Is the 30-year green SGS bond worth investing in?

What happened?

There seems to be more options for us to earn a higher yield on our savings these days.

Many investors have been putting their money into the 6-month T-bill and 12-month T-bill, driving demand to record high levels in recent months. 

The latest SSB issuance which offers a 10-year average return of 3.33% per year has also caught the attention of many investors. 

More recently, the 30-year green SGS bond (NA24300E) offering a yield of 3.30% p.a. was opened to retail investors.

As there were several questions about this bond issuance in the Beansprout community, I shall take a deeper look at the 30-year green SGS bond to find out if it might be worthwhile applying for.

What is the Green SGS (Infrastructure) bond?

Green bonds are bonds issued by the government to finance major, long term green infrastructure projects. 

As you might be aware, Singapore has a target to get to net zero emission. To finance the infrastructure required to combat climate change, the government will take the lead by issuing up to S$35 billion of green bonds by 2030. 

This will support Singapore’s decarbonisation efforts and deepen Singapore’s green finance market. 

How is the Green SGS bond different from other SGS bonds?

There are a few key differences between the SGS Green (Infra) bond and other SGS bonds. 

The first is that the SGS Green (Infra) bond typically has a longer maturity period compared SGS bonds, which have a maturity of 2-30 years.

The current issuance of the green bond has a tenor of 30 years, and will mature in 2054. 

Next, the SGS Green (Infra) bond can only be used to finance major, long-term green infrastructure projects. 

The last key difference lies largely in the application process. While SGS are usually issued via auction, the Green SGS (Infrastructure) is being issued via syndication. 

What this means is that yield of the SGS Green (Infra) bond has already been determined through a bookbuilding process with institutional and accredited investors. 

If you are interested in the SGS Green (Infra) bond, what is important for you here is that the application process is slightly different from the usual SGS bonds, which we will share later in the article.  

How is the Green SGS bond different from the SSB? 

We thought it might be useful to compare the SGS Green (Infra) bond to the Singapore Savings Bond, since that is what most bond investors in Singapore are familiar with. 

Like the Singapore Savings Bonds, the SGS Green (Infra) bond is fully backed by the Singapore Government.

They offer a sound way for you to diversify your investment portfolios, while earning a regular interest payment. 

The key difference is that the Singapore Savings Bonds offer more flexibility compared to the SGS Green (Infra) bond.

The SGS Green (Infra) bond has a fixed maturity of 30 years, which means that you need to be comfortable holding on to the bond for this period of time.  

While the SGS can be traded in the secondary market, the price you will receive may be lower than what you paid if you decide to sell them before maturity. 

On the other hand, the SSBs can be redeemed in any month with no penalty. You will receive the initial investment amount plus accrued interest upon redemption. 

What we would consider before investing in the 30 year SGS bond

#1 – Interest rate risk

So having shared the lack of flexibility compared to the Singapore Savings Bond, we thought it is worthwhile highlighting the risks of the SGS Green (Infra) bond.

Top of the list is interest rate risk, where you may incur a loss if you sell the bonds before their maturity in 2054. 

If interest rates continue to go up, the price of the bond will decline. And if you need to sell to bond to buy a house or pay for your children’s education (in say 2038), you will be getting back an amount that is below your initial capital. 

What is even more important to note here is that with a maturity of 30 years, the SGS Green (Infra) bond is considered a long-tenor bond. 

As a long tenor bond, it will be more sensitive to changes in market interest rates than shorter-tenor ones.

If you want a detailed explanation of how this happens, you can ask us on our Telegram group. 

To illustrate how sensitive the price of a long-tenor bond can be to changes in interest rates, we have pulled up the chart of the Austrian Government 100-year bond.

From a price of 208 in July 2020, it fell to a low of around 30 late last year as interest rates rose sharply. While it has recovered slightly since then, it remains significantly below its price level back in 2020.

You’d need to brace yourself for such price swings if you’re holding on to the SGS Green (Infra) bond, or be prepared to hold it till maturity in 2054.

We can also look at the price action of the existing 30-year SGS bonds. 

As we can tell from the chart below, the price of the 30 year SGS bond has seen fairly significant movements over the years.

The price of the bond fell from 122 in November 2021 to about 74 in September 2022. 

Remember once again that the price of a bond falls when interest rates rise, and vice versa. 

Hence, the decline in the price of the bond during this period would reflect rising long-term interest rates as inflation starting picking up. 

Investors who are looking at investing in the 30-year SGS bond should be aware of such price risks. 

One instance where the SGS Green (Infra) bond might be of interest would be if you expect to make a capital gain out of it by selling it before maturity.

This could be the case if you expect interest rates to fall, which will cause the price of the bond to increase. 

#2 – Liquidity 

The other key risk is liquidity risk as there might be limited liquidity in the secondary market if you decide to sell the 30-year green SGS bond before its maturity. 

If there are few interested buyers in the market, you may not be able to sell the bonds at your desired price. 

What would Beansprout do?

The yield on the 30-year green SGS bond of 3.3% is comparable to the 10-year average return on the latest Singapore Savings Bonds (SSBs).

However, we would prefer the SSB over the 30-year green SGS bond as a way to generate passive income on our savings. 

This is because the SSB offers us the flexibility to redeem before the maturity, while we may incur losses if we sell the 30-year SGS bond before maturity. 

Hence, we must be comfortable holding on the the 30-year green SGS bond through its maturity in 2054 if we are looking to reduce the risk of any capital loss. 

Conversely, if interest rates were to fall sharply, then the SGS Green (Infra) bond may offer potential capital gains for investors who sell them before maturity. 

We would just need to be aware of the potential interest rate and liquidity risks relating to taking such an approach. 

If we are looking to lock in interest rates for the short term, then the T-bill may offer a higher yield compared to the 30-year green SGS bond. 

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How do I apply for the 30 year green SGS bond?

If you are interested in the Green SGS bond, do take note of the following timeline. 

The closing date for applications is at 12 noon on 27 May 2024 (Mon).

Applications can be made through the following channels: 

• ATMs: DBS (including POSB), OCBC and UOB 
• Internet banking: DBS (including POSB), OCBC and UOB 
• Mobile banking apps: DBS, OCBC and UOB
  A non-refundable administrative fee of S$2 will be charged at the point of application 

Please note the following: 

• Use the ESA/IPO application, not the SGS application. On the ATM screen, internet banking website screen or mobile banking app, choose the Electronic Securities Application (ESA) or the IPO application. Do not apply through the SGS application, which is meant for SGS auctions and Singapore Savings Bonds. 
• Submit one application only. Only one application per individual (across all banks) will be accepted. Multiple applications will be rejected. 
• You need an individual CDP account. Applications made using joint CDP accounts will be invalid. 

Can I apply for the Green SGS (Infra) bond using CPF?

Only cash applications are accepted for this issue. CPF funds and SRS funds cannot be used for your application. 

After the issuance and the listing of the Bonds, you can check with your relevant bank and/or stockbroker if you wish to purchase the Bonds from the secondary market using CPF funds or SRS funds.