You will be able to explain when a longer SGS bond suits a goal better than rolling T-bills.
Arjun is putting aside S$30,000 for a home renovation he expects in about five years. Rolling six-month T-bills has worked well so far, but every six months he has to apply again, and every six months the yield is different. He wonders whether there is a way to lock in one rate for the whole five years. There is: the SGS bond, the longer member of the family you met in lesson 1.3, Who borrows: governments, banks and companies.
An SGS bond is a Singapore Government bond that runs for years rather than months. MAS lists the maturities it issues on its website, from a couple of years out to several decades. Unlike a T-bill, it pays a fixed coupon every six months, and it repays face value at maturity. It is the plain bond from lesson 1.1, A bond is a loan with a fixed timetable, with the Singapore Government as the borrower.
New SGS bonds are sold at auctions run the same way as T-bill auctions. Lesson 4.2, How the auction sets one yield for everyone, applies unchanged: bids are ranked by yield, there is a cut-off, and every successful bidder gets the same yield. You can pay with cash, SRS or CPF Ordinary Account savings, as in lesson 4.4.
There is one more difference. SGS bonds are listed on SGX, so after issue you can buy or sell them through a broker at the market price. That means you are not stuck until maturity. It also means the price can move, as module 2 showed.
Here is a made-up comparison for Arjun's S$30,000 over five years.
Option one is a five-year SGS bond bought at auction with a 2.8% coupon at a price of 100. It pays S$420 every six months, the same in every period, for ten payments. That is S$4,200 of interest over five years, and S$30,000 back at the end. Nothing that happens to rates afterwards changes those numbers.
Option two is rolling six-month T-bills. Suppose the first year's bills yield 3.2%, and then yields fall to 2.0% and stay there. The five years earn about S$960 in the first year and S$600 a year after that, roughly S$3,360 in total, ignoring the small effect of compounding. Locking in won by about S$840.
But reverse the story. If yields rise to 4.0% after the first year instead, rolling T-bills earn about S$960 plus four years at S$1,200, roughly S$5,760. Now locking in lost by about S$1,560.
Neither outcome is predictable. What the SGS bond removes is reinvestment risk: the chance that each time your money comes back, you have to put it to work at a lower rate. Rolling T-bills keep that risk. In exchange they keep you flexible, because your money comes back every six months and your yield resets to whatever the market pays at the time.
Locking in removes one risk and adds another. Because the bond runs for five years, its price moves with market yields, and the longer the bond, the bigger the move, as you saw in lesson 2.3, Duration: how far a price moves when rates move.
This only matters if you might sell before maturity. Suppose that after two years Arjun's plans change and he wants the money, and by then three-year government yields have risen to 4%. A bond with three years left and a 2.8% coupon would trade at about 96.64. His S$30,000 of face value would fetch about S$28,992, roughly S$1,008 less than he put in, before any broker charges. He has still collected four coupons of S$420, but the sale itself is at a loss.
If he holds to maturity, none of that matters. He gets every coupon and the full S$30,000. The bond suits money whose date is firm. If the date might move earlier, the price risk becomes real. Compare that with the SSB in lesson 3.3, Getting your money back early, and what it costs you, which can be redeemed at face value in any month and so avoids this risk, within the SSB holding limits.
The choice comes down to how sure you are of the date and how much you value certainty of income.
A firm date, a sum you will not need before then, and a wish to know exactly what you will earn all point to an SGS bond maturing on or just before the date. A date that could shift, or a preference for keeping options open, points to rolling T-bills, accepting that the yield will move. Many people mix the two, and that idea becomes the ladder in module 8.
Arjun's renovation date depends on a home purchase that is not yet fixed. That uncertainty is the main fact he needs to weigh. Now do the same for a goal of your own five years out, setting the main advantage of each choice against its main risk.
For a goal five years away, list one advantage and one risk of holding a five-year SGS bond versus rolling six-month T-bills.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).