A quick look at the bond market in Singapore and SGS bonds in particular
Singapore’s excellent credit rating makes Singaporean bonds very attractive choices.
Usually, retail and institutional investors alike rely on third party credit rating agencies to determine if a debtor is likely to be able to pay back its debt on time.
These ratings are issued for corporate debtors as well as for sovereign countries or economies.
Although Western and non-Western credit rating agencies have come up with their own rating scales and rating methods, Singapore remains one of a handful of countries in the world to be rated very highly by all of those agencies.
A highly rated investment option in Singapore
Fitch, S&P, RAM and R&I have all rated Singapore’s currency AAA or equivalents in their latest long-term evaluations.
The first of these two agencies are based in the United States while RAM is a regional ratings agency based in Malaysia and R&I is an agency based in Japan.
This distinction is shared by very few countries, Switzerland and some Nordic countries being some notable mentions.
Why Singapore bonds are highly rated?
Singapore government securities (SGS) bonds are fully backed by the Government of Singapore and thus they are deemed very safe financial instruments. Consequently, the returns on these bonds also tend to be low.
The returns on bond instruments, otherwise know as yield, for SGS bonds are shown below, according to various terms to maturity.
Short term bonds provide lower yields and long term bonds provide higher yields. This is easy to understand because if an investor has to tie up his funds in a bond for the long haul, he can not usually make any alternative use of it for the entire duration of term to maturity of the bond.
So he has to be paid a greater amount in return for investing in long term bonds. It is also easy to understand that countries with generally riskier bond markets and lower credit ratings tend to offer higher yields on most investments, including bonds.
This can be seen from a simple comparison of the yields of long term government bonds of the US and the ASEAN+3 economies, which includes the 10 ASEAN member states and the East Asian trio of China, Japan and Korea.
LCY 10 Year Government Bonds
YTD Change (BP)
MTD Change (BP)
There are other factors besides the riskiness of a bond that affect its yield but generally, the high yield bonds are issued by high risk countries and the low yield bonds are issued by the low risk countries.
Interest rates, inflation and expected inflation are some other common factors that influence the yield curves.
SGS bond market safe but not deep enough
As Singapore Government Securities bonds, or SGS bonds, are fully backed by the Government of the Republic of Singapore, they are deemed relatively safe investments.
There are some points to be borne in mind, however. Singapore does not usually run budget deficits and so the government does not necessarily need to issue large amounts of bonds and T-bills to finance any deficits, as is commonly the case in other developed countries that have deep and liquid bond markets.
Not all bonds are issued by the government, either. The bond market may not be very liquid or large in comparison to the world’s leading markets but it is quite liquid and large in comparison to regional competitors.
As of the second quarter of 2016, the total bonds outstanding in the market stood at US$233bil. Of this amount, US$135bil consisted of government bonds and the remaining US$98bil consisted of corporate bonds.
The government bonds outstanding consisted of US$81bil worth of SGS bills and bonds and the remainder consisted of US$54bil worth of MAS bills.
The yield curves for different terms to maturity of some selected Singaporean bonds are seen below.
So, in short, bonds may be very safe investment instruments but they come with lower returns compared to other investments like stocks and are not as liquid.