Sneak Preview of SSB Interest Rates

Nobody likes to lose money, so wouldn't it be nice if you could place your bets after the results are known? Well, the Singapore Savings Bonds (SSB) almost just allow you to do that. The interest rates for SSB are computed based on the average yields (i.e. interest rates) for the previous month's Singapore Government Securities (SGS). The applications for SSB will close on the 4th last business day of the month. So, by monitoring the SGS yields for the current month, you could estimate what would be the SSB interest rates for the next month. If the estimated interest rates for the next month are higher than that for the current month, it is advantageous to skip the current month's SSB and apply for the next month's SSB instead. Let us take a look at how this works.

The current month's SSB interest rates are shown below. They are based on the average yields of the previous month's SGS, which are also shown below. The SGS yields can be found at the SGS website. As you can see, the SSB interest rates are very close to the average yields of the 1-year, 2-year, 5-year and 10-year SGS bonds.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%

For Sep, SGS yields have been rising and the average yields (up till 18 Sep) are shown below. Compared to the average SGS yields for Aug, the yields have risen across the board by 0.10% to 0.20%. If there is no significant change to the SGS yields from now till the end of the month, you can expect the SSB interest rates for Oct to be higher than that for Sep by the same margin.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%
Avg SGS Yield for Sep (Todate)	1.12%	1.12%	2.22%	2.83%
Difference (Todate)	0.16%	0.10%	0.19%	0.20%

However, on 18 Sep, US Federal Reserve announced an important decision not to raise interest rates. This caused the SGS yields for that day to drop by as much as 0.1% or 10 basis points, which is considered significant. Since nobody can forecast how SGS yields will move from now till the end of the month, let us assume that the SGS yields for the next 7 working days would be the same as the yields for the latest available date, i.e. 18 Sep. Making this assumption, the estimated average SGS yields for Sep are shown below.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%
Avg SGS Yield for Sep (Todate)	1.12%	1.12%	2.22%	2.83%
Avg SGS Yield for Sep (Estimated)	1.17%	1.13%	2.20%	2.79%
Difference (Todate)	0.16%	0.10%	0.19%	0.20%
Difference (Estimated)	0.21%	0.11%	0.17%	0.17%

The average SGS yields are estimated to continue moving up for the 1-year and 2-year bonds but down for the 5-year and 10-year bonds. Still, the SGS yields are estimated to be higher across the board by 0.11% to 0.21% for Sep than Aug. You can expect the SSB interest rates for Oct to be higher than that for Sep by the same margin.

Among the various SGS yields, the most important one is the 10-year SGS yield, because that determines the annualised return for the entire 10-year lifespan of the SSB. The higher, the better.

However, if 2 SSBs were to have the same 10-year interest rate but different 5-year interest rates, how would you choose? It depends on the individual investor's preference. A higher 5-year interest rate would mean that you can collect higher interest payouts earlier, even though over the entire 10-year lifespan of the SSB, you get the same annualied interest rate. However, because higher interest is paid out early in the SSB lifespan, the interest-on-interest compounding effect is lower. Consider 2 extreme cases in which one SSB pays out a constant 2.63% every year versus another one which pays out only in the 10th year. For the constant-payout SSB, the total interest you will get over the 10-year lifespan for every $100 invested is $26.30. For the bullet-payout SSB, the total interest you will get at the 10th year is $29.64, or $3.34 higher than the constant-payout SSB.

So, if the current month's SGS yields are higher than the current month's SSB interest rates, it is best to skip the current month's SSB and wait for the next month's SSB. However, what happens if the reverse occurs, i.e. next month's SSB interest rates are likely to be lower the current month's SSB interest rates? You can actually choose to invest in the current month's SSB and observe the future trend of SGS yields. Unlike fixed deposits and stocks where you can only get the interest/ dividend on the maturity of the fixed deposit or ex-dividend date of the stock, bonds pay accrued interest for the duration that you are holding the bond. Using the 1-year interest rate of 0.96% for the current month's SSB, you will get accrued interest of 0.08% for each month you are holding the bond. So while you are holding onto the SSB and waiting for the interest rates to rise, you are being paid for waiting. However, please take note that there is an application and redemption fee of $2 per transaction which will cut into the interest earned.

To conclude, things are seldom in favour of investors. But with SSB, things are tilted quite overwhelmingly in favour of investors! Not only are you allowed to place your bets after the results are known, you also have a SGS put option to guard against interest rate rises, as discussed in Getting the Best of Both SSB & SGS.

See related blog posts:

• Getting the Best of Both SSB & SGS
• SSB Interest Rate Estimates – A Year On
• SSB Interest Rate Estimates