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Second Reading Speech by Mrs Josephine Teo, Senior Minister of State for Finance and Transport, on the Government Securities (Amendment) Bill 2015

11 May 2015

Madam Speaker, I beg to move, "That the Bill be now read a Second time."

2. The Government announced in March 2015 the introduction of Singapore Savings Bonds, a new type of Government security. The Bill before the House amends the Government Securities Act to allow the Government to issue the Savings Bonds as non-tradable securities, which is a key design of the Savings Bonds to protect individuals from capital loss.

3. The Government is introducing the Savings Bonds programme to provide individual investors with a long-term savings option that offers safe returns. Unlike in other countries, we do not issue bonds to fund Government expenditure. Where bonds are issued, they are for the purpose of helping to develop the local bond market. The proceeds of these issuances cannot be spent but must be invested instead.

4. Madam, I will now go through the key features of the Savings Bonds.

Key Features of Savings Bonds

5. Savings Bonds are safe investments, as both the principal and interest payments are guaranteed by the Government.

6. In addition, individuals have the flexibility to redeem their bonds at par from the Government in any given month, which means that they will get back in full the initial purchase price with no risk of capital loss. And, unlike fixed deposits for which early withdrawals means forgone interest payments, holders of the Singapore Savings Bonds get to keep the interest paid out at 6-monthly intervals even if they redeem the bond before the full bond tenor.

7. The interest payments are also designed to ‘step-up’ every year, with each year’s interest payment being larger than the one before.

a) In the first year, the total interest payments results in an annual interest equivalent to that of conventional one-year Singapore Government Security, commonly known as SGS.

b) And if a bond-holder redeems the bond after 5 years, the average earned interest per year will match the return of a 5-year SGS issued at the point of purchase.

c) By the end of the tenth year, the total interest payments results in an average annual interest equivalent to that of a conventional 10-year SGS issued at the point of purchase.

8. These features mean, in effect, that individuals do not need to commit to the investment period upfront but will still get to enjoy the higher returns of a longer-term investment.

9. The Government will make Savings Bonds easily accessible to individual retail investors:

a) New bonds will be issued every month for at least the next 5 years.

b) For 2015, the Government could potentially issue between $2 billion to $4 billion of Savings Bonds, depending on demand.

c) The Monetary Authority of Singapore (MAS) will announce each month’s issuance size on the first business day of that month. Individuals can apply for the bonds via ATMs of participating banks, at a transaction fee that is charged by the banks.

d) In any month, individuals will be able to apply for the bonds with as little as $500.

e) For a start, each individual can apply for up to $50,000 per issue and can hold up to $100,000 of Savings Bonds at any point in time. The Government will review these caps if there is a need to after the programme has been in place for some time.

10. It is the Government's intention to enable all individuals to have access to the Savings Bonds. There is therefore no need to rush to buy these bonds. If total applications exceed the total issuance size in a particular month, the MAS will allocate bonds to all applicants in increasing multiples of $500. The allocation to each individual will stop when the individual gets the full amount applied for, or when all the available bonds have been allocated, whichever comes first. This means that smaller applications will have a higher chance of receiving full allotment, and individuals with larger applications may not get the full amount that they have applied for.

Amendment to Government Securities Act

11. Madam, let me now go on to explain the amendment in the Bill.

12. The Government Securities Act currently allows Government securities to be transferred and pledged. This means that securities-holders can freely transfer ownership to other parties or trade the securities in the open market. The Bill proposes an amendment to allow the Government to impose restrictions on such transfers and pledges in future new issues. This change will allow Savings Bonds to be issued as non-tradable securities.

13. The change is necessary to protect individuals from capital losses. When interest rates rise, instead of selling the bonds in the open market at a price that is possibly lower than the purchase price, individuals are assured of getting their full capital back should they decide to redeem the bonds with the Government. On the other hand, when market interest rates fall, while bond-holders will not enjoy possible price appreciation or capital gain, they would benefit from the higher-than-market interest rates of their existing Savings Bonds which have been locked in at the point of purchase.

14. The restrictions on transfers and pledges of Government securities will be set out in the terms of issue for the Savings Bonds. Conventional SGS are not affected, and will remain tradable.

15. MAS is working with the banks to set up the systems and launch the first tranche of the Savings Bonds by the second half of 2015. The exact launch date will be announced later.

16. Madam Speaker, I beg to move.