Singapore Savings Bonds

I guess many are looking forward to Singapore Savings Bonds. While much has been discussed, I would like to just share some of my thoughts.

On surface, this is an very attractive and 'almost risk-free' investment tool. If you compare it against Fixed Deposit, the Bonds will deliver higher return (guidance effective 2-3% pa) if you keep it to maturity. However, if you redeem it earlier, the effective interest rate could be lower than the normal Fixed Deposit.

10 years is a long period of time. A few scenario could happen. The interest rate could rise, stay the same or fall (though the downside room is limited). The investor may need the cash back earlier and not able to keep it maturity.

This brings to the important point. Unlike other bonds which can be traded openly, this bond can only be sold back to MAS at par value plus accrued interest. The biggest disadvantage of this is that you lose the market mechanism to price it accurately to reflect its future earning (step up interest). Imagine after you hold the bond for 5 years at low interest rate, you need the money, but this is when the interest rate starts to step up. If this were to be an openly traded bond, all else equal, the bond price will be higher than par.