Investors still eyeing SSBs, T-bills and fixed deposits as rates yet to fall

Inflation seems to be slowing, increasing the likelihood of the United States Federal Reserve pausing interest rate hikes, although Fed chair Jerome Powell noted recently that rates could still remain elevated for some time.

This means that investors will be keeping an eye on Singapore Savings Bonds (SSBs), Treasury bills (T-bills) or fixed deposits as their yields could still be attractive.

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, says interest rates may not fall so soon because of the ongoing Russia-Ukraine conflict.

“Nevertheless, I don’t think interest rates will spike up like they did in 2022. We are in a high but stable interest rate environment,” he adds.

Reits

If rates do fall, this will reduce borrowing expenses and help the bottom line with cost-effective refinancing as real estate investment trusts (Reits) often rely on debt for acquisitions, says Mr Lim Choon Siong, a research analyst at wealth advisory firm Providend.

The competitive yields of other fixed-income investments, such as bonds, might decrease. This shift could prompt investors to favour Reits over alternative income-generating assets, potentially driving up trusts’ unit prices.

However, investing in Reits means being exposed to risks of the real estate sector.

Investors seeking exposure to Reits while maintaining diversification can benefit from a diversified equity index portfolio.

Many equity indexes offer diversification across various asset classes and sectors, including Reits. By incorporating Reits within a comprehensive index portfolio, investors gain the advantages of diversifying across diverse sectors and industries beyond real estate, Mr Lim notes.

SSBs, fixed deposits, T-bills

As a small and open economy, Singapore’s monetary policy is based on exchange rates, unlike central banks that use interest rates. While Singapore cannot directly control its interest rates, they tend to closely follow US rates, albeit not always in perfect alignment.

So changes in US central bank rates affect yields of Singapore Government Securities, which in turn influence SSBs and T-bills, says Providend’s Mr Lim.

Additionally, fixed deposit rates may move in tandem with changes in SSB and T-bill rates. For instance, if T-bills and SSB rates rise, commercial banks may need to adjust their fixed deposit rates to attract or retain customer funds, he adds.

SingCapital’s Mr Chia says Reits can provide relatively higher yields but also come with higher risk due to market volatility. They are often suitable for investors with a moderate to long-term horizon and a tolerance for risk. 

Mr Darren Chan, senior research analyst at Phillip Securities Research, gives some examples of S-Reits with dividend yields of 10 per cent or more.

His list includes Prime US Reit, Keppel Pacific Oak US Reit, Elite Commercial Reit, United Hampshire US Reit and Cromwell European Reit.

However, their attractive yields may indicate that these Reits are seen as riskier as their assets are overseas, in places such as the US or Europe, and not in Singapore.

SingCapital’s Mr Chia says: “As Reits come from different sectors, leverage level and geographical areas, investors need to do more research.”

Other Reits offer lower yields; Keppel Reit is at 6.4 per cent based on the August report on Reits from the Singapore Exchange, while Frasers Hospitality Trust is at 4.6 per cent. Among its properties is the InterContinental Singapore.

Mr Chia notes that SSBs are low-risk, government-backed investments with moderate yields that suit conservative investors or those seeking stability in their portfolios.

This means that their yields are likely to be lower than those of Reits. For example, the September SSB will give an average return of 3.06 per cent a year if held for 10 years.

Fixed deposits also offer fixed, predictable returns and are appropriate for risk-averse investors looking for capital preservation. The proportion allocated to fixed deposits may depend on the investor’s need for liquidity, says Mr Chia.

Fixed deposit promotions last week showed offers such as RHB’s 3.4 per cent for either a six- or 12-month tenure with a minimum placement of $20,000.

Mr Chia points out that T-bills are very low risk and provide liquidity over six and 12 months. They can be used as a safe haven for short-term cash or as a component of a diversified portfolio for stability.

The rate in Singapore is slightly higher than for fixed deposits, with the six-month auction on Aug 17 giving a 3.73 per cent yield. 

Deciding on whether to invest in Reits, SSBs, fixed deposits, and T-bills depends on an investor’s financial goals, risk tolerance and time horizon, Mr Chia says.