Singapore Government Securities (SGS) refers to both SGS Bonds and T-Bills. So, how do individual investors invest in SGS? What factors should consumers consider before deciding whether to place their money in SGS?
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.
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 $1,000. You can invest with cash or your CPF savings. Investors can choose to hold the SGS to maturity and receive the face value; or sell SGS before maturity at the prevailing market prices in the secondary market to other investors like banks. Do note the prevailing market prices for SGS can be higher or lower than the purchase price.
T-bills are short-term debt securities that mature in one year or less from their issue date. They are bought and sold at a discount, i.e. at a price less than their face (par) value, and when they mature, the Government will pay the holder an amount of S$ equivalent to the face value of the security. Therefore, the interest earned on the T-bill is the difference between its purchase price and face (par) value. They are denominated at nominal values of S$1,000 and traded at a rate of discount basis.
SGS bonds are longer-term debt securities, which pay a fixed rate of interest (called the coupon) every six months for the life of the securities and then their face (par) values upon redemption on maturity. They are not issued at a discount unlike T-bills, and have typical maturities of 2, 5, 10, 15, 20 and 30 years.
The most recently issued SGS bonds in each of these tenors are typically known as the benchmark securities and tend to be more actively traded. Older and more seasoned SGS bonds become off-the-run issues and tend to be less actively traded. SGS bonds are also denominated in nominal values of S$1,000 and traded on a price basis expressed in terms of S$100 principal.
The table below illustrates the difference between SGS and T-bills.
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T-Bills
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Bonds
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Issuer
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Singapore
Government
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Singapore
Government
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Tenor
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1
year
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2,
5, 10, 15, 20 and 30 years
|
Interest Rate
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Discount
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Fixed
Coupon
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Coupon Payments
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N/A
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Every
six months
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Minimum Denomination
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S$1,000
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S$1,000
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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
1-year T-bills and SGS bonds are issued according to an issuance calendar published at the end of the preceding calendar year on the SGS website (
www.sgs.gov.sg). Auctions for the 1-year T-bills and bonds typically take place three business days before the respective issuances. Prior notice is given on the SGS website one week in advance. Notices announcing the bond auctions and 1-year T-bill are published both on the SGS website and also advertised in the newspapers.
MAS introduced “mini-auctions” of SGS bonds in 2015 as a regular feature in the issuance calendar to address unexpected instances of strong demand for bonds outside the issuance calendar. Mini-auctions are re-openings of SGS bonds with a maximum size of S$1 billion. Unlike normal auctions, should MAS decide to conduct a mini-auction, it will announce the bond to be re-opened one month before its issuance date*. The possible dates of mini-auctions will be published in the issuance calendar.
Bonds scheduled in the issuance calendar will not be re-opened via mini-auction until at least six months after they were first issued in the year. In line with the current practice, the issuance size will be announced five business days before the mini-auction date. Mini-auctions will follow the same procedures as regular SGS auctions.
*Note: If MAS decides not to conduct a mini-auction, it will also make the announcement on the same day, i.e. one month before what would otherwise have been the issuance date.
After the auction announcement, the most convenient way for most individual investors to submit bids for SGS is through the DBS, UOB and OCBC Automatic Teller Machines (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?
| Benefits | Risks |
- Allows investors to lock in a fixed rate of return over the tenure of the bond
- Coupon payments from SGS bonds generate periodic cash flows before the SGS matures. This may 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 tax exempt for individuals
- Liquidity – Investors can buy or sell SGS through the secondary market.
- Diversification – SGS can help diversify risks in investment portfolios.
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- Should the investor wish to liquidate the bond before maturity, he is subjected to fluctuations in the price of the bond. The price received by the investor can be higher or lower than the actual price paid.
- The investor is subjected to the credit risk of the issuer (i.e. Singapore Government)
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How do I calculate 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.
You may also use the Bond
Calculator on the SGS website to calculate your returns.
For more information on SGS, please refer to the list of
Frequently Asked Questions for Retail Investors on the SGS website.
Do you have any more questions relating to investing in Singapore Government Bonds? Are you ready to diversify your portfolio by allocating some funds to low risk SGS? You can write in to us about them.
