Bond yield: Understanding how they work and why they matter

Many savers compare CPF interest rates with returns from SGS bonds and T-bills when evaluating fixed-income options. A bond yield is the annualised return an investor earns from a bond based on its market price and coupon payments. Interest earned on certain government securities is also tax-free for individual investors, making them locally relevant.

This guide explains bond yield types, calculation basics, yield curve interpretation, and the relationship between bond prices and interest rates.

How do bonds work? A quick refresher for investors

A bond is essentially a loan you make to the issuer. The government or a corporation borrows your money, pays you periodic interest, and returns the principal on a set date. Three components define every bond: face value, coupon, and maturity.

For example, a SGD 1,000 SGS bond with a 2% coupon pays SGD 20 annually until maturity, when the SGD 1,000 principal is repaid. While bonds provide fixed income, their market prices still move with interest rates. Singapore holds AAA/Aaa credit ratings from S&P and Moody's, placing SGS bonds among the world's safest sovereign debt.

Singapore retail investors can access fixed income through three main government instruments, each with a distinct yield profile.

• SGS bonds offer fixed coupons across tenors from two to 50 years and trade on the secondary market, so their prices and yields fluctuate.
• T-bills are short-term instruments of six or 12 months, issued at a discount and redeemed at face value, making the cut-off yield the investor's effective return.
• SSBs offer a step-up interest structure with no secondary market: rates rise over time if held longer, and investors may redeem in any month without penalty.

Beyond government securities, Singapore corporate bonds and Asian credit markets offer access to a wider range of issuers, tenors, and yield levels, generally at higher yields that reflect additional credit risk.

What is a bond yield?

A bond yield is the annualised return an investor earns from a bond, expressed as a percentage of its market price. Bond yield changes after issuance because bond prices move in the market, while the coupon payment remains fixed.

What is a bond yield?

What is a bond yield?

Consider a Singapore Government Securities (SGS) bond. At auction, the coupon rate is the cut-off yield rounded down to the nearest 0.125%. If the cut-off yield exceeds the coupon, the purchase price falls below face value. That discount is what pushes your actual yield above the stated coupon.

What are the types of bond yields investors encounter?

Not all yield numbers measure the same thing. Five types appear most frequently, and understanding what question each answers helps distinguish what each measure reflects.

For SGS bonds, Yield to Maturity (YTM) is the most widely used measure because it captures coupon income, price changes, and returns if the bond is held to maturity. Current yield provides a simpler snapshot based on the bond's market price. Yield to Call and Yield to Worst are more relevant for callable corporate bonds than SGS bonds or MAS T-bills.

How can bond yield be calculated?

The simplest way to calculate bond yield is through current yield:

Suppose a five-year SGS bond carries a 2% coupon and trades at SGD 980 for a SGD 1,000 face value. The annual coupon payment is SGD 20, giving a current yield of approximately 2.04%.

YTM is commonly calculated using online tools such as the MAS SGS Bond Calculator, and secondary market prices are published on MAS eServices.

Bond prices and interest rates: understanding the inverse relationship

Bond prices and interest rates move in opposite directions.

Inflation expectations influence interest rates, as investors generally demand higher yields when inflation is expected to rise.

Recent MAS T-bill auctions have reflected these changing rate expectations through shifting cut-off yields. The reverse also holds. When rates fall, existing bonds with higher coupons become more desirable, pushing their prices up and yields down. Lower yields generally reflect higher bond prices in the market.

For bondholders, price fluctuations mainly matter if bonds are sold before maturity. Investors who hold SGS bonds to maturity continue receiving coupon payments and the bond's face value regardless of interim market price movements. MAS notes that SSBs offer flexibility here, since you can redeem any month with no early-exit penalty.

What are the factors that move bond yields?

Four main factors influence bond yields:

• Central bank monetary policy: Interest rate decisions affect overall borrowing costs and market yields.
• Inflation expectations: Investors generally demand higher yields when inflation is expected to rise.
• Issuer credit risk: Issuers with stronger credit profiles can generally borrow at lower yields, while those with weaker profiles must offer higher yields to compensate investors for greater default risk. Yield differences between bonds tend to reflect the market's assessment of each issuer's creditworthiness, whether sovereign or corporate.
• Market liquidity: Supply and demand conditions can influence bond pricing and yields. The outstanding amount of SGS bonds has grown significantly in recent years. A larger supply may exert upward pressure on yields.

Bond duration measures how sensitive a bond's price is to interest rate changes. Longer-duration bonds experience larger price swings when rates move. For example, a 2-year SGS bond would typically move less than a 30-year SGS bond following a 1% interest rate increase.

How should investors interpret the bond yield curve?

The SGS yield curve, published on the MAS SGS Yield Curve page, plots bond yields across different maturities and reflects market expectations about future interest rates and economic growth.

Published MAS data have shown periods of a relatively flat to mildly inverted Singapore yield curve. While yield curves can provide economic signals, they are not guaranteed forecasts. Shorter- and longer-term yields simply reflect differences in market expectations across bond maturities.

Why do bond yields matter?

For a saver choosing between a six-month T-bill and a two-year SGS bond, understanding yield-to-maturity helps evaluate whether the higher yield on the longer instrument compensates for tying up funds. Additionally, for a CPF member watching interest rate cycles, knowing that Special Account rates are linked to SGS yield movements provides useful context, and for anyone holding bonds in a portfolio, understanding duration makes it easier to anticipate how a rate change will affect the value of existing holdings.

For investors who want exposure beyond SGS bonds and T-bills, the fixed income landscape extends further. Singapore corporate bonds, Asian investment-grade credit, and high-yield debt may offer higher potential yields in exchange for greater credit risk. Accessing this broader universe directly requires individual security selection, ongoing credit monitoring, and meaningful capital.

Professionally managed fixed-income funds provide an alternative: they pool capital across a diversified range of bonds, with active duration and credit management across market cycles — a structure that may suit investors who want income-generating exposure to fixed income without managing individual bond positions themselves.

Learn more about Eastspring Investments' range of fixed income funds →

Read blog → Multi-asset funds: Diversification across asset classes