Sunday, September 15, 2024

T-bill: With Singapore T-bill yields easing - it’s time investors look at bonds, stocks and Reits - say experts


With S’pore T-bill yields easing, it’s time investors look at bonds, stocks and Reits, say experts

T-bills are short-term Singapore government bonds with six-month or 12-month maturities. ST PHOTO: AZMI ATHNI

SINGAPORE - For more than two years, Treasury bills have been the go-to option for conservative investors looking to cash in on high interest rates, but the compensation for holding and rolling Singapore Government Securities is waning as yields soften.

Singapore T-bill yields are likely to fall further over the next six to 12 months, with the US Federal Reserve widely expected to embark on a series of rate cuts, says Mr Lui Chee Ming, head of investment advisory, onshore Citigold private client at Citibank Singapore.

The cuts could happen as early as September, financial experts say. Singapore’s interest rates broadly follow the direction of US rates.

Prudent investors should start exploring how to manage reinvestment risk, which is the possibility that their cash cannot be invested at the previously attainable rate, they say. 

T-bills are short-term Singapore government bonds with six-month or 12-month maturities. You buy them at a discount, and receive the full face value of the bill upon maturity. These risk-free securities have gained in popularity among many retail investors in Singapore since 2022 as their yields climbed along with the rate hikes in the United States.

While most banks were offering near-zero base interest rates for savings accounts then, the cut-off yields for the one-year T-bill hit 3.7 per cent in October 2023, and the six-month T-bill, 4.07 per cent in September 2023. 

The yields have since eased.  

The cut-off yields for the one-year T-bill issued on July 30, 2024 was 3.38 per cent, and 3.13 per cent for the six-month T-bill issued on Sept 3, 2024.

If you have been investing your Central Provident Fund Ordinary Account (CPF-OA) savings in T-bills via the CPF Investment Scheme, do take note of the potential risks of investing your CPF balances in T-bills when yields are falling, says Ms Lorna Tan, head of financial planning literacy at DBS Bank.

You will need to work out the “break-even” yields of T-bills for using CPF savings so that you will not be in a worse-off position than if you had left your CPF-OA monies alone and collecting 2.5 per cent per annum of interest.

CPF contributions received this month start earning interest the following month and withdrawals or deductions in this month will not earn interest from this month onwards.

“Depending on when the deduction is done from your CPF account, you can lose up to two months of CPF interest. Assuming you lose two months of interest, the recommended minimum cut-off yield for investing in six-month T-bills using CPF-OA is 3.33 per cent. For one-year T-bills, it will be 2.92 per cent,” Ms Tan says.

Based on data on the Monetary Authority of Singapore website, $80.3 billion worth of six-month T-bills will be maturing from Oct 1, 2024, to March 4, 2025, and $19.2 billion worth of one-year T-bills will mature from Oct 22, 2024, to July 29 next year. 

Here are some options investors can consider other than T-bills:

SSBs

At current yields, T-bills still offer investors a safe investment option, but Singapore Savings Bonds (SSBs) may be an option for those who want to lock in better long-term rates today and not be subject to a further drop, says Ms Tan.

They can enjoy the flexibility to exit the 10-year tenor investment any time without any capital loss and penalty.

The October SSB offers a one-year interest rate of 2.59 per cent, and a 10-year average return of 2.77 per cent.

High-quality bonds

Mr Aaron Chwee, head of wealth advisory at OCBC Bank, says Singapore dollar-denominated local corporate bonds with one year to two years’ duration offer an opportunity for investors seeking higher potential returns than T-bills or fixed deposits. 

Fixed deposit rates are hovering on either side of 3 per cent depending on the size of funds as well as various terms and conditions. 

In contrast, corporate bonds offer yields of 3.4 per cent to 4.7 per cent from issuers like Singapore Airlines, Mapletree Investments, Fraser and Neave and Starhill Global Reit. 

When an investor buys a bond, he is lending money to the issuer in exchange for regular interest payments and the promise of repayment of the bond’s face value or the par value. 

The interest paid on this amount is known as the coupon rate. Bonds come with a maturity date, which could range from a few months to several years, dictating when the issuer must repay the principal to the bond holders.

Yield is another important term. It is the investment return on a bond. 

If you buy a bond with a par value of $5,000, a coupon rate of 3 per cent and a maturity date of 10 years from issuance, the issuer would pay you $150 annually for a decade before returning the $5,000 principal on maturity.  

A diversified bond unit trust which invests in a basket of bonds is also an option, says Mr Lui, who encourages clients to have a balanced portfolio of bonds and equities to achieve a better risk-adjusted return over the longer term.

Asian bonds

Investors can diversify their portfolios in the Asian fixed income bond market, says Mr Joevin Teo Chin-Ker, head of investment at Amundi Singapore, a European asset management company.

He says: “We are at a turning point in global development. Asian growth fundamentals are likely to be strong over the medium term, with an increasing contribution to world gross domestic product.

“Over the past few years, Asian policymakers have acted swiftly to combat inflation and their efforts are bearing fruit. Corporate earnings have generally been resilient with a positive outlook.”

Yields in hard-currency Asian fixed income bonds are above their five and 10-year average, suggesting opportunities to generate income, he says. 

Investors can also consider exposure to Asian local currency government bonds to benefit from any potential appreciation of Asian foreign exchange. 

But investors have to note that foreign bonds come with the added risks from currency exchange and different regulatory environments.

US T-bills

At the time of writing, the one-year US T-bills offer 4.2 per cent yield, and the offer for the two-year US T-bills is 3.77 per cent.

However, the US dollar is expected to weaken when the Fed begins cutting rates. As such, investors need to factor in potential depreciation of the US dollar, Mr Chwee says.

Money market funds

Money market instruments are a collective term for very short-dated securities. A money market fund invests in a variety of such instruments selected by a professional fund manager to provide a stable yield for investors, and ensures that the monies continue to be reinvested when the securities mature.

Over the past one year, Singapore dollar-denominated money market funds like the LionGlobal Money Market Fund have delivered a 3.78 per cent return and holds securities with an average yield of 4 per cent as at July 31, 2024, Mr Chwee says.

Stocks and Reits

Dividend stocks can generate passive income. Singapore real estate investment trusts (S-Reits) are also a popular choice for dividend hunters as they are required to distribute 90 per cent of income earned to unit holders.

Several exchange-traded funds offer an efficient way to invest in S-Reits. Examples include UOB APAC Green REIT ETF, NikkoAM-StraitsTrading Asia ex Japan REIT ETF and Lion-Phillip S-REIT ETF.

Investors should speak to a licensed financial adviser to determine the suitability of products before parting with their money.

Some products are shorter term in nature and are more suitable for parking cash temporarily than accumulating for long-term goals like children’s education or retirement, Mr Chwee says. 

Investors will need to monitor for maturities and reinvest the proceeds to keep growing their wealth and keep pace with inflation, the experts say.

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