Trading of govt bonds on SGX for retail investors by mid-year

A safe and higher-yielding alternative to bank deposits

BY mid-year, retail investors should be able to trade in Singapore government bonds – an eagerly awaited development for risk- averse savers.

Yesterday in Parliament, Finance Minister Tharman Shanmugaratnam said Singapore Government Securities (SGS) will begin trading on the Singapore Exchange (SGX) by the middle of this year, providing retail investors with a safe and higher-yielding alternative to bank deposits. Retail investors have since 2009 been able to take part in the SGS auctions via ATMs in minimum amounts of $1,000, but if they wanted to trade in them subsequently, they had to do so at selected bank branches.

In preparation for this year’s trading launch on the stock exchange, SGX’s Central Depository has been a custodian of individual investors’ SGS holdings since April 1 last year.

Mr Tharman said retail investors concerned about the low savings rates can also participate in government bond auctions or buy high-quality corporate bonds that are now traded in smaller lot sizes on the exchange.

Most bank savings pay between 0.1 and 0.25 per cent. At yesterday’s auction of three-month SGS, the median yield was 0.29 per cent.

The consumer price index inflation for November 2010 was 3.8 per cent year-on-year – the highest since January 2009 – with many economists expecting it to rise further this year from wage pressures, higher food and fuel prices and sharp hikes in vehicle certificate of entitlement (COE) premiums .

‘Inflation should peak at 4.8 per cent in December, but may remain stubbornly high at above 4 per cent in Q1, such that there remains a real risk that full-year inflation will breach the upper end of the MAS forecast of 2-3 per cent,’ said Wei Zheng Kit, Citi economist.

He said drivers include wage inflation from strong demand and policy-induced supply-side constraints, which would show up in services costs, fuel and food prices, rents and COE premiums. The likelihood of further tightening in 2011 by the Monetary Authority of Singapore (MAS) remains high in his view, Mr Wei added.

Mr Tharman said that inflation is expected to rise further in the first quarter of this year before moderating in subsequent quarters.

Last year, SGX said SGS will begin trading by the first quarter of this year as part of its programme to expand bond offerings to retail investors.

Last week, CapitaMalls Asia joined a small but growing coterie of corporates like Singapore Airlines and DBS Group Holdings to offer bonds to retail investors with its sale of $200 million worth of one-year and three-year bonds.

The one-year bonds maturing next year offer a return of one per cent per annum. The three-year bonds maturing in January 2014 carry an annual interest rate of 2.15 per cent.

Tng Kwee Lian, SGX head of fixed income, said the exchange is continuing to enhance its infrastructure to build the retail bond space.

She said companies are keen to tap on the SGX bond market as an alternative funding platform and she expects more to issue retail bonds given the strong market demand and interest.

‘To build a vibrant bond market, SGX will continue to enhance its infrastructure to facilitate bond listings and trading, and expand its product range to include Singapore Government Securities (SGS). Recently, we have successfully put in place our first liquidity provider for some of the retail bonds to enhance market liquidity. This means investors can buy and sell easily at fair valuation,’ said Ms Tng.

SGX will also hold a new series of bond seminars starting this month to help investors understand bond investing.

Topics covered include bond investment, bond holders’ rights via trustee of the bond issuance, and the mechanics of bonds. These seminars are being conducted via SGX Academy and details can be obtained from the website (www.sgxacademy.com).

Govt bonds to trade on SGX by mid-2011

SINGAPORE – Singapore government bonds will begin trading on the Singapore Exchange by the middle of this year, providing retail investors with a safe alternative to bank deposits, Finance Minister Tharman Shanmugaratnam said on Monday.

He said that retail investors concerned about low savings rates can also participate in government bond auctions or buy high quality corporate bonds that are now traded in smaller lots on SGX.

Singapore banks currently pay less than 0.2 per cent on savings deposits while inflation is running at above 3 per cent.

