by Ryan Ong

WHEN the Singapore Savings Bonds (SSBs) were first announced, it came with the assurance that there’s “no need to rush”. See, that’s how you jinx your take-up rates. Right now, Singaporeans seem as eager to buy SSBs as they are to get an unnecessary enema. The reasons may not be too logical.

A quick recap on SSBs

SSBs are bonds that can be bought for as low as $500. The coupon (interest pay out) of the bond increases every year – if held for the maximum of 10 years, the interest amounts to around 2.6% per annum (less if you cash out earlier).

This is much higher than the interest on bank fixed deposits (most do not reach one per cent). It also provides more flexibility, as you can cash out any month without losing the accrued interest.

While SSBs are not powerhouse investment opportunities – the interest is too low to beat inflation – they were noted to be a strong alternative to fixed deposits. SSBs were also held to be ideal for some retirees, who focus more on protecting their remaining wealth than growing it.

So where are all the buyers?

Since the gates opened on September 1, investors have only applied for $413 million worth of the bond, out of an available $1.2 billion. A number of reasons have been posited, not all of which are related to the actual numbers:

The limit on buying the bonds

Other assets look cheap right now

The complexity of the coupon system

Lack of awareness in the target demographic

Recent boost in the CPF

Not enough people know where and how to buy this

The limit on buying the bonds

An individual can buy up to $50,000 during each bond issue. It’s possible that, if this limit didn’t exist, the small number of buyers who are clued in would have bought a lot more.

If you have a significant sum in a fixed deposits (e.g. $200,000) and you know the SSB has a higher return and a government guarantee, there’s little reason to keep it in the bank. You’d probably want to buy a lot more than $50,000 worth.

So simply put, they could have sold a lot more of the bond to the handful of buyers who did respond. But this doesn’t explain the apparently low volume of buyers.

Other assets look cheap right now

With the stock market flailing like my dance routine after the fourth drink, it sure looks tempting to throw your money into equities. Everything looks cheap right now, considering how far other prices have fallen. Well, that’s one theory that’s floating around – but I happen to disagree with it.

If you understand value investing and you care about timing markets, etc. you are probably not the sort who’s interested in a bond that provides 2.6 per cent interest. That’s the kind of return that makes a stock broker replace your account name with a picture of a crippled duck.

My take: the people who are buying stocks are not the sort who would be buying SSBs anyway – it’s got nothing to do with stock prices at the moment.

The complexity of the coupon system

The interest is based on the returns of Singapore Government Securities (SGS). It is paid every six months, and it steps up every year. So if you hold it for 10 years the pay-out will be as if you had invested in a 10 year SGS. If you hold it for five years, the average interest per year would be as if you had invested in a five year SGS.

For laypersons, who are already unfamiliar with even the basic concept of bonds (What’s a coupon? What’s the par value? What the heck is a government security?), adding this coupon system makes their eyes glaze over.

Fixed deposits may fare poorly compared to SSBs, but fixed deposits are simple maths that everyone can understand.

Put your money in here, get one per cent per annum, and in 10 years you will have $X. It’s that simple.

Lack of awareness in the target demographic

SSBs are a product designed for the non-expert investor. This is why the minimum amount required is kept low at $500.

Unfortunately, information about SSBs have been mainly confined to government websites and finance sites. And hello to all you non-finance people reading finance articles like these; all three of you.

The banks through which you can buy SSBs (DBS / POSB, OCBC and UOB) have not been very loud in advertising or explaining them.

(The again, are they supposed to advertise SSBs next to their own fixed deposits? You know, the thing SSBs are meant to be superior to? Wouldn’t that be like McDonald’s taking out an ad to explain the Burger King Mushroom Swiss is delicious?)

There’s just not enough awareness in the target demographic. Right now, the people who seem to know the most about SSBs are also the people who don’t need it – they are financial advisors with alternative products for clients, or savvy investors who have the knowledge and capital for other products.

The G needs to market this more aggressively.

Recent boost in the CPF

SSBs have an advantage over the CPF, in that the money is easier to take out. You can have all the money back any month. However, there are some people to whom this has no appeal – this is the crowd that intends to hoard the money and never, ever touch it. The liquidity doesn’t matter to them.

For this lot, they may prefer just putting the money into their CPF. This is especially true since the CPF has been revised to an Ordinary Account OA) interest rate of 3.5 per cent, and a Special Account (SA) rate of five per cent. These significantly outpace SSBs, if you don’t mind that the money will arrive at the same time as your walker and false teeth.

Not enough people know where and how to buy this

Too many Singaporeans are still unaware of where and how to buy SSBs.

Be honest – if I didn’t just now tell you to approach DBS/POSB, OCBC, UOB, would you have known that’s where you can go to apply?

Coupled with the fact that banks and financial advisors are not too active in pushing SSBs, there’s just very little in terms of direction or a call to action.

The target demographic also matters here. SSBs are most heavily promoted and discussed online, but lay investors prefer to talk to another human being when parting with large sums. They are unlikely to read about SSBs on the internet, and then click on a few buttons to transfer what may be their life savings.

Hopefully, the next round will see a better response – but for that to happen we need to look at some seemingly mundane details (e.g. how is someone who has never bought a bond going to be guided through the buying process?) and work them out.

SSBs are not being ignored because of inherent flaws in the bond; they’re just unfamiliar to the people who could most benefit from them.

Featured image Money, by Flikr user GotCredit, CC BY 2.0

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