Singapore Saving Bonds (SSB)
Asked by Anonymous
Asked on 29 Aug 2019
As interest rates globally decrease and negative in some countries, as well as many talks about a recession coming, can banks sustain their high-interest rates savings accounts?
For example, putting my money in DBS multiplier gives me 2.2%, already higher than what SSB offers so I just leave my emergency funds in there. However, I am afraid that DBS might alter the interest rates anytime, then buying the SSB would be more beneficial in the long run.
Seeking kind advice, please.
Top Contributor (Jan)
Banks giveth and banks can taketh away.
These newer high-interest savings accounts have been great for consumers and banks alike especially when they do force you to jump through a few hoops to achieve them giving them other means of receiving a profit from your relationship with them.
But we've seen "nerfs" over the last few years especially to OCBC 360 and some other accounts. At the same time that these accounts have been created overnight, they can be gone in an instant.
What you're describing is reinvestment risk.
There is no guarantee that the banks can or will keep this up but I would say due to the industry being ultra competitive and consumers rarely being brand loyal, it would be hard for the banks to get out. A nerf as mentioned, can move funds around pretty quickly.
Even SSB has reinvestment risk because if you were buying them regularly over the last 12 months, you'd have seen a sharp decline in first 3 year interest rates from close to 2% to just 1.68% today. And it doesn't look like it's going to increase anytime soon.
29 Aug 2019
Hmm, the banks are seeking to lock down capital and have a steady stream of income coming in through recurring GIRO transactions. This is in preparation for a recession actually (and a response to the last recession) so that they have sufficient funds for their war chest. I doubt they will drastically lower their interest rates for these savings accounts, maybe just the top tier interest rate, as they still want consumer loyalty during a recession. As the 10-year average return for this month's issue is 1.95%, I don't think that SSB will be more beneficial in the LR. I don't see SSB issues improving in the near future, so I think it is still best to maintain your multiplier or look for short single premium endowment plans which offer you an interest above 2.2%. My two cents here, would love to discuss more with you.
Banks can continue to give attractive rates on the conditions that:
They are able to loan out excess liquidity at a much higher rate than what it cost. The net interest margin – NIM (the differential between the lending rate and the borrowing/cost rate). The borrowing rate is what DBS pays to the depositors and lending rate is the rate that DBS earns by loaning out the excess liquidity to corporations, home mortgages, etc. In fact, the NIM in 2019 for DBS is actually increasing. Check out the article linked below.
The economy does not go into a recession (point 1 is sort of dependent on this point). In a market downturn, businesses tend to refrain from borrowing from the banks for their expansion and in turn, banks would not be able to loan out its excess liquidity as before. This will impact their earnings and therefore impact the borrowing rate to depositors.
As to your concern, if DBS will alter its rate, I don’t think it is something you should be overly worried about since it is outside of your control. Enjoy while it lasts.
That said, if you want to hedge your interest rate risk, you can always go with a fixed deposit to lock in that interest rate.
As always, do your own due diligence.
On a side note, I am starting a financial blog. Do check it out.