By ARTHUR LEE
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THE move to allow individuals to participate in Singapore government bond auctions at ATMs from today cannot come soon enough. It presents a welcome option for anyone who wants almost absolute security on their savings albeit at slightly lower yields, while at the same time, paving the way for these instruments to be traded on the Singapore Exchange.
Singapore Government Securities (SGS) have long been available to small investors, but many are put off by the cumbersome application system. Previously, the average retail investor can only apply for these bonds by queuing at a major bank that is a primary dealer, filling up forms and opening a custodian account.
Depending on the time of day, this can take up to half an hour; and sometimes, one meets a less than enthusiastic officer. The primary dealers, after all, do it as a form of 'national service' and do not make any brokerage on the transaction.
Many small investors will now find the simplicity of an ATM transaction attractive, especially given that SGS instruments can be bought in denominations of just $1,000. The latest initiative appears to be targeted at the retail investor who wants safety in a plain vanilla package. There is clearly room for this, given the Lehman Brothers Minibond collapse. And it can be very successful if a comprehensive structure evolves that allow individuals to actively manage their SGS holdings in an easy and uncomplicated way.
This means going beyond merely ATM applications for SGS. For a start, this can perhaps be expanded to allow individuals to also access their SGS holdings in addition to just applying for them.
The next step is to allow online transactions such as buying and selling of SGS instruments with direct debit and credit facilities into one's bank account. After all, under the plan, successful applicants for SGS through the ATMs will have their holdings reflected in their central depository or CDP accounts. This move away from a bank's custodian account will open the way for investors to sell and buy government bonds like equities on the exchange, just like the bonds issued by various government bodies such as JTC Corp, the Housing & Development Board and the Land Transport Authority.
All this will obviously require some fine-tuning on how bid and offer prices for retail players are formulated by the various primary dealers. These prices will differ from those quoted between primary dealers as the lot sizes are very much smaller.
The labelling of the various instruments also needs to be simplified for ease of transaction. A percentage-based transaction fee with a nominal minimum for those who trade just $1,000 and higher for large amounts could be set to help cover the additional costs of running this added application.
A public education campaign is also needed to help investors understand how SGS instruments work. A lot of useful information is already available on the Monetary Authority of Singapore website, but reinforcing this with readily available literature and an expanded website will greatly benefit potential bondholders. One important addition can be charts showing historical data on interest rates for the past 10 years.
A lot of work clearly is needed to take SGS ATM transactions beyond the application stage and improve market accessibility, but it will be worthwhile. The local bond market has so far been relatively inaccessible to the man in the street as corporate bonds often trade in denominations of $250,000 while those from statutory boards trade in $10,000 lots.
But the current financial crisis has demonstrated the need for safer options for more risk adverse investors. At the height of the financial crisis some months back when even big financial institutions were worried about counter-party risks, many individuals were at a loss as to where to park their hard-earned money. The equity markets were down and even good solid bluechip counters saw large price corrections. Investors in seemingly safe Reits also saw drops of 50 per cent.
The average yield on the latest SGS two-year bond is just 0.55 per cent, although investors may choose instruments of much longer duration to benefit from a higher yield (at a higher risk). Unlike equities, SGS also show very small capital price movements and the interest earned can be lower than dividend yields from some good companies.
But they are as safe as safe can be: after all, SGS are issued and backed by the triple A-rated Singapore government with its impressive reserves. And for some segments of investors, this is what they need.
Of course, you can lose money even on SGS. If the world's economy recovers strongly in a few years' time, for example, bondholders may find themselves out of the money due to rising interest rates. They may end up with a bond that still has some years to maturity and the option of selling out at break even or even at a loss.
But it will be nothing like the losses incurred by thousands when Lehman Brothers collapsed!
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