Last year, I shared that you could beat the CPF OA interest rates by buying Treasury Bills. Those were the good time when T-bills were offering 3.2%. But fast forward today, T-bill rates have gone down.
If you had invested in T-Bills back then, your T-bills will likely be maturing soon (or maybe have already matured), and you may be looking for other avenues that offer higher yields.
Good news, there’s a new opportunity to capture higher returns in the current markets – buy longer term government SGS bonds instead.
Here, we’ll explore this new opportunity. I share some calculations, considerations and show you how you can increase your CPF OA interest to >3%!
Longer term rates are up: Singapore Yield Curve
While shorter term rates have stabilized over the past 6 months, the 10 year rate has gone up to 3.29%, as of 13 Sep 2023:
This means that you can lock in a higher rate, for a longer period of time!
By locking in a 10 year SGS bond at 3.29%, you would beat the CPF OA rate by 0.79%, for the next 10 years!
But, can you actually execute this?
Let’s take a look at the latest SGS bond rates:
As of 12 Sep 2023, the latest 10 year bond yields 3.25%.
And since the bond (NZ13100V) is already trading on SGX, your actual yield would depend on the price you buy the bond at, if you were to enter now.
Take note: CPF offers compounding interest while government bonds don’t
Interest you earn in your CPF compounds – i.e. the interest you get this year will be included in your principle for the next year, which means you’re earning interest now the new total principle amount.
However, interest for the government bond is “flat” – you will earn the 3.25% on the same starting principle for the 10 years.
So, your next question would naturally be:
“Would I really capture more growth than CPF OA’s 2.5% if I were to invest in the 10 year bond at 3.25%?”
I did the calculation for you:
As you can see, assuming you hold to maturity, you would outperform the CPF OA’s return. Here’s why:
Bonus: 10 year bond interest will also earn interest!
All interest earned from the bonds you bought using your CPF OA will go back to your CPF OA. This means that you cannot withdraw it nor spend it.
However, that also means the interest you receive from the bonds will earn the 2.5% CPF OA interest rate!
Now that’s a good way to double dip!
So after 10 years, you would end up with an additional $840, assuming your principle is $10,000.
Caveat: my calculations were based on the assumption that the price of the 10 year bond doesn’t fluctuate. If you were to hold to maturity, your priciple shouldn’t fluctuate. However, you should note that your buy price may not be exactly $10,000.
You can download my calculator to find out your potential returns based on the latest market price of the bond:
You can find the latest daily bond prices on the MAS website.
Bond Volume Too Low? Or Not Happy With Current Market Price?
Bid for upcoming bonds instead!
However, do keep in mind that you’ll need to make a trip to a bank branch to apply for the SGS bond if you’re investing using your CPF funds.
You can view the upcoming auctions here.
At the point of writing, the upcoming long term government bond would be a 30 year bond.
This may only be suitable if you have the luxury of handling the long tenure. Otherwise, you may want to wait for new releases in subsequent months.
Risks of investing in long-term bonds using CPF OA
1) You need the cash before the bond matures
You can simply sell the bond to get the cash, however you must know that bond prices will fluctuate depending on the markets. This means that you might be forced to sell your long-term bond at a lower price, incurring a loss.
Many of us would use the CPF OA to pay for our housing. So if you have the intention to buy a house in the shorter term, long term bonds may not be for you.
2) Interest rate may go higher
You could FOMO if rates increase in the coming months.
To mitigate this, you can set up a ‘ladder’ where you buy smaller tranches for now and add on more tranches in the coming months.
3) CPF might raise interest rate
Should interest rates remain high over the long period, some may wonder if there’s a chance that the CPF base interest rate could go up.
If the CPF base rate goes up, the gap between the returns from investing in the bond vs not doing anything would narrow. That would make this entire exercise moot.
But, you should note that the CPF OA interest rates are benchmarked against the banks’ base interest rates. Although interest rates have gone up, bank base interest rates have remained stagnant.
Hence, the likelihood of CPF increasing interest rates remains fairly low.
We may be near Peak Interest Rates
Interest rates have been hiking for a while now, and we may be very close to the peak interest rates.
IMO, the risk of missing the >3% on long term bonds is greater than missing out on future hikes at this point in time.
Would you invest your CPF OA in long term government bonds?
Many people had invested in the short term T-bills previously when the short term rates were higher. But the key issue with T-Bills is that they mature within 6 months to 1 year. If you’re investing excess cash, you’ll be left wondering if there are still high yielding safe opportunities once they expire.
In the current state, there isn’t much options left in the short term T-bills.
The good news is that long term rates have gone up, giving rise to the opportunity to invest in long term bonds that yield more than the CPF OA interest rate of 2.5%.
Since the guarantor for CPF and the SGS bonds are the same (i.e. Singapore government), there is no additional risk of default if you were to buy the SGS bonds.
However, your entry price would affect your eventual yield.
You should also keep in mind that these long term bonds will mature in 10 to even 50 years. Hence, if you plan to buy long term SGS bonds, you should make sure that you don’t need access to the CPF funds. If not, you may be forced to sell the bond at a lower price before maturity, resulting in a loss.