Updated 2023-02-12
https://www.straitstimes.com/business/invest/fixed-deposits-t-bills-ssbs-can-still-make-sense-even-if-interest-rate-hikes-ease
Q: Interest rates are coming down for Singapore Savings Bonds and Treasury bills. What is the outlook for rates, and should I still put my money in fixed deposits? Also, what are money market funds?
Rates are likely to head downwards; the question is when yields on fixed deposits, Treasury bills (T-bills) and Singapore Savings Bonds (SSBs) will also fall.
US inflation and the interest rate outlook
Inflation peaked at 9.1 per cent in the United States last June. By December, it had dropped to 6.5 per cent as the Federal Reserve implemented a set of aggressive rate hikes.
PhillipCapital financial services manager William Lim says: “Given the hawkish tone set by the US Federal Reserve, they seem determined to bring about a price stability at 2 per cent inflation rate – a move that critics would say is done at the expense of the equity markets.”
Analysts expect another rise of 50 basis points, with the Fed halting the hikes soon after. Standard Chartered global chief investment officer Steve Brice says: “Our central scenario is for one more rate hike, with the risks skewed towards another two rate hikes, rather than zero.”
Most economists predict some form of slowing down for the economies of the United States or Europe.
Mr Brice adds: “Inflation is a backward-looking indicator but if we look at leading indicators such as consumer confidence or inventory-to-sales ratio, this suggests that the (US) economy is weakening.
“The pace of tightening has been unprecedented, and the impact is likely to feed into the economy for another 12 months or longer.”
He thinks a recession could start in a few months: “Based on the past, when the spread has turned negative for the three-month versus 10-year US Treasury yields, the US economy has gone into recession within the following 24 months.
“Two-thirds of the time, that has happened within nine months. Given that the spread turned negative in October 2022, we believe the recession will start around mid-year.”
After the interest rate hikes stop, Mr Brice’s view is that there are likely to be interest rate cuts towards the end of the year.
Inflation will still be above the Fed’s target rate of 2 per cent, but as the economy weakens – from the unprecedented tightening – the Fed will then have to cut rates, albeit reluctantly, to avoid a more serious recession.
T-bills, SSBs and fixed deposits
The yield on the upcoming six-month and one-year T-bill auctions have not been determined yet.
However, the benchmark yield, based on the Monetary Authority of Singapore (MAS) website for the six-month T-bill, is around 3.9 per cent – up a tad on the 3.88 per cent for the latest T-bill auction but lower than late last year when the yield hit 4 per cent and higher.
The latest SSB issuance for March will offer 2.76 per cent for the first year, while February offered 2.84 per cent.
MORE ON THIS TOPIC
What is the inverted yield curve and how is it a US recession indicator?
Should I go for T-bills, Singapore Savings Bonds or fixed deposits?
Some of the promotional rates on fixed deposits are lower for a longer tenure, suggesting that expectations are for rates to fall. For example, OCBC Bank is offering 3.88 per cent for eight months for funds from the Central Provident Fund Ordinary Account and 3.4 per cent for 12 months.
HSBC is offering 4 per cent for seven months, but that goes down to only 3.2 per cent for 12 months.
The Bank of China is paying 3.85 per cent for six and 12 months, but this falls to 3.7 per cent for a 15-month tenure.
StanChart’s Mr Brice says: “While the short-term deposit yields are attractive, they will become less attractive over time. The key is to balance what you can generate today versus what you lock in today for the long term.
“You need to consider the liquidity aspects as well.”
PhillipCapital’s Mr Lim says: “While there are higher-yielding instruments, investors should take reference from how the Evergrande liquidity crisis triggered a major sell-off in the high-yield bonds issued by Chinese property developers.
“T-bills, SSBs and fixed deposits offer relative security against market volatility, with reasonable yield. In particular, T-bills and SSBs have an AAA credit rating, with the backing of the Singapore Government, making them good safe havens with a reasonable yield.”
Providend chief executive Christopher Tan says: “Many analysts still expect six-month T-bills to be above 3.5 per cent and SSBs to be in the range of 2.5 to 2.75 per cent in the coming months. This is still attractive for instruments of such low risk and relatively decent liquidity.”
MORE ON THIS TOPIC
Singapore’s one-year T-bill to offer 3.87% yield
As yields of Singapore Savings Bonds could be easing, make sure to put CPF funds to good use
Mr Tan advises that these instruments are not meant for long-term investing, but are suitable for short-term cash management, such as the parking of emergency funds.