Mr Tharman said that the low interest rate environment in Singapore will continue for sometime as the financial system is flush with cash and Western economies will keep monetary policy loose in view of their weak economies. — REUTERS

SIA triples size of retail bond offering

This comes on heels of tepid response from institutional investors, some say

Singapore Airlines has increased its retail bond offering to $150 million – three times as high as the original allocation of $50 million. This has been done by reducing the amount initially allocated to institutional investors following a lukewarm reception from smart money, BT understands.

SIA’s unrated $300 million of 2.15 per cent 5-year bonds with a retail tranche was launched last week to coincide with the Singapore Exchange’s (SGX) strategy to offer bond trading to retail investors.

SIA said it will reallocate up to $100 million of the bonds from the placement to the public offer, to satisfy excess demand from that quarter.

This means the $300 million worth of SIA bonds have been sold in equal amounts of $150 million to both retail and institutional investors.

The original allocation was $50 million for retail investors who could apply in minimum lots of $10,000. The placement tranche allocation of $250 million was sold at $100,000 apiece.

‘To maximise retail participation, the reallocation feature allowed $100 million of the placement tranche to be reallocated to the public offer.

‘Demand on the placement tranche picked up very quickly and when orders crossed $200 million, the placement channels were informed that allocation on the placement tranche was likely to be only $150 million,’ said the arrangers of the issue. DBS, OCBC Bank and United Overseas Bank handled the bond issue.

At the close of the public offer on Tuesday, SIA said it had received $346,282,000 in subscription. ‘We are very pleased with the response from both retail and institutional investors to the offering,’ said SIA spokesman Nicholas Ionides.

All retail investors who applied for the SIA bonds will be allocated all or a portion of their subscription.

Fund managers told BT yesterday that, unlike retail, institutional investors have alternatives, and the SIA bonds pricing was a little too rich.

‘Despite the fine credit standing of SIA, I think its 5-year bond at 2.15 per cent is a bit too aggressive,’ said Teng Ngiek Lian, chief executive, Target Asset Management Pte Ltd.

‘As institutional investors are better informed and have the ability to access other issues, I am not surprised if their response is lukewarm,’ he said.

Earlier, in June, SIA sold $500 million of 3.22 per cent 10-year bonds to institutional investors.

Its latest bond sale took place around the same time as Keppel Corp’s $500 million of 3.1 per cent 10-year bonds. Keppel Corp did not offer a retail tranche.

‘This offering was made in response to demand from institutions for such bond issues. We have no plans at the moment for a retail bond issue, and will review our plans according to market demands,’ said Eva Ho, KepCorp assistant general manager, group corporate communications.

CapitaMall Trust in August sold $300 million of 4-year and 7-year bonds, also to institutional investors. They were priced at 2.85 per cent and 3.55 per cent respectively.

SIA’s latest bonds were unrated and ‘some of the US funds have certain restrictions on the amount they can invest on unrated bonds’, said Yueh Ee Lee, Aberdeen Asset Management portfolio manager.

Ms Yueh said local retail investors know SIA well.

‘From the retail side, it makes a lot of sense. SIA is a household name – and you know what deposit rates are,’ she said.

DBS’s savings rates range from 0.1 to 0.25 per cent.

Observers say while bonds have rallied a lot, the bond market remains bullish, given expectations that the current record low interest rates could persist for a while.

Trading of the SIA bonds on SGX starts today.

Uphill climb for SGX in retail bond trading

‘I HEARD about it but didn’t know it was tomorrow’ and ‘no client has asked about it’. That was what one remisier said yesterday when told about today’s launch of bond trading for retail clients by the Singapore Exchange (SGX).

To be fair, he did know that Singapore Airlines is offering $50 million worth of bonds for small investors to coincide with the SGX’s promotion of bond trading for retail investors. The retail tranche is part of a five-year $300 million SIA bond issuance with interest rate of 2.15 per cent payable semi-annually.

Bonds have been listed on the SGX for many years but there is little trading mainly because overwhelmingly they were sold to institutions, at minimum lots of $250,000.

But that is about to change with a concerted effort by the SGX to get corporates to issue bonds at retail size.

In August, the SGX said that the Central Depository has been a custodian of individual investors’ Singapore Government Securities (SGS) holdings since April 1, 2010.

