askST: How will your home loan and investments be affected by the US Fed’s interest rate cut?

SINGAPORE – The era of high interest rates appears to be at a turning point after the United States central bank cut rates by half of a percentage point on Sept 18.

The cut brought the benchmark rate

 to the 4.75 per cent to 5 per cent range.

The US Federal Reserve sees rates falling by another half of a percentage point by the end of 2024, another full percentage point in 2025, and by a final half of a percentage point in 2026. The rate will likely end in a 2.75 per cent to 3 per cent range.

Mr Chen Jingwei, chief investment strategist of wealth management platform Wrise Private Singapore, noted that the Fed has likely cut rates to stimulate growth and prevent a slowdown.

“Lowering interest rates reduces borrowing costs for businesses and consumers, which can lead to increased spending, investment and economic activity,” he said.

“However, this move also suggests the Fed is balancing concerns of inflation with the need to maintain economic stability, and it might be preparing for further economic challenges down the line.”

Singapore’s monetary policy is centred on the exchange rate, and interest rates here are largely determined by global rates and foreign exchange market expectations of the Singapore dollar.

The Straits Times looks at how the first US rate cut in four years could impact borrowers and investors here.

Q: How could my home loan change?

A: Borrowing is set to become cheaper following the US Fed’s move.

Fixed-rate home loan packages had already started to drop in anticipation of the cut, driven partly by intense competition among banks to attract mortgage customers, said SingCapital chief executive Alfred Chia.

“Yesterday’s rate cut signals the beginning of a potential downward trend. I expect this reduction in rates to be gradual, continuing from now through 2026,” he added.

Mr Wayne Quek, director of mortgage consultancy Home Loan Whiz, said fixed rates are priced based on expected interest rates over the next two years, “so most of these have already factored in the drop”.

The lowest two-year fixed rate mortgage is now around 2.6 per cent, he noted, compared with about 3 per cent at the start of 2024.

Meanwhile, the three-month compounded Singapore Overnight Rate Average (Sora), used as a benchmark to price floating mortgages, was 3.53 per cent as at Sept 19, down from 3.6 per cent a month ago.

A fixed rate loan has an interest rate that is unchanged throughout the lock-in period, while rates in a floating mortgage are pegged to a reference rate.

Mr Vasu Menon, managing director for investment strategy at OCBC, said the three-month compounded Sora has been weakening since mid-June. Markets started expecting the Fed to cut rates around that time due to concerns about a weakening US economy and falling inflation.

“So, it is not just actual Fed rate cuts that impact Sora; it is also impacted by the market’s expectations of the Fed’s rates, and at this stage, markets are expecting the Fed funds rate to fall further. Hence, Sora should also fall further in the next 12 to 18 months,” he said.

Q: Should I continue to invest in T-bills and fixed deposits?

A: Mr Abel Lim, head of wealth management advisory and strategy at UOB, said T-bill yields and fixed deposit rates tend to mirror broader interest rate movements.

This will negatively impact investors who prefer to hold very safe assets to meet their long-term financial objectives, he added.

Mr Menon said investors who have committed to assets with a fixed maturity may wish to stay the course lest they suffer unnecessary losses due to a premature exit. “Nevertheless, such individuals can use the time to do some research and look out for opportunities to consider buying into when the current investments mature.”

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

The cut-off yield on the latest Singapore six-month T-bill fell to 3.1 per cent on the auction that closed on Sept 12. This was lower than the 3.13 per cent offered in the previous six-month auction which closed on Aug 29, and the 30-year high of 4.4 per cent in December 2022.

The highest Singapore-dollar fixed deposit rates include the 3.2 per cent per annum offered by DBS on balances between $1,000 and $19,999 for a 12-month tenor. Maybank offers the same rate for its six-month tenor with a minimum placement of $20,000.

Q: What types of investment should I be looking at?

A: Lower deposit rates will make real estate investment trusts (Reits) and dividend-paying stocks more appealing, said experts, adding that investors can look at companies with good fundamentals. 

Equity markets tend to do well after the Fed embarks on rate cuts, provided a recession is averted and the US economy enjoys a soft landing, said Mr Menon.

A soft landing refers to a situation where economic growth gradually slows and the unemployment rate remains low, even as inflation returns to the Fed’s 2 per cent target rate.

Wrise’s Mr Chen said: “It is essential to note that while rates are coming down, we are not expecting a return to the ultra-low levels seen between 2020 and 2022.”

He expects that Singapore banks will remain resilient despite lower interest rates, due to their solid balance sheets and high dividend yields. 

Meanwhile, bond prices are inversely related to interest rates, meaning that rate cuts would generally push the prices of older bonds up as they become more attractive to investors.

UOB’s Mr Lim said: “If investors had not already positioned themselves into bonds, they might have already missed the first capital gains in this cycle, but it’s not too late.”

Retail investors can consider well-diversified bond funds, he added, noting: “Bonds will play a very important part in an investor’s portfolio, in terms of diversifying some of the risk (from market volatility) and acting as a portfolio buffer.”

Bonds, especially those with longer durations, could see price appreciation as rates fall, said Mr Chen.

Meanwhile, gold benefits from lower interest rates, noted Mr Menon. The yellow metal does not offer a yield, so falling rates enhance its relative appeal.

“A weaker US dollar due to lower US rates is also positive for gold as the precious metal is priced in US dollars and becomes cheaper and more attractive to buyers,” he noted.

Mr Chen said investors should consider a balanced portfolio that includes dividend-yielding stocks, Reits and high-quality bonds to capture the benefits of a lower interest rate environment.

“Having exposure to different asset classes can help mitigate risks. It is also wise to monitor global market conditions closely and avoid overly concentrating investments in a single sector or region,” he added.