He categorises them into three baskets:
SSBs: These are suitable for immediate liquidity needs as there is no penalty for early redemption. There is even interest paid pro-rata if redeemed early.
Fixed deposits: Suitable where immediate liquidity is needed and you are prepared to lose the interest if there is early termination.
T-bills: While the tenure of T-bills can be as short as six months, early redemption during this period can mean a potential loss of capital. So the portion of money parked in T-bills should be the cash that is not required until at least after the T-bill has matured.
Mr Tan also advises: “For investors looking to lock their short-term cash into higher-yielding instruments for as long as possible, they can consider buying the one-year T-bills instead of the six-month ones, 18- to 24-month fixed deposits or even put their monies into SSBs.”
While SSB yields have come down, “the good thing about the SSB is that you are locked into the current average yield for the next 10 years”, Mr Tan added.
MORE ON THIS TOPIC
Rush for S'pore govt securities means it now takes 20 business days to open a CDP account
Yields on Singapore government securities likely to peak in early 2023 even as demand slows
Money market funds
Money market funds are an option for those who want to work their idle cash harder, says Mr Martin Chong, director of portfolio management at Phillip Capital Management.
When compared with stocks or corporate debt issues, the risk to the principal is generally quite low as the funds invest in certificates of deposit, T-bills and short-term commercial paper, adds Mr Chong.
These funds are structured as unit trusts for daily subscription and/or redemption by the public, making them more liquid than fixed deposits.
While bank accounts may offer similarly attractive rates, they come with conditions, such as spending requirements or salary crediting.
Money market funds do incur management fees, although these are generally lower than fees for other unit trusts.
Phillip Capital Management has its own money market fund with the latest seven-day annualised return at 3.41 per cent as at last Monday.
MORE ON THIS TOPIC
Investing when a slowdown looms: Switch to defensive sectors, keep more cash
Home loan rates set to rise amid banks’ bid to attract deposits
Timing and risk of Fomo
Not all experts are totally convinced that this is the time to get back into equities.
While Maybank in its February strategy report is positive on the earnings front as most sectors in Singapore have the ability to raise their average selling prices and pass on costs, it still feels that “market valuations remain stretched despite earnings, dividends resilience and clearer book values”.
Maybank also warned about risks.
One could be a prolonged recession in either the US or Europe. Another risk is that carbon taxes are set to rise steeply, which may slow investment and deal pipelines.
StanChart expects recessions in the US and Europe, a recovery in China and a slowdown in global inflation, and it is advocating a strategy where investors should secure their yield.
This could include holding high-quality corporate bonds as well as high-dividend global equities.
It also says that investors can look to keep government bonds as well as cash and gold to guard against nasty surprises.
Investors can build up long-term value by looking to consumer stocks and communication services in China and financials and staples in India.
MORE ON THIS TOPIC
Investment opportunities look promising from China’s reopening
Wine: Sparkling returns or years in the red?
But PhillipCapital’s Mr Lim says that you can play it too safe, and possibly miss the boat.
“If you do not diversify your allocation away from such ‘risk-free’ assets and only decide to do so after many months, you run the risk of the proverbial Fomo (fear of missing out),” he noted.
“Those late to the game to re-allocate would most likely push prices up on equities and bonds.”
Providend’s Mr Tan argues that there are two kinds of inflation – short term, which is usually a spike for a short period like one to three years; and long-term inflation, which can erode purchasing power.
He says: “Many people are worried about short-term inflation because they experience the immediate pain of the spike, but somehow they are less sensitive to the effects of long-term inflation, which is as important or perhaps even more important.
“For investors with extra funds in excess of their emergency fund, they should consider investing into equities now.
“Global equities fell by about 20 per cent last year. Even though they have recovered slightly, it is still a good time to invest now if we take a longer-term view.”
MORE ON THIS TOPIC
Higher-income earners hit by expensive items; worst of inflation may be over: Analysts
Interactive: What is your personal inflation rate?
Bottom line
When deciding on putting more money into T-bills, SSBs or fixed deposits, consider your liquidity needs.
Note that there is a trade-off between a higher yield now and a lower yield for a longer period.
Also, investing in such instruments is not a long-term solution to generate passive income. The time for staying out of the market and being conservative may soon be coming to an end.
Investment involves risk. Past performance is not necessarily a guide to future performance or returns.
The value of investments and the income from them can go down as well as up, and you may not get back the full amount you invested.
If you are in doubt, you should consult your stockbroker, bank manager, solicitor or other professional advisers.
MORE ON THIS TOPIC
The one true secret to successful investing
Invest microsite: Get more investment and career tips
No comments:
Post a Comment