Tuesday, October 28, 2008

Make Government Bonds easily available

26 October, 2008

Forum Page
Straits Times

Make Government Bonds easily available to the public

The Singapore Government has decided to guarantee all deposits with banks in Singapore. This move is intended to maintain the depositors' confidence in Singapore banks and to prevent the flight of deposits to financial jurisdiction covered by a state guarantee.

I wonder why Singapore taxpayers should be bearing the cost of this guarantee? The Singapore banks now offer a low interest rate of less than 1% per annum and earn a high spread on the loans that they make out. They are able to lend out the money on loans and overdrafts at the prime rate of 4% plus a margin. Are the taxpayers subsidising the shareholders of these banks?

I like to suggest an alternative approach. The Singapore Government should issue more government bonds for durations of 1 to 30 years. This should be made easily available to the public to buy through ATMs or other channels. The money collected from these bonds can be lent out to the financial institutions based on the cost of funds plus a credit spread, for the financial institutions to make loans and overdraft.

This approach will allow the working people and retirees in Singapore to earn a market rate of interest on the government bonds, which is higher than interest paid on bank deposits. This higher interest rate will help to cushion the temporary high inflation rate in Singapore.

The banks should not be allowed to earn a high margin on their lending operations and benefit from the guarantee provided by the Government. The high margin increases the profits of the banks and benefits their shareholders, but comes at the expense of the deposits who are given a low interest rate.

Tan Kin Lian


Koh Siew Yong said...

Hi Mr Tan

Your suggestion is very much in line with my view point.

In fact the retirees/savers currently have an alternative to participate in govt bonds - through their special accounts in the CPF. This is pegged to 10yrs SGS yields. Currently it is around 3.77% p.a. though there is a floor of 4% p.a. for 2 years.

$60K of this amount actually earns 1% more at 5% p.a.

I have suggested many times in multiple forum postings that retirees/savers shore up their SA to the max of $106K..it is the safest funds avail from the govt. Interest is around $5K a year. For retirees, the I/R is easily avail for them as it can be withdrawn yearly (i think) and govt pays around $1K a month based on the minimum sum of $106K.

For those who have already shored up their SA and have extra cash, it is only right that govt make bond buying a painless and easy process for savers.

No matter how one cuts it, saving is a virtue that ought to be recognised and rewarded. And definitely not a society that lives on credit and spends like there is no tomorrow....the current low savings rate is truly a "SLAP on retirees/savers face"..the govt should ernestly look at all ways to make this msg clear especially to younger Singaporeans.


Koh Siew Yong.

Anonymous said...

This is a good proposal. Currently government bonds are available from some banks but not always easy to get especially for those not familiar with the bond market and for those "vulnerable" group of people.
To ask the banks to increase the fd rates is like asking the tiger for its skin. After this toxic strutured products saga, banks will no longer be able to sell such things to the public in future for hefty profit as nobody will trust them anymore. They will be hard pressed by shareholders to sell something else to compensate for the loss of the good profit from structured products. Going forward the banks may have to cut cost and retrench the many highly paid RMs who will become redundant as these RMs will have less things to sell and the public will be more sceptical of what they try to sell. So you can see that the future for these RMs is rather bleak. I would not be surprised if the rating agencies are keeping a close watch on these FIs.

Anonymous said...

Are you saying that Govt bonds are extremely safe as well and is 100% capital guaranteed?

Anonymous said...

My understanding from cpf board when i checked at the beginning of the month is that retirees can only draw about $295 per month for any deposits into the retirement account....

Wealth Journey said...

The SG bond market is primarily used by MAS to manage and influence the domestic liquidity and interest rate.

Issuing excess bonds means govt is absorbing liquidity and thus, reducing the supply of money into the market.

This will result in driving up the currency value.

However, as an export-dependent economy with a 2.5times trade-related figure as compared to domestic GDP, this is not beneficial.

When export-dependent economy is hit, jobs in singapore that is dependent on export will be affected.

Anonymous said...

put it quaintly, the public office would surely have considered all these before making formal announcement worldwide

that means to say they have covered all the legal angles

means to say, theres not very much ANY protest could do

i mean, we pple elected them and put them there in charge of us isnt it

Anonymous said...

Wealth Journey is right. Demand will push the yield down.Bond is monetary regulator to control supply of money therefore to adjust the inflation.Issue of more bond means removal of money in circulation. Inflation and interest rate will respond to this excercise.

Koh Siew Yong said...

i am aged 37 and currently i have maxed out my $106K contribution in the cpf special account. some of my friends said for my age, i am crazy to trans my savings from ordinary account to special account. But when i asked them why they buy unit trust? why they buy stocks? why they buy other investment products. many tell me "oh its for my retirement."

So..arent we all trying to achieve the same outcome? its just that i prefer a more safe and steady way to reach there.

