Investors in S’pore look elsewhere to park spare cash as interest rates on T-bills fall

SINGAPORE - Just over two years ago, lab technician Dallas Goh, 34, would put money into Singapore Treasury bills (T-bills) as their yields climbed along with the rate hikes in the United States. He accumulated as much as $100,000 at one point in these short-term government securities.

But with interest rates now set to head lower, T-bills are losing their allure among investors here. Mr Goh, for one, stopped buying T-bills six months ago.

Investors buy T-bills at a discount and receive the full face value upon maturity, which is either six or 12 months later.

Yields on the six-month T-bills hit a peak of 4.4 per cent on Dec 8, 2022, and currently stand at 3.06 per cent, according to the latest fortnightly auction on Oct 10.

For one-year T-bills, the yields rose as high as 3.87 per cent on Jan 26, 2023, before settling at 2.71 per cent in the Oct 17 auction.

Experts told The Straits Times that people who are looking to get more out of their spare cash could consider a range of options, from lower-risk bonds to real estate investment trusts (Reits) and stocks, which may carry higher risk.

Mr Goh opted to park his cash in a money market fund offered by MariBank, the digital banking arm of Singapore e-commerce firm Sea Group, because there was a promotional offer of 5.07 per cent for locking up the money for a month.

Money market funds invest in a mix of cash and cash-like instruments, such as fixed deposits, and short-term fixed-income products like government and corporate bonds.

“The product is higher risk than T-bills, because a portion is invested in corporate bonds,” he said, adding that “the additional yield gained over T-bills is worthwhile” for the small risk that he is taking.

The interest rates on the MariBank fund have now dropped to 3.17 per cent per annum as at Oct 21, but Mr Goh said he will leave his money there until he finds a better option elsewhere. He still has $30,000 worth in T-bills, which will mature over the next few months.

Market watchers say bond funds could be a beneficiary of the money flows.

Bond funds, also known as fixed-income funds, can hold investment-grade or high-yield bonds issued by governments or companies. Investment-grade credit offers a steady stream of income and is less risky than high-yield credit, but the returns are lower.

Mr Alex Mackey, co-chief investment officer for fixed income at MFS Investment Management, said yield is much more compelling for fixed-income investors today than it was prior to and during the Covid-19 pandemic.

“Absolute yield levels are higher,” he added.

However, quality matters in a slowing global economy, Mr Mackey said, adding that “investment-grade quality credit can perform very well” in this environment and hence is a “relatively safer place” to put one’s money in.

Fixed-income investments allow an investor to lock in relatively higher yields now. Investors also stand to gain as the value of their bond investments rises when interest rates fall further, said Mr Ling Seng Chuan, who heads financial planning, insurance and investment at DBS Bank.

Bond yields fall as interest rates fall, while bond prices rise as yields drop.

As with equities where people can invest small amounts regularly – known as “dollar-cost averaging” – regardless of the price of the equity or bond, Mr Ling said they can apply the same strategy with their bond investments.

Mr Frederick Lim, 69, who stopped buying T-bills recently due to the declining yields, scooped up some private equity-backed bonds, Astrea 8, in July.

These bonds, which are denominated in Singapore dollars and in US dollars, are issued by a subsidiary of state investor Temasek, and hence, are of higher risk than if issued by Temasek, said the retired financial journalist-turned-novelist.

The Singdollar version gives a fixed return of 4.35 per cent. It matures in July 2039 but can be redeemed in July 2029 if certain conditions are met. The US-dollar version gives a higher return of 6.35 per cent. It matures in July 2039 but can be redeemed in July 2030.

Mr Lim also bought into Reits, as they give better returns but at higher risk, he said.

Reits were hit when interest rates rose, but with interest rates coming down, they have become more appealing, he added.

Mr Alvin Chow, assistant director of investment advisory at iFast Financial, said Reit prices have gone up as the markets anticipate that interest rate cuts will boost the income of Reit players.

However, it will take some time for lower interest rates to have an impact on the financial results of Reits, he noted.

Reit prices could rise further if their earnings exceed expectations, or if the US Federal Reserve cuts interest rates more aggressively than expected, Mr Chow said.

Reits also have to pay out at least 90 per cent of their income as dividends.

Mr Daryl Liew, head of portfolio management at SingAlliance, said Singapore-listed Reits, or S-Reits, are some of the higher dividend-yielding options that can give an investor returns in excess of 5 per cent.

He added that the valuations of S-Reits remain reasonable on a price-to-book basis.

The price-to-book ratio compares a company’s current market price to its book or net asset value. A ratio below one indicates that the Reit is undervalued.

If you look at what is the current price versus the book value, most of them are actually trading at par, or some even below par, he noted.

Mr Liew is more cautious about those S-Reits with US office assets because a lot of people are still working from home in the United States, reducing demand for office space there. Examples that are listed on the Singapore Exchange (SGX) include Manulife US Reit, Keppel Pacific Oak US Reit and Prime US Reit.

“Those have recovered a little bit, but (are) still very, very underwater,” he said, adding that “if they can turn things around, there could be a huge potential upside”.

Retiree Kevin Lim, 59, is not buying into S-Reits because he is wary of the demand for office and retail space in Singapore.

Reits invest in real estate and distribute revenues, which are typically rental income from these assets, to investors. 

Mr Lim said: “I see a lot of vacant food and beverage units in Tiong Bahru, where I stay.

“Restaurants elsewhere are clearly suffering, if you look at the dinner crowd,” he added.

As for S-Reits with US office assets, Mr Lim said he does not know enough about them, so he prefers not to invest in them.

There are other dividend-yielding stocks in Singapore that investors can buy into, such as the Singapore bank trio of DBS, OCBC and UOB, Mr Liew noted.

All three banks are giving investors dividend yields in excess of 5 per cent, according to the SGX.

He added that telcos Singtel and StarHub also give good dividends. Singtel has a dividend yield of 3.22 per cent while StarHub has a dividend yield of 5.85 per cent.

Mr Lim puts some money into NetLink NBN Trust, which builds, owns and operates the fibre broadband network infrastructure that powers Singapore’s broadband network. He also buys the shares of public transport operator SBS Transit.

“SBS and NetLink pay decent dividends,” he said. SBS Transit has a dividend yield of 4.56 per cent, while NetLink NBN is paying 5.86 per cent, according to the SGX.

Insurance companies have also come up with investment-linked policies that allow investors to enjoy the benefits of insurance coverage while accumulating wealth at the same time.

Investors either pay a lump-sum premium or at regular intervals. The death benefit from the policy is guaranteed but the returns are not and are subject to how the markets perform.

Mr Liew said he personally does not like such products because there are a lot of embedded fees. 

Mr Chow added that insurance and investments should be kept separate.

“Insurance is a cost, while investments are meant to grow one’s wealth. Mixing them may not yield the best outcomes,” he said.

Correction note: In an earlier version of the story, we said that investors of an ILP pay premiums for a fixed period of time before they get the guaranteed returns. This is incorrect. Investors either pay a lump-sum premium or at regular intervals. The death benefit from the policy is guaranteed but the returns are not and are subject to how the markets perform.