value. The Singapore Government issues 3-month
and 12-month T-bills"- blogger
"Because many
people do not know about such instruments, their ignorance has
caused them to lose out the ability to maximize their returns even
under very safe investments"-Financial
planner
"Most clients,
come in every 3mths to renew la. So if you ask me , whether this
product can lose $, i don't think so. Why would clients keep coming
back to renew their application if they are losing
money?"-Karren Tan Relationship
Banker
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