From Nov 1, it will be much easier to shore up one's SA as one can use cash to top up to max. As a matter of fact I intend to do exactly that for my wife.

Anonymous said...

In the below SGS link which shows high and low for each Issue code:


Does it mean that the bank can only sell not higher than the highest price or buy not lower than the lowest for the day.


nhyone said...

6:04pm, SGS is issued in S$, thus the Singapore Government can *always* meet the obligation. (It can always print more S$.)

I don't think SGS is hard to understand and buy. The SGS FAQ helps: http://www.sgs.gov.sg/pub_guide/faqs/publ_faqindinvestors.html

Note that you are allowed to put in a competitive bid. If you submit 2%, for example, you will only get it if the cut-off yield is 2% or higher. There's no danger of getting a yield less than what you would like to have.

Anonymous said...

To Koh Siew Yong,

Your suggestion of transfering to CPF-SA sounds good in principle but it comes with extremely high risk. Your CPF-SA is not risk-less. Do you know why CPF-SA is giving 5%pa? It is because you could never see all your money in the CPF-SA ever again. Look at the CPF Life (annuity) program. The regulatory risk is so great that the govt has to compensate you by giving you high return.

Currently it looks OK but it could turn out to be another Lehman fiasco where you could never see the principle value of your CPF-SA again.

There is no free lunch in this where. This is the basic principle in financial planning that one must remember. If you think there is free lunch, you will lose your financial independence very quickly.

Prudent financial planning is the key to financial independence. Never trust anyone except yourself. Don't ever trust your govt. I don't. Do you?

Anonymous said...

For those who interest in Singapore Govertment Bond, could refer to the following wed site...


For me, the safest fund for normal people should be our CPF. Any one could maximun the CPF, SA-$106k, MA-$34.5k. OA-$20k, should get an interst earn of $6720 per year...not only that, SA is a compound interst rate, the amount will add on and as time go by, the interst will go up...

For a normal couple, if both of them top to the max, the interest earn could be more than $13k per year, very good return and no risk at all...

But sadly to say, most of the Singaporean don't appreciate our CPF...

For other who still still can afford, I would recommend high yield blue chip such as SPH..for the past 5 year, SPH is giving more than 6% yield, near to monopoly business...you could refer to the following wed for more detail...


Lastly, pls do not put all money into one busket...diversify into more area to cut down the risk and increase the odd of getting more return...

Anonymous said...

Good ideas. Support your ideas.
Your proposal hv the ordinary people in mind.

zhummmeng said...

Miss Koh Siew Yong,
you have done the right and sensible thing by transferring OA to max the SA. You are assured of an income in your retirement.This is the first thing CPF members should do, to protect from yourself and especially the predators out there.
Your friends might have been influenced by the insurance agents .You know what insurance agents are eyeing.
I have known of insurance agents selling to customers single premium endowment which gives about 4% , projected, with long lock in and with risk and risk is not made known to them. Some even made customers buy this product with their SA. This is the most unethical , in fact robbing the customers of their money.This should be reported to MAS.
I would advise you to be adventurous with the excess balance, to take some risk by investing in well diversified portfolio of unit trust over long term. That is if you need to grow more to meet your retirement funding needs. Your SA is for minimum subsistence living.
Of course you mustn't engage an insurance salesman to help you because they don't know.These agents are product pushers who only think of selling you products with high commission.It serves well to keep away from them.
Look for a qualified, competent and honest adviser who can structure a portfolio that matches your risk appetite and required return and needs.Remember, sometimes taking risk is necessary or a need if you want to meet needs like retirement.Minimum return must be equal to inflation if you want to preserve your money.
Bonds' return is too low and is safe for retirees but not for you.
You are still 'young'. You need a balanced portfolio with 40% bond and 60% global equities.This is considered moderate risk.
Remember risk is necessary if you want higher return. The good news is risk can be managed if you get a competent investment adviser to do that and NOT insurance salesman.

MR koh siew yong said...

at max 106K today. In 18 years time when me and my wife turn 55, even at the lowest base rate of 2.5% p.a. (gtd by the cpf act) and even without any contribution at all (i.e. assuming both not working for the next 18 years), the amt ($212,000) will grow to about $332,326 on its own based on interest alone.

In 18 years time, the min sum (assuming $2800 per year increase) is expected to be about $160,000. for a couple, we need to set aside only 1.5 times this amount which is around 240K total...we are still looking at a withdrawal of around 100K. Even if we decide to set aside the FULL sum, the amt in the SA is more than enough to cover this requirement.

FACT - Even under a worst case scenario, there is still a withdrawal of around 100K when we turn 55. In addition from age 65 onwards, we have regular income of at least $1,500 (for both in today's dollars) per month.

We are v hopeful that during normal times (est 3.5% pa. interest, regular contributions), the amount we can withdraw will definitely be much more...

this is a scheme which some of you rightly pointed out not many ppl appreciate. In fact when you tell ppl put money in cpf, they say you 'siao'!

