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Investing in treasury bills and government bonds
12 Dec 2022 (291 views)  

Treasury bills, or T-bills, are short-term Singapore Government Securities. T-bills are available in short-tenors of 6 months and 1-year. Unlike the SGS bonds, T-bills do not have interest payments but are issued at discount to its face value. Upon maturity, T-bills will be redeemed at its face value of 100.

Should you invest in T-bills or government bonds?

It depends on your financial needs. Some investors want to lock up the yield for a longer period; others want to lock up the yield for a shorter period and have a yield that reflect the current interest rate.

In past years, the yield on government securities have been quite low. Recently, the yields increased sharply due to higher inflation rate in Singapore and globally.

The yields on government securities are shown in the table below.

The current yields (12 Dec 2022) are
6 month securities - 4.3%,
1 year - 4.0%,
5 year - 2.9%
10 year - 3%.

Should an investor buy a short term security (4% yield) or a longer term security (3%).

By investing for a longer period, say 10 years, the investor locks up the prevailing yield for that period. If the yield increases, the investor loses the opportunity to earn a higher rate. However, if the yield drops, the investor enjoys the higher yield that has been locked up. 

As inflation is likely to persist for some time, it is better to invest for the short term (say 1 year) and reinvest the money at the market interest rate.

The credit rating of Singapore government securities is AAA. The risk of a default by the borrower (i.e. the Singapore government) is low. 

The investor have the choice of investing in a corporate bond, i.e. the bond issued by a company. This bond pays a higher interest rate (compared to government securities) but carries a higher risk of default. The different in yield could be 1% or 2% higher. 

For investors who do not wish to take the risk, or are not able to assess the credit worthiness of the company, it is better to stick to government securities.

Tan Kin Lian






 


Investing in treasury bills and government bonds
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Treasury bills, or T-bills, are short-term Singapore Government Securities. T-bills are available in short-tenors of 6 months and 1-year. Unlike the SGS bonds, T-bills do not have interest payments but are issued at discount to its face value. Upon maturity, T-bills will be redeemed at its face value of 100.

Should you invest in T-bills or government bonds?

It depends on your financial needs. Some investors want to lock up the yield for a longer period; others want to lock up the yield for a shorter period and have a yield that reflect the current interest rate.

In past years, the yield on government securities have been quite low. Recently, the yields increased sharply due to higher inflation rate in Singapore and globally.

The yields on government securities are shown in the table below.

The current yields (12 Dec 2022) are
6 month securities - 4.3%,
1 year - 4.0%,
5 year - 2.9%
10 year - 3%.

Should an investor buy a short term security (4% yield) or a longer term security (3%).

By investing for a longer period, say 10 years, the investor locks up the prevailing yield for that period. If the yield increases, the investor loses the opportunity to earn a higher rate. However, if the yield drops, the investor enjoys the higher yield that has been locked up. 

As inflation is likely to persist for some time, it is better to invest for the short term (say 1 year) and reinvest the money at the market interest rate.

The credit rating of Singapore government securities is AAA. The risk of a default by the borrower (i.e. the Singapore government) is low. 

The investor have the choice of investing in a corporate bond, i.e. the bond issued by a company. This bond pays a higher interest rate (compared to government securities) but carries a higher risk of default. The different in yield could be 1% or 2% higher. 

For investors who do not wish to take the risk, or are not able to assess the credit worthiness of the company, it is better to stick to government securities.

Tan Kin Lian