Friday, June 24, 2005
SGS - Singapore Government Securities
Introduction
Not happy with your Fixed Deposit Rate of 1.5% (need $50k just to get this rate)? Unwilling to take the risk for POTENTIAL higher returns in various kinds of schemes that the banks are always trying to push to you? Treasury Bills (T-Bills) issued by the Singapore Government may be the choice for you. Current 3-mths T-Bills are giving a yield of ~2%. You get better rates than FD, min. investment amt is ONLY $1000, short 3-mth tenure (you can also sell in the open mkt before 3-mth) and it's virtually risk-free as it's guaranteed by the govt, therefore capital protection :)
SGS
All SGS, whether T-Bills or Government Bonds, are sold in lots of $1,000. T-Bills have a tenure of either 3 months or 1 year, never pay coupons (similar to interest rate), and are always sold at a discount. Government bonds are sold with maturities of 1, 2, 5, 7, 10 and 15 years. They always pay coupons, and may be issued at a discount, at par or even at a premium.
Where, When and How To Buy
You can buy SGS from any of the local banks. There are no admin or custodian fees involved. Banks earn NOTHING (they are legally REQUIRED to process your orders as it's one of the requirements to be a Primary Dealer) when you buy SGS at issue ie. when the Singapore Government first sells the SGS. The banks do earn from a spread when they buy and sell existing SGS on the open market. When you buy at issue there is no accumulated interest to be paid, nor any transaction fee. Since the Singapore Government regularly issues SGS, there's little reason to buy on the open market and pay commissions.
The first time you buy SGS through the bank, you'll need to open a custodian account (a form to fill) with the bank. To buy new issues, you need to fill in another form to bid. Either bid (for competitive bids) something close to the going rate or pick the "non-competitive bid" which guarantees a successful application. If you bid, the difference is usually only 0.05% at most, and you risk being unsuccessful.
3-month T-bills are issued every Monday and bids must be submitted before 12noon. Check the SGS website for details.
My Experience
I just bought mine at a OCBC neighbourhood branch (heard from others that DBS will likely refer you to apply at their Shenton Way HQ). Applications closes on Mondays at 12noon and in my case, 20-Jun. Monies will be deducted from my bank acct on 23-Jun (I pre-signed all the forms when I went to the bank on a Sat.) The tenure of the T-Bill is fm 23-Jun to 22-Sep. Yield is at 1.96137363% (yes, the decimal points are for real) for the non-competitive bid, meaning, it's sold at a discount of 99.511 ie. for $1000 worth of T-Bills, you pay $995.11 and you'll get back $1000 at maturity.
Bond Ladder Concept
In the context of the SGS issued by MAS, which have durations of 1, 2, 5, 7 and 10 years (not counting the 15 year SGS), a bond ladder can be set up in the fllwg manner,
In Year 1, for every $10,000, you buy at issue (= no fees):
one 10-year bond;
one 7-year bond;
one 5-year bond;
three 2-year bonds; and
four 1-year bonds
In Year 2, the four 1-year bonds mature. Reinvest the proceeds into:
one 10-year bond;
one 7-year bond;
one 5-year bond; and
one 2-year bond
Since all the other unmatured bonds have aged one year, the portfolio now appears thus:
one 10-year bond;
one 9-year bond;
one 7-year bond;
one 6-year bond;
one 5-year bond;
one 4-year bond;
one 2-year bond; and
three 1-year bonds
In Year 3, the three 1-year bonds mature. Reinvest these proceeds into:
one 10-year bond;
one 7-year bond; and
one 2-year bond
The portfolio will now contain:
one 10-year bond;
one 9-year bond;
one 8-year bond;
one 7-year bond;
one 6-year bond;
one 5-year bond;
one 4-year bond;
one 3-year bond;
one 2-year bond; and
one 1-year bond.
In only the 3rd year of operation, you have a 10-year bond ladder. The average interest rate will of course be lower than the actual 10-year rate, but it will climb every year as the 1-year bond matures and you reinvest it into a 10-year bond, until the 10th year, when all the bonds are in fact 10-year bonds maturing in consecutive years.
Given the already low returns of bonds, this strategy is helpful as it avoids having to pay commissions at any point in time, because you always buy at issue rather than on the open market. It's simple, cheap and effective.