As for the point on cpf collapsing or monies wiped out...you can be assured when that day comes, i think chances are the whole island has already sunk into the deep blue sea.


Anonymous said...

Making Government Bond easily available to man in the street is defintitely a good idea.

Many a times , I had gone to the bank to look for some save investment like Government Bond but finally was led to buy Unit Trust or some structured product.

zhummmeng said...

Sorry for addressing you as Miss, Mr.Koh Siew Yong.
You are right, even adjusted for inflation, you can still get decent income in 25 years time. Remember when MSS is maxed the excess spills over to medisave or OA.
Those people who call you 'siow' will be 'siow' when their retirement got burned by themselves or the insurance agents.
However i still recommend that you take some risk to grow at 6% rate of return or more depending on your needs. Time is still on your side and time is a good diversification of risk. Sieze it before you lose it.

nhyone said...

Before anyone tops up their CPF, take a look at the Supplementary Retirement Scheme too.

Transferring OA to SA is irreversible, so it's not something to be treated lightly. (However, the Government has allowed withdrawals from SA to meet housing loan repayment in the Asian financial crisis.)

Personally, I won't transfer from OA to SA so far ahead. It's impossible to plan so far ahead. However, I think it's fine to do so 5-8 years before retirement.

nhyone said...

Oh yah, one thing about contributing extra to CPF to meet the Minimum Sum: it's $ you'll never see in one lump sum again.

Also, the goalpost keeps changing. God knows what will be introduced in 2013, when the current 10-year CPF roadmap expires.

Anonymous said...

It looks to me that Mr Kok Siew Yong doesn't know what is regulatory risk. Maybe he has not been following what the govt has be doing. All the best Mr. Koh. When you lose all your $300K of projected money in your CPF-SA to CPF Life or whatever XYZ program, don't cry father mother. While Mr. TKL may try to help you but since you've been warned, I am sure you already know the risk.

Again I stress, there is no free lunch in this world. You get 5%pa but you give up something. In this case, I am 99.999% sure you give up ALL your capital in the future in the CPF-SA.

Anonymous said...

yes, it is irreversible. It is good discipline.Why do you want to reverse? It is sent there for retirement and the advantage is it is protected from predators like the insurance agents and the smart alek consultants.

freeier said...

alot of ppl complain that their date of drawing out cpf is being delayed times after times. hinting that government needs the money to invest, do this do that.

those are simply very narrow minded thoughts.

i always believe CPF is one of the best saving mechanism and have mentioned it in many of my investment talks given to public. The 2.5 or 4 or now 3.7/5% interest given out are almost risk free (if CPF is to go bankrupt most other things in sg wld have 'died' as well)...

the objective of cpf is to have a retirement income stream. not to have a lump sum for people to squander on when they hit 62 or 65 or wahtever age.

Koh Siew Yong said...

zhummeng and nhyone are both correct also...

trans from OA to SA only if you have enough to meet your housing/other needs. also such cash top ups should be part of your wider portfolio. To put things in perspective, our cpf funds constitute less than 20% of our entire assets which consists of mainly cash and our humble 5 room HDB flat which is fully paid up via CPF OA.

you see...we took a different route from most freshies when we started work 12 years ago....instead of buying the biggest HDB or condo we can get our hands on, we bought a humble 3rm HDB flat and slowly upgraded from there.

in fact i would go so far as to advocate maxing one's SA as the first financial objective for everyone. Once maxed, then you can use the extra cash to undertake more risky investments.

In fact i remember it took me 30min just staring at the cpf online system before pressing the button sometime last year. but once i did it, i have been doing it till max.

i am glad i did it.

especially for youngsters, it is important for them to build up their savings when they are young...financially they are taking advantage of compound interest but more importantly, they are developing a thrifty attitude. cpf SA is definitely a good way to do it.

True - Locking away permanently means that you will not see it again (at least not till you retire) - but dont forget, it means also the monies is always there and not spent on the next big condo/HDB or on some foul investments.

Koh Siew Yong said...

To Zhummeng

When the Min Sum is maxed at $106K, it can still grow with the monthly contribution as well as interest earned. in other words, one can have >106K in the SA. So the trick is to top up as much cash as possible when young so that with future contributions and yearly interest, the SA will be a sizeable amt.


Anonymous said...

This is a good scheme for people who just want a plain vanilla bond.
The FI exploited public's interest and difficulty to buy a bond, and set up these toxic products to imitate bond to lure the victims.

Parka said...

It's a good idea for government bonds to easily purchased.

For people who need liquidity, they don't have to invest in a long period. They just have to keep a small amount in the bank. And banks in return to attract deposits will start offering higher interest to compete.

Even though the coupon rate from government bond might not be enough to fight inflation. It's better than nothing. And it certainly less insulting than the rates banks are offering at the moment.

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