Moneytalk: What is SGS ?

• Bangulzai

  5 Jun 09, 21:37

  What is SGS ?

  [Thursday, January 15, 2009 | 0 comments ]

   

  This post is part of a series of posts that discuss about the SGS in detail. To access the other posts in this series, click here.
  
  So what is SGS ? SGS stands for Singapore Government Securities and they are marketable debt instruments issued by the Singapore Government. The link for the official website of the SGS can be found here. In other words, the government actually borrows money from you and will promise to return you your capital with some amount of interest after a agreed period of time.
  
  What is so special about SGS as a form of investment ? The special feature about SGS is that it is avirtually risk-free investment. This is because they are backed by the full faith and credit of the Singapore Government. The Singapore Government has consistently run budget surpluses consistently over the years thus it has the ability to pay back debts. Furthermore, SGS are given the highest debt rating by various international rating agencies such as Moody's, Standard and Poor's and Fitch. As compared to fixed deposits, SGS generally gives a higher interest. Furthermore, fixed deposits have a locked-in period whereas you can always sell your SGS for cash on the market after buying them.
  
  SGS are generally dividend into two categories. They are Treasury Bills which are more commonly known in short as T-bills, and Bonds.
  
  Treasury Bills are short-term debts that have a maturity period of one year or less. It is being sold or bought at a discount to their face value which is $100. At the end of the maturity period, the Singapore Government will pay back the face value thus the interest is simply the difference between the purchase price and the face value.
  
  For example, a Treasury Bill is being sold at $99.04 for a face value of $100 which the government will pay back to you at the end of the maturity period thus it is being sold at a discount to the face value. If you bought it at $99.04, at the end of the maturity period, you will receive back $100 and your profit will simply be $100 - $99.04 = $0.96. Thus your yield will be $0.96 / $100 * 100 = 0.96%. As such, the discount is actually the interest of the Treasury Bill.
  
  Currently, the Singapore Government currently issues 3-month and 1 year Treasury Bill although 1 year Treasury Bill has been issued before and the minimum purchase amount is $1000. The 3-month Treasury Bill is being issued every week while the 1 year Treasury Bill is being issued twice a year.
  
  Bonds are longer term debts that have a maturity period of more than one year. During the holding period of the bonds, the Singapore Government will give out the interest which is also known as coupon, twice annually with the payment dates six months apart from each other until the end of the maturity period. This is one of the main difference between Treasury Bills and Bonds. For Treasury Bills, the interest is given in the form of a discount to the face value of the Treasury Bills whereas for Bonds, the interest is given out in the form of coupons.
  
  For example, you bought $1000 worth of a SGS Bond that has a yield which is also known as a coupon rate of 4% on a face value of $100 and it will mature on 1st March 2015. Every year, the total interest you will receive will be 4% * $1000 = $40. Since the coupons is being given out twice a year, you will receive $20 for each coupon payment which are six months apart until 1st March 2015.

  
  

  If you wish to view a more detailed explanation on the SGS, you can download the guide by MAS here. In my next post, I will be doing a comparison between SGS and fixed deposits.

  
  

  http://www.moneytalk.sg/2009/01/what-is-sgs.html
  

• Bangulzai

  6 Jun 09, 22:07

  SGS: An alternative to fixed deposits

  [Saturday, January 17, 2009 | 2 comments ]

  This post is part of a series of posts that discuss about SGS in detail. To access the other posts in this series, click here.
  
  As compared to SGS treasury bills and bonds, fixed deposits is the more widely known product that is known to carry very little or no risk. This is because most of us are aware that the Singapore Goverment currently guarantees the money that you deposit at the bank up to a certain amount. However, not many people know about SGS. SGS has some distinct advantages which makes it a superior form of investment over fixed deposits in its class that is suitable for conservative investors.

  
  

  1. Superior returns

  
  

  SGS treasury bills and bonds are likely to offer a better rate of returns as compared to fixed deposits. I have attached a chart of the historical yield of SGS bonds with an average year to maturity of 2 years.

  
  

  
  

  Chart taken from fundsupermart

  
  

  If you take a closer look at the chart, you will realize that the yield for the SGS with an average year to maturity of 2 years.is rather attractive as compared to fixed deposits. Furthermore, the lowest yield for the SGS, which is slightly less than 1% is comparable than the yield offered by fixed deposits, which is generally below 1%. There were also instances where the yield of the SGS with an average year to maturity of 2 years is even greater than 3% and at its highest point, the yield has gone up to more than 4% before. This shows that generally, SGS treasury bills and bonds offer a better yield than fixed deposits.

  
  

  2. No locked-in period

  
  

  As compared to fixed deposits which has a locked-in period, SGS treasury bills and bonds have no locked-in period. You can always choose to sell your SGS treasury bills and bonds in the secondary market before maturity. However, since the price of SGS such as the treasury bills or bonds can fluctuate, there is a chance that you will make a small loss if the price that you sell your treasury bills or bonds is lower than your purchase price. If your selling price is higher than your purchase price, that will bring me to my new point.

  
  

  3. Potential Gains

  
  

  Since one is able to sell SGS treasury bills and bonds on the secondary market, if the selling price of your treasury bills or bonds is higher than your purchase price, you will be able to have some capital gains. However, the price of the SGS treasury bills and bonds are usually not so volatile, thus any capital gain is likely to be rather small.

