If you’re looking for ways to diversify your investment portfolio, you’re in luck.
The Singapore government has just issued its inaugural 50-year sovereign green bond that has received a solid response from the public, with a subscription rate of 1.06 times.
The green bond is aptly named Green Singapore Government Securities, or Green SGS.
Proceeds from this issuance will be used to finance spending in support of Singapore’s Green Plan 2030, which includes the construction of the Jurong Region and Cross Island MRT lines.
Green SGS is a new method for issuing Singapore Government Securities (SGS) and is a complement to the regular issuance of these SGS.
With the issuance of Green SGS, we explore if this bond can help to diversify your investment holdings and decrease your risks.
A good yield with low risk
A total of S$50 million worth of Green SGS were offered to the public at a yield of 3.04%.
The yield comprises a coupon rate of 3% and the bonds were offered at S$98.976 per S$100 face value.
The long tenor of this bond minimises the risk of interest rate fluctuations affecting the price of the bond, a valid concern as interest rates have risen globally due to aggressive rate hikes by the US Federal Reserve.
Previously, the longest tenor for an SGS bond was 30 years.
The Green SGS offers a good yield with very low risk as Singapore is just one out of nine sovereigns globally with a triple-A credit rating from all three major credit rating agencies.
The yield is also a touch higher than the 10-year average return of 3% offered by Singapore Savings Bonds, or SSBs, last month.
The 10-year average return for the latest September 2022 SSB has since dipped to 2.8%.
Predictable coupon payments
The great thing about bonds is that they pay a reliable coupon that is contractually guaranteed.
If you are thinking about securing reliable and steady cash inflows, a bond makes a great choice as the bond issuer is contractually obliged to pay out this interest.
In contrast, dividend payments are discretionary and companies have the choice to withhold dividend payments to conserve cash during times of economic stress.
That said, investments such as REITs are great for passive income as they need to pay out 90% of their earnings to qualify for tax incentives.
Some REITs, such as Mapletree Industrial Trust (SGX: ME8U), offer a historical distribution yield of around 5.1%.
While this may sound attractive relative to Green SGS’s 3.04% coupon rate, investors should remember that REIT unit prices can be volatile.
Offering an additional choice for investors
This tranche of Green SGS is only the first in a series of sovereign green bond issuances under the Singapore Green Bond framework.
The government has indicated that it has up to S$35 billion of green bonds that will be issued by 2030.
Investors thus have many more chances to subscribe to these bonds to help diversify their investment portfolios.
It was also recently reported that the Public Utilities Board (PUB) plans to launch its inaugural green bonds later this month, and is part of the government agency’s S$10 billion multi-currency medium-term note programme.
Get Smart: The coupon rate may increase for future issuances
It’s an interesting time for investors as the number of investment options in the market increases.
Other than parking some money in REITs and dividend-paying blue-chip stocks such as DBS Group (SGX: D05), you can also consider allocating some to bonds.
Also, with interest rates on the rise, future issuances may see the government offering a higher coupon rate to entice both the public and institutional investors.
With stable government backing and a decent coupon rate, investors can now enjoy better diversification with the addition of Green SGS into their portfolios.
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Disclaimer: Royston Yang owns shares of DBS Group and Mapletree Industrial Trust.