The SSB swing factor
- SSBs can be a swing player for intra-system liquidity
- We offer three ways to gauge SSB demand
- SSB demand is likely to stay robust
The impact of Singapore Savings bonds (SSBs) on liquidity between the different players in the SGD system should not be underestimated. First introduced in 2015, SSBs provide individuals with a safe and flexible way to save for the long term (see factsheet here). At first glance, the total amount of SSBs outstanding is small (SGD 4bn) compared to SGD deposits (SGD 615bn). However, there already is some impact on bank funding. Below, we put forth three ways to view SSB demand and estimate how much of a drain this could have by the end of the year.
Two regression models highlight the key factors driving demand for SSBs. Model 1 (see table below) captures the absolute attractiveness of SSBs – the level of short-term SSB yield (1Y) and the slope steepness (1Y/10Y). Intuitively, the higher the 1Y yield is, the more attractive that issue will be. Similarly, if the step-up yield is high enough to compensate for prolonged spending deferment (>1Y), another group of investors would be drawn in. Assuming constant-to-modestly higher levels of 1Y yields (around 2%), we should reasonably expect SSB demand to be around SGD 300mn per month (a back of the envelope calculation would be the average subscription from November to January).
Model 2 considers the relative attractiveness of SSBs compared to deposits – 1Y SSB yield less the 1Y fixed deposit rate. If individuals are rational, they should be indifferent between the two products. Therefore, if the gap between the two is positive and large, we would expect more flows into SSBs as the model suggests. Note that this gap between 1Y SSB yield and the 1Y deposit rate has narrowed significantly in recent months, Anecdotal evidence also suggests that several banks have dangled attractive rates to maintain the attractiveness of deposits. From residents’ deposit data, we can also see the impact of SSBs on the mix of fixed deposits to savings deposits. Notably, the ratio has climbed to 0.77 in December 2018, from 0.71 a year before.
Lastly, we consider the possibility that investors in SSBs are not locked in and will take full advantage if newer issues offer better yields. We parse through data and adjust each SSB issue to the current 1Y yield. For example, a bond issued on February 2017 would have had two years’ worth of step up and a much higher current 1Y yield. We plot these adjusted yields to the percentage of outstanding for each issuance. The results are telling. Outstanding issuances are much “stickier” when the 1Y yield is high (above 1.75%). If 1Y yields hold above 1.75% as we expect, individuals are likely to hold on to the upcoming SSB issuances this year.
The upshot is that demand for SSBs is likely to stay strong given elevated 1Y yields and the total amount issued for 2019 could come close to the SGD 2.5bn issued in 2018. Much will depend on how banks react to this competition.
*This paper is the first step towards understanding SSB demand and we acknowledge the limitations of the models used. Other factors that can be considered include equity market performance and the possibility that SSB demand may be saturated at some point.
Sources: Bloomberg, DBS Group Research, MAS,
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.