Singapore announced a 50-year bond with S$50 million tranche available to retail investors. Coupon rate is at 3% but yield-to-maturity is higher at 3.04% because you buy the bond at a discount.
If you invest $1,000, you will receive $30 a year or $1,500 over the 50 years, and get back about $1,010 at maturity. Total gain would be $1,510.
It doesn’t seem a lot and that’s because it is an investment grade bond which means the risk is very low. The Singapore Government is very credit worthy.
You might say the interest rate can’t beat inflation of 5.6%. But monthly inflation rate fluctuates regularly so it isn’t useful for long term planning. The long term inflation rate should be used and it is 2.5% for Singapore. So the bond yield does beat inflation.
The 3.04% yield is consistent with other options too.
A Singapore 30-year bond yield is at 2.866% now. A 50-year bond definitely has to pay higher.
50-year duration is almost equivalent to the CPF scheme. At 3.08%, the 50y bond is higher than CPF OA of 2.5% but lower than CPF SA 4%.
This is fair as CPF OA can be used for certain purposes while CPF SA can’t. The 50y bond offers the flexibility to be sold for cash, so it should yield lower than CPF SA.
Hence, if you are doing CPF SA top up, it is still a better deal than the 50y bond. Moreover you get tax relief.
Even if you are doing a top up to the 3 accounts (OA, SA and Medisave), the 50y bond might still not be a better deal.
For example, the lowest blended yield for CPF is 3.067% and highest is 3.88%. Both are higher than the 50y bond yield.
The CPF top ups make sense only if you don’t mind locking up the money.
The 50y bond price can fluctuate and go below your purchase price while your CPF monies can only go up with interest.
Hence, you have a chance to lose money on the 50y bond should you choose to sell it before it matures. The flexibility has a price.
The bond price will fluctuate with the interest rate movements. If you think that inflation will go away and interest rate falls, the 50y bond will go up in price and you can make some capital gain from it.
So the bond price movements can be a boon and a bane.
For retail investors, I think there are two main reasons why you would consider the 50y bond.
First is that you are conservative and have a long investment horizon. Safety of capital is more important than returns. At the same time you don’t want to do CPF top ups because you don’t wish to have your money locked up.
Second is that you are a short term speculator. You believe the inflation issue will be resolved and interest rate would start to fall. 50y bond will be the most sensitive to interest rate changes due to its ultra long tenure. The capital gain (loss) will hence be larger.
