Singapore may consider issuing bonds that protect against inflation after price gains sent the cost of a public-housing apartment to a record S$1 million ($813,000) last month and made cars as expensive as U.S. homes.
Singapore’s consumer price index rose 3.9 percent in August from the year before, more than double the 1.7 percent rate in the U.S., the world’s biggest economy. Inflation in the island state averaged 5 percent for the past year. With the nation home to world’s highest proportion of millionaire households, the central bank said in July it was studying the feasibility of securities to help savers protect their funds from rising costs.
Assets in inflation-protected bond funds worldwide climbed to a record $183.8 billion as of Aug. 31, according to EPFR Global in Cambridge, Massachusetts. In the U.S., the largest market for the debt at $729.8 billion, bond payments are based on a principal amount that increases or decreases in line with the consumer price index. Japan, South Korea, Australia and Hong Kong are Asia-Pacific economies that already sell inflation-linked debt, according to data compiled by Bloomberg.
“For whoever is looking at managing inflation risks, it would be a handy tool which has been developed in many other markets already, particularly those that consider themselves financial centers,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd., part of Japan’s third-biggest lender by market value. “I think we see a need to go ahead and say, ‘let’s get this done.’”
Inflation will be within the government’s forecast of 4 percent to 4.5 percent this year, Varathan said.
An index of debt that protects against rising costs has returned 5.6 percent in 2012, versus 3.6 percent for sovereign securities, according to Bank of America Merrill Lynch data. Inflation-linked bonds have beaten conventional debt every year since 2008, when the global economy was in a recession, the indexes show.
Singapore’s millionaire households expanded by 14 percent last year, according to a Boston Consulting Group study published May 31. The proportion of millionaire homes was 17 percent, the highest in the world, followed by Qatar and Kuwait.
A public housing apartment sold for a record S$1 million in September, according to Singapore’s Straits Times newspaper. The 17-year-old unit was 1,615 square feet (150 square meters), according to the article.
The cost of a 5 Series sedan made by Bayerische Motoren Werke AG starts at S$257,800, according to prices posted on SGCarMart.com by dealer Performance Motors Ltd., or about $209,000. The price includes the cost of the car plus taxes and a permit fee imposed by the government. The median price of a U.S. existing home was $187,400 in August, data from the National Association of Realtors show.
Inflation-protected bonds would follow a series of measures by Prime Minister Lee Hsien Loong to cope with price pressures.
The government raised taxes on purchases of private residential property in December, according to the Ministry of National Development’s website. It announced plans last month to increase public housing units, according to the Housing Board website. Singapore’s central bank said last week it would restrict home-loan maturities for new residential properties to a maximum 35 years to avoid a housing bubble.
The Land Transportation Authority took steps in May to increase the supply of driving permits that are auctioned every two weeks. The government this year introduced vouchers to aid lower- and middle-income people and the elderly in offsetting the 7 percent sales tax.
Singapore may follow Hong Kong by selling bonds that are tailored for individuals and linked to the consumer price index, said Tan Su Shan, a so-called nominated member of Parliament who has limited voting rights and is appointed by the president. Tan proposed such a debt plan in Parliament earlier this year.
“Some kind of CPI-linked bonds in the Singapore market, specifically for the retail market, will be great,” said Tan, who is also head of wealth management at DBS Group Holdings Ltd., Southeast Asia’s largest bank. “It’s no secret that the regular saver is losing money” to inflation, she said.
High inflation rates make the set payments on debt less valuable over time and can cause bonds to deliver negative returns. The fixed deposit rate for 12 months is 0.32 percent at Singapore banks, according to the MAS. The so-called real rate that accounts for inflation is negative 3.58 percent. Yields of 1.36 percent on Singapore’s 10-year government notes are also less than the rate of price increases in the economy.
Hong Kong Model
The central bank is “studying the feasibility of such bonds,” Lawrence Wong, a board member at the MAS, said in Parliament on July 9 in response to Tan’s question. Inflation is “uncomfortably high,” and the government “is mindful of the problems such an environment poses to savers and depositors,” he said.
The MAS hasn’t commented on inflation-linked bonds since July 9.
Hong Kong first issued HK$10 billion ($1.3 billion) of the securities in July 2011, and it sold another HK$10 billion of bonds in June.
Investors could buy amounts as small as HK$10,000, equivalent to $1,289, by placing orders through a bank. Both bonds have three-year maturities, and their interest rates are linked to inflation measured by the composite CPI.
Investors seeking to buy at the second sale in June submitted orders for HK$49.8 billion of securities, a record for the local retail bond market, according to a statement from the Hong Kong Monetary Authority.
Rajeev De Mello, who oversees $7 billion as the Singapore-based head of Asian fixed-income assets at Schroder Investment Management, said he would like to add inflation-linked bonds from the nation to his portfolios.
“The average investor would also be interested,” he said.