A total of 1,229 bonds are currently listed on SGX. In FY2010, 200 bonds were listed involving programmes to raise over $100 billion.

Still, the remisier was pretty dismissive about the potential interest from retail clients for bond trading which he put down to their lack of sophistication.

Which is another way of saying not many understand how fixed income securities work. Fixed income securities include preference shares and government bonds, according to the SGX.

These securities are preferred by investors seeking fixed, regular income that could either substitute or add to their earnings.

Fixed income refers to securities that pay a specific interest rate, such as bonds and preference shares. Governments issue government bonds while companies issue corporate bonds or preference shares.

The Singapore Government Securities which are currently sold by banks will be listed on the SGX by the first quarter of next year.

In the case of bonds, at maturity, the principal is returned to the investor and the bond is delisted. Most preference shares have no stated maturity, thus they are sometimes referred to as a ‘perpetuity’.

‘When OCBC pref shares traded below $100, they didn’t buy it, saying the mother share was bengkok (spoiled),’ the remisier said. He was harking back to the 2008/9 financial crisis when equities and bond prices plunged.

What the small investors didn’t understand was that the yield on the preference shares rose inversely with the fall in the price, he said.

In addition, for those which have a callable date like the OCBC 5.1 per cent pref share callable 29/07/2013, the holder would be paid back 100 per cent of the principal.

Typically, for pref shares with callable dates, if the issuer does not redeem them, it would have to pay an even higher interest rate.

All this is information that a retail investor would have to find out. So it would entail some work.

It’s true that many small investors are not interested in poring over prospectuses.

SIA’s latest bond prospectus was 113 pages long! This, for a plain vanilla bond.

One could be sceptical about the SGX’s latest effort to promote retail bond trading given the behaviour of retail investors in Singapore.

Many small investors are cheapskates, and it is not because they do not have the funds. Many too treat the SGX as a casino, and a short term mentality is not uncommon.

‘So no penny stocks then’ was the comment from one observer. She was referring to the minimum board lot for retail bonds at 1,000 units or $1,000 in value.

Others wonder at the SGX’s timing to promote bond trading for retail investors when interest rates are at all-time lows.

They fear that retail investors might rush into bonds and when interest rates rally, bond prices could fall, sparking the inevitable outcry.

But this is also the time when corporates are drawn to issue more bonds, precisely when interest rates are low.

Without enough supply, the SGX would be hard put to promote bond trading.

The SGX does have its work cut out for it but it is an exchange for all investors. There are retail investors out there who will do the sensible thing and study before taking the leap.

Remisiers too will have to make sure their clients understand what they are getting into. Reminding them that a bond could turn into a long term hold would be a good way to start. Another reminder should be that bond issuers, unless they are the government or government guaranteed, can go bust and their bonds become worthless.

Individual investors’ SGS holdings to shift to CDP

THE Singapore Exchange (SGX), DBS Bank, United Overseas Bank (UOB) and OCBC Bank yesterday announced that all Singapore Government Securities (SGS) holdings of individual investors will be migrated to the Central Depository (CDP) for safekeeping starting from next month.

The SGS migration exercise is part of the Monetary Authority of Singapore’s (MAS) initiative to make the SGS market more accessible for individual investors.

Other elements of the SGS migration exercise include consolidating details of investors’ SGS and securities holdings into a single CDP account; making SGS valuations and details of investors’ SGS holdings available online at www.cdp.com.sg; making available day-end SGS/ T-Bill prices at www.sgx.com; and allowing investors to freely buy or sell SGS through any SGS agent bank, to improve their access to the most competitive SGS market prices.

Currently, individual investors are restricted to dealing SGS only with their agent bank.

The SGS migration exercise will be conducted from April 1 to June 30. SGX, DBS, UOB and OCBC Bank will contact investors with more details on the exercise.

During the exercise period, SGX will waive the CDP transfers fees in relation to the SGS holdings being migrated. SGX will also waive fees for the SGS holdings services for a three-year period from April 1, 2010. SGX does not currently charge fees for CDP account opening.

CDP account opening fees and the securities and/or SGS holding fees are subject to a review process that SGX conducts every three years.