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Singapore

Why we’re staying away from the 50-year Green SGS (Infra) bond

05 Aug 2022

We’d give the SGS Green (Infra) bond a miss as the yield is not attractive enough for us to invest in such a long-tenor bond given the risks.

SGS Green (Infra) bond

TL;DR

  • The inaugural Green SGS (Infrastructure) bond offers investors an effective interest of 3.04% per annum. Maturing in 2072, investors will only receive their principal back after 50 years. 
  • If investors want to sell the bond before maturity, they would face interest rate risk and may incur a loss. In particular, a 50-year bond would be more sensitive to interest rate changes than those with a shorter maturity. 
  • As the first 50-year bond issued by the Singapore government, it is hard to tell what the liquidity of the bond would be like in the secondary market. 
  • We’d give the SGS Green (Infra) bond a miss as the yield is not attractive enough for us to invest in such a long-tenor bond given the risks. 

It’s hard to catch up if you are a bond investor in Singapore these days.

We’ve seen much interest in the Astrea bonds, Singapore Savings Bonds, and SGS bonds recently. 

And before we have time to think about how much to apply for the most recent SGS bond auction, there’s the inaugural green SGS (infrastructure) bond to consider. 

What is the Green SGS (Infrastructure) bond?

As the name suggests, the Green SGS (Infrastructure) bond is all about being green.

You’ve heard how water levels are rising and this will threaten Singapore’s long term existence as a low-lying city state. 

On certain days (especially on the ones you’re not working), you’d probably realise that the weather these days is much warmer than what it used to be. 

So the government came up with the Singapore Green Plan 2030 to drive initiatives to meet our long term aspiration of net zero emission.

As part of these initiatives, the government will take the lead by issuing up to S$35 billion of green bonds by 2030. 

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

Your next question will probably be, what are green bonds?

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

So, another keyword here is long-term. And here we get to one key characteristics of the inaugural green bond. 

It has a tenor of 50-years, which means that the bond will only mature in 2072. 

Think about this once again – 50 years. 2072. 

To put this into perspective, the 50-year SGS bond would mature at about the same time as the HDB lease expiry for some SERS flat owners at Ang Mo Kio.

There will be a fixed coupon of 3.00% per year, payable semi-annually until maturity. But as you will be paying S$98.976 per $100 in principal amount of the bonds, you will be getting an effective yield of 3.04% per year. 

How is it different from other SGS bonds?

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

The first as we have been highlighting, is that the SGS Green (Infra) bond has a much longer maturity of 50-years, compared to the usual SGS bonds that have a maturity of 2-30 years. 

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 inaugural 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 it 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 50 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. 

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Source: MAS

What are the risks of the 50-year? 

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 date (gentle reminder: 2072). 

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 50 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 130 in December last year, it has halved to 56 as of 5 August as interest rates have gone up. 

Yes, we know it’s ugly. Almost like a Chinese property bond. 

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 2072). 

The other key risk is liquidity risk. As the first 50-year bond issued by the Singapore government, it is hard to tell what liquidity of the bond will be in the secondary market. 

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

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Source: Tradingview

Should I apply for the 50-year sovereign green bond?

So here’s the verdict – we’d give the SGS Green (Infra) bond a miss. To us, the yield of 3.04% is not attractive enough for us to invest in such a long-tenor bond given the risks. 

For a bond of such long maturity, the best comparison would be with the CPF scheme. Even then, the day that we can withdraw from our CPF is probably closer than the maturity of the SGS Green (Infra) bond for most of us reading this. 

But still, let’s use the CPF rates as a comparison.

At 3.04%, the yield on the SGS Green (Infra) bond is higher than the CPF Ordinary Account (OA) interest rate of 2.5%. However, it is below the CPF Special Account (SA) interest rate of 4.0%. 

If you are comfortable with having your cash kept in the SA account, then topping up on your SA would provide you with a higher return compared to investing in the SGS Green (Infra) bond. By doing this, you get tax deductions too! 

Of course, you might say that the SGS Green (Infra) can be sold in the secondary market, but the CPF SA top-up will be locked up till withdrawal age.

So 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. 

The risks relating to this investment are worth repeating. You’d be exposed to interest rate risks where the price of the bond may decline if interest rates do not fall as expected. There might also not be liquidity should you wish to sell the bond in the secondary market before it matures. 

We'd prefer the Singapore Savings Bonds and SGS bonds over the Green SGS (Infra) bond due to their shorter maturities.

How do I apply for the Green SGS (Infra) bond?

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

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Source: MAS

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 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

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Source: MAS