Credit : Much of the above information is gleaned fm WallStraits Buffett Forum
Not happy with your Fixed Deposit Rate of 1.5% (need $50k just to get this rate)? Unwilling to take the risk for POTENTIAL higher returns in various kinds of schemes that the banks are always trying to push to you? Treasury Bills (T-Bills) issued by the Singapore Government may be the choice for you. Current 3-mths T-Bills are giving a yield of ~2%. You get better rates than FD, min. investment amt is ONLY $1000, short 3-mth tenure (you can also sell in the open mkt before 3-mth) and it's virtually risk-free as it's guaranteed by the govt, therefore capital protection :)
SGS
All SGS, whether T-Bills or Government Bonds, are sold in lots of $1,000. T-Bills have a tenure of either 3 months or 1 year, never pay coupons (similar to interest rate), and are always sold at a discount. Government bonds are sold with maturities of 1, 2, 5, 7, 10 and 15 years. They always pay coupons, and may be issued at a discount, at par or even at a premium.
Where, When and How To Buy
You can buy SGS from any of the local banks. There are no admin or custodian fees involved. Banks earn NOTHING (they are legally REQUIRED to process your orders as it's one of the requirements to be a Primary Dealer) when you buy SGS at issue ie. when the Singapore Government first sells the SGS. The banks do earn from a spread when they buy and sell existing SGS on the open market. When you buy at issue there is no accumulated interest to be paid, nor any transaction fee. Since the Singapore Government regularly issues SGS, there's little reason to buy on the open market and pay commissions.
The first time you buy SGS through the bank, you'll need to open a custodian account (a form to fill) with the bank. To buy new issues, you need to fill in another form to bid. Either bid (for competitive bids) something close to the going rate or pick the "non-competitive bid" which guarantees a successful application. If you bid, the difference is usually only 0.05% at most, and you risk being unsuccessful.
3-month T-bills are issued every Monday and bids must be submitted before 12noon. Check the SGS website for details.
My Experience
I just bought mine at a OCBC neighbourhood branch (heard from others that DBS will likely refer you to apply at their Shenton Way HQ). Applications closes on Mondays at 12noon and in my case, 20-Jun. Monies will be deducted from my bank acct on 23-Jun (I pre-signed all the forms when I went to the bank on a Sat.) The tenure of the T-Bill is fm 23-Jun to 22-Sep. Yield is at 1.96137363% (yes, the decimal points are for real) for the non-competitive bid, meaning, it's sold at a discount of 99.511 ie. for $1000 worth of T-Bills, you pay $995.11 and you'll get back $1000 at maturity.
Bond Ladder Concept
In the context of the SGS issued by MAS, which have durations of 1, 2, 5, 7 and 10 years (not counting the 15 year SGS), a bond ladder can be set up in the fllwg manner,
In Year 1, for every $10,000, you buy at issue (= no fees):
one 10-year bond;
one 7-year bond;
one 5-year bond;
three 2-year bonds; and
four 1-year bonds
In Year 2, the four 1-year bonds mature. Reinvest the proceeds into:
one 10-year bond;
one 7-year bond;
one 5-year bond; and
one 2-year bond
Since all the other unmatured bonds have aged one year, the portfolio now appears thus:
one 10-year bond;
one 9-year bond;
one 7-year bond;
one 6-year bond;
one 5-year bond;
one 4-year bond;
one 2-year bond; and
three 1-year bonds
In Year 3, the three 1-year bonds mature. Reinvest these proceeds into:
one 10-year bond;
one 7-year bond; and
one 2-year bond
The portfolio will now contain:
one 10-year bond;
one 9-year bond;
one 8-year bond;
one 7-year bond;
one 6-year bond;
one 5-year bond;
one 4-year bond;
one 3-year bond;
one 2-year bond; and
one 1-year bond.
In only the 3rd year of operation, you have a 10-year bond ladder. The average interest rate will of course be lower than the actual 10-year rate, but it will climb every year as the 1-year bond matures and you reinvest it into a 10-year bond, until the 10th year, when all the bonds are in fact 10-year bonds maturing in consecutive years.
Given the already low returns of bonds, this strategy is helpful as it avoids having to pay commissions at any point in time, because you always buy at issue rather than on the open market. It's simple, cheap and effective.
Credit : Much of the above information is gleaned fm WallStraits Buffett Forum
