A Rare Opportunity...

SGS 1-YEAR BOND YIELD
NOW HIGHER
THAN 12 MONTH FIXED DEPOSIT!

The shorter end of the SGS bond yield curve in Singapore is moving up. This is a clear reflection of how Singapore's short term interest rates are also moving up in line with the hike in US interest rates. However, when we look at fixed deposits and savings accounts rates, we find that this remains essentially unchanged in contrast to the yield provided by shorter term SGS bonds.

As of the end of August, the average annual interest rates of Banks and Finance Companies for savings deposits remains at 0.23%, a rate that has remained for the last 7 months (Source: Monetary Authority of Singapore). The average 6 month fixed deposit rate stands at 0.53% and the average 12 month fixed deposit rate still stands at 0.71%. Thus, savings accounts and bank fixed deposits have not adjusted to the rising interest rates environment yet. However, when we look at the yield for the shorter maturity SGS bonds, we find that these have increased significantly.

So, there is now a huge opportunity to buy a 1 year SGS bond and get a return of 1.16% (nett of processing and custodian fees, as at 4 October 2004) after 1 year as compared to the 0.71% that a current 12 month fixed deposit can give you. That is a difference of 0.45% points (see table below)

Table 1

*Yields/Returns as at 8 October 2004; nett of processing and custodian fees

Hence, we are in a situation now where Singaporeans who go into the market to buy a 1 year maturity SGS bond will receive a significantly higher return than if they were to put money into a 1 year fixed deposit from banks. Considering that SGS bonds have a higher credit rating than fixed deposits issued by banks, investors currently have a rare opportunity to get a higher return, yet at a lower risk to that of 12 month fixed deposits.

There is another instrument that will allow investors to quietly enjoy the benefits of rising interest rates. That is the money market fund. A money market fund invests at least 90% of the fund into fixed income investments that are up to 1 year in maturity. The remainder of the up to 10% of the fund can be invested into fixed income investments that are up to 2 years in maturity. A money market fund can also invest in short term bonds and commercial bills. So, it is not just restricted to fixed deposits. The money market fund manager has more flexibility in his choice of short term fixed income instruments and he also has easier access to Singapore interbank markets. Thus, the money market funds will respond faster to rising interest rates than fixed deposits.

In conclusion, the current rising interest environment in Singapore has created the situation where savings accounts and fixed deposits rates have not risen even though interbank rates and the Singapore bond market have already reacted. Hence, investors can make use of SGS bonds or money market funds to obtain a higher 1 year return without waiting for savings accounts or 12 month fixed deposits to be adjusted by banks.

Click here for the latest yields on SGS Bonds!

To find out more about the characteristics and risk profile of SGS Bonds click on the following articles:

What Returns Can You Get At Zero Risk?

Singapore Govt Bonds In A Nutshell