  
  

  As we can see, SGS treasury bills and bonds have a few distinct advantages over fixed deposits and one should seriously consider them over fixed deposits. In my next post, I will be covering on how one can go about in buying SGS treasury bills and bonds.

  
  

  http://www.moneytalk.sg/2009/01/sgs-alternative-to-fixed-deposits.html
  

• Bangulzai

  7 Jun 09, 22:56

  How to buy SGS ?

  [Saturday, January 31, 2009 | 5 comments ]

  This post is part of a series of posts that discuss about the SGS in detail. To access the other posts in this series, click here.
  
  How should one go about in buying SGS treasury bills or bonds ? For this post, I will cover on how one can buy SGS treasury bills and bonds through banks in the primary market.

  
  

  There are two avenues which you can purchase SGS treasury bills and bonds. You can either buy it on the primary market or the secondary market. The primary market is where the sale of the SGS treasury bills and bonds is made by the Singapore Government to the SGS primary dealers through auctions while the secondary market is the trading of the SGS treasury bills in a market after the SGS treasury bills and bonds have been sold by the government.

  
  

  I have attached a list of the SGS primary dealers below and if you wish to buy it on the primary market, you can approach the banks in the list.

  
  

  
  

  
  

  Before you approach any of the banks to purchase SGS treasury bills and bonds, you will have to decide on which treasury bill or bond that you wish to purchase and the date of issue for the SGS treasury bill or bond that you are interested in. Currently, 3-months treasury bills are being issued weekly while the 1-year treasury bill, 2-year, 5-year, 7-year, 10-year and 15-year are being issued according to the issuance calendar. To access the issuance calendar, click here for the 1-year treasury bills and bonds and here for the 3-month treasury bills. Alternatively, you can click here to access the main page of the SGS website and on its main page, there will be updates on the latest issue of treasury bills and bonds under the 'latest highlights'.

  
  

  After you have decided on which SGS treasury bills or bonds to buy, take note of the issue or ISIN code and the issue date. Do remember that you must submit your application 3 days before the issue date of the SGS treasury bill or bond that you wish to purchase. The minimum sum of investment is $1,000 and you must be at least 21 years old.

  
  

  Once this is done, you can approach the banks under the SGS primary dealers list. When you enter into the bank, you can approach any of the staff saying you wish to purchase SGS treasury bills or bonds. After that, you will need to fill in two forms. One form is for opening a SGS trading account with the bank and the other form is to buy the treasury bill or bond that you wish to bid for since SGS treasury billls and bonds are being sold in the form of an auction. You can either opt for the competitive bid i.e. choose the price which you wish to make the purchase or the non-competitive bid which will guarantee you a successful purchase of the treasury bill or bond. My recommendation is that you choose the non-competitive bid since the difference in yield between the competitive bid and the non-competitive bid is rather small and on top of that, you run a risk of being unsuccessful in you application. If your application is successful, funds will be deducted from your designated account on the issue date. Subsequently, if you wish to purchase SGS treasury bills and bonds, all you have to do is to fill up the bidding form and submit it again.

  
  

  I have read in some forums that there were some difficulties in purchasing SGS treasury bills and bonds from banks due to the fact that some of the staff are not well-trained in this investment product. This can be due to the fact that banks do not earn anything from processing your application since there is no commission involved. In fact, banks have no incentives to recommend SGS treasury bills and bonds since they can might as well use the money you placed in fixed deposits to buy SGS treasury bills and bonds and profit from the difference in interest as the interest in SGS treasury bills and bonds is higher than fixed deposits. Thus if you face any difficultes in making your purchase, you can either request to see a more senior staff or simply go to the other branches of the bank.

  
  

  In my next post, I will cover on how to buy SGS treasury bills and bonds in the secondary market.

  
  

  http://www.moneytalk.sg/2009/01/how-to-buy-sgs.html
  

• charlize

  7 Jun 09, 23:00

  Me no financial expert.

   

  But with inflation starting to hit the global economy, the Fed and the rest of the central banks will likely start increasing interest rates soon.

   

  Bond prices will likely start falling.

   

  Should we be buying bonds now?

• youyayu

  7 Jun 09, 23:02

  so

  i throw in 200k for 1 year

  i can get 208000?

• Bangulzai

  7 Jun 09, 23:04

  if u mean the article's sgs bonds, probably ok even for cautious people

• lianamaster

  8 Jun 09, 00:34

  Sounds quite chimm for me...

• CashBench

  19 Jun 09, 01:12

  It's great that Bangulzai has written this series on SGS bonds. They are almost risk-free, but it's also important to understand what exactly are the remaining risks that investors should know about.

  One important aspect to consider, for example, is the potential for the SGS bond's price to change as time passes or when interest rates move up (as pointed out by Charlize). This means that selling the SGS bond before it "matures" will expose you to some risk. "Matures" refers to the date where the Singapore government is obliged to return the original investment back to you based on the "face value" of the bond. Before maturing, the government would also have paid you interest every 6 months for "borrowing" money from you.

  Agree with Lianamaster that some of the SGS bond terms can be chim. Over at CashBench, there is a two-part series on SGS Bonds that will cover all the important aspects & terms that you need to know before investing. You can then decide if it's an appropriate investment for yourself. Links as follows: