Singapore Savings Bonds as Pseudo-Savings Account
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| Average interest per annual for 1-year and 10-year period |
The 1-year interest rate for this month SSB has reached the highest at 1.80% since inception. The increase is in tandem with the increase in interest rates by the US Federal Reserve. We are still looking at a flattening yield curve trend as the short term rates are catching up with the long term rates. As the short term rates continue to raise, it is becoming more attractive for short term play. So far, my holdings in SSBs played a role of diversification and is intended to be held till maturity for 10 years. I am now considering to use SSBs as a pseudo-savings account to ride along with the increasing interest rate environment.
This could be an option if you have max out your high interest savings account such as DBS Multiplier, UOB One or OCBC 360, and there is still cash lying around collecting low interest. I am currently using DBS Multiplier, and has max out the balance of $50,000 which also acts as my emergency fund. The remaining cash is investable fund or 'war chest' which can be deployed into the market as and when needed. My current 'war chest' is earning low interest and the intention is to put the investable fund into SSBs for short-term holding. One consideration is that SSBs require at least one month of turnaround time to redeem so it is not as liquid as cash in real savings account. If there is a need to enter the market, it will be too late to redeem and wait for next month to enter. Therefore, we will have to balance between having liquidity and earning higher interest.
I will be allocating a portion of the investable fund into this month SSB. The purpose is not to hold till maturity for 10 years, but to act as a provisional 'war chest'. The SSBs will be acting as near-term maturity bonds instead. The objective is to ensure around 50% of my investable fund will be in the SSB with the highest 1-year interest rate. If the 1-year interest rate for next month is higher, the current month SSB will be redeemed and swapped by subscribing for next month SSB using the other 50% of investable fund. The SSB will also be redeemed if my liquid investable fund has depleted. If the interest rate for the next month does not increase, then there is no need to redeem and swap the bond. In the event that the investable fund does not get used up, at least the provisional 'war chest' will continue to earn higher interest.
Assuming the 1-year interest rate is increasing each month till Jan. An example would be the following.
October
Do note that the total transaction costs for applying and redeeming is $4. If your intention is to hold minimally for just 1 month, you will need to subscribe at least $3,000 to get back $4 of interest for Nov issue of SSB with an effective 0% interest rate. The effective interest rate will be lower after deducting the transaction fees, so the more you subscribe (assuming fully allocated), the higher the effective interest rate. You can calculate your accrued interest for early redemption here.
If you have max out your high interest savings accounts, or you have not max out your SSBs of $100,000 for 10-years holding period, and there is no intention to use your excess cash in the following few months, you can consider to use SSBs as a pseudo-savings account. The next interest hike by the Fed is expected to be in December, so do keep a look out.
I will be allocating a portion of the investable fund into this month SSB. The purpose is not to hold till maturity for 10 years, but to act as a provisional 'war chest'. The SSBs will be acting as near-term maturity bonds instead. The objective is to ensure around 50% of my investable fund will be in the SSB with the highest 1-year interest rate. If the 1-year interest rate for next month is higher, the current month SSB will be redeemed and swapped by subscribing for next month SSB using the other 50% of investable fund. The SSB will also be redeemed if my liquid investable fund has depleted. If the interest rate for the next month does not increase, then there is no need to redeem and swap the bond. In the event that the investable fund does not get used up, at least the provisional 'war chest' will continue to earn higher interest.
Assuming the 1-year interest rate is increasing each month till Jan. An example would be the following.
October
- Apply for Nov issue
- Apply for Dec issue
- Apply to redeem Nov issue in Dec (holding period 1-month)
- Received Nov issue principle + 1-month accrued interest
- Apply for Jan issue
- Apply to redeem Dec issue in Jan (holding period 1-month)
Do note that the total transaction costs for applying and redeeming is $4. If your intention is to hold minimally for just 1 month, you will need to subscribe at least $3,000 to get back $4 of interest for Nov issue of SSB with an effective 0% interest rate. The effective interest rate will be lower after deducting the transaction fees, so the more you subscribe (assuming fully allocated), the higher the effective interest rate. You can calculate your accrued interest for early redemption here.
If you have max out your high interest savings accounts, or you have not max out your SSBs of $100,000 for 10-years holding period, and there is no intention to use your excess cash in the following few months, you can consider to use SSBs as a pseudo-savings account. The next interest hike by the Fed is expected to be in December, so do keep a look out.
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| Nov 2018 Issue |
Details on this month SSB can be found on SGS website.
How much does the interest rate increase from month to month? About 0.0× %. Sounds like penny wise but pound foolish strategy to me. And given the amount allocated per trench is limited by balloting, how many dollars can one make? Unless you are talking about a six figure amount. There are better things to do with our life. Just my personal opinion.
ReplyDeleteThere are a few points raised and I will try to address them.
Delete1. Significance of accrued interest
You are right. This will vary depending on the amount put in and the duration of holding. As mentioned in the post, any amount below $3000, you will be losing money. Above that, you are ok. Since I am weighing against an interest rate of 0.05% p.a for savings account, any additional interest earned is good for me. I am not sure how long I will have to wait before deploying the money. If the money is deployed into the market next month, then the interest earned will not be significance. But what if I didn’t deploy the money in like 6 months or a year?
2. Effort needed
Application and redemption can both be done via iBanking and should take less than a minute. Once the interest rate has peaked, then there is no longer any action needed.
3. Allotment
This is a good point as allotment may not be full for each issue. This is something which I have to be mindful about. The issue in Oct was full allocation, and Sep was $45,000 ceiling, which is still above what I am applying for.