More options for S’pore bond investors with US Treasury yields closing in on 5%

SINGAPORE - A recent sell-off in United States bonds, driven by rising fiscal risks, persistently high inflation and slower-than-expected rate cuts, has pushed US Treasury yields to their highest levels since the pandemic.

The 10-year US Treasury yield on Jan 13 rose to 4.788 per cent, the highest since November 2023.

This surge has spilled over into global markets, causing yields in major sovereign debt markets, including Britain’s 10-year gilts and Japan’s 10-year government bonds, to rise sharply. Germany’s 10-year bond yields, which are the benchmark for the euro area, rose to a seven-month high.

Singapore’s 10-year government bond yields have also risen, climbing from around 2.7 per cent to 2.8 per cent in December 2024, to over 3 per cent this month.

Returns on shorter-term six-month Treasury bills in Singapore have risen in tandem with the increase in longer-dated bond yields here.

In the last auction for six-month T-bills in Singapore on Jan 2, the cut-off yield rose to 3.05 per cent from 3.02 per cent during the Dec 19, 2024, auction and 3 per cent in the Dec 5, 2024, auction. 

The next auction for six-month T-bills will take place on Jan 16, while 2025’s first auction of one-year T-bills will happen on Jan 23.

Mr Eugene Leow, head of fixed income research at DBS Bank, said the yield for six-month T-bills should hover around 3 per cent, unless the US Federal Reserve cuts rates further in 2025.

Mr Leow had earlier expected T-bill yields to soften at around 2.5 per cent by the middle of 2025.

However, the decline in T-bill rates has stalled on the back of a flurry of firm US economic data, making the case for further interest rate easing less compelling, he said.

T-bills became popular with retail investors here when yields climbed along with interest rate hikes in the US in 2022 and 2023. Yields on six-month T-bills hit a peak of 4.4 per cent on Dec 8, 2022, while yields on one-year T-bills rose as high as 3.87 per cent on Jan 26, 2023.

Mr Hou Wey Fook, DBS Bank’s chief investment officer, said investors sitting on T-bills may want to consider broadening their fixed income allocation to include bonds with a longer time-to-maturity.

Mr Hou added that absolute bond yields, or the return an investor can expect to receive from a bond, are much higher today than they were a decade ago, making them attractive investments for investors at their current price points.

Mr Daryl Ho, DBS’ senior investment strategist, noted that the Fed “gets a bit concerned” when yields on US Treasuries are close to 5 per cent.

“The last time the 10-year (US Treasury yield) was approaching this level was around 2022, and the Fed was actually quite concerned back then that there was an unintentional tightening of financial conditions,” he added.

Mr Ho noted that “we are closer to that point now” than at the start of the year, and said that now is “as good a time as any to start to secure... yields”.

Mr Hou noted that investment-grade bonds not only act as a hedge against the risk of a trade war but could also be beneficial if this scenario pans out.

This is because the Fed will be forced to cut interest rates in a replay of what happened in 2018 when then US President Donald Trump first imposed tariffs on Chinese goods.

Back then, China retaliated and the tit-for-tat trade war led to economic uncertainty and slower growth. 

The Fed responded swiftly with rate cuts and this resulted in double-digit returns of up to 14.5 per cent on some investment-grade bonds.

Over a three-month period, DBS Bank is overweight on developed market government and corporate bonds, and underweight on emerging market bonds.

For a typical investment portfolio with a medium-risk profile, 11 per cent is allocated to developed market government bonds, 20 per cent to developed market corporate bonds and 5 per cent to emerging market bonds.

While the bank had favoured shorter-duration bonds in 2024, it now prefers a mixture of bonds – the shorter-term ones of two to three years and longer-term ones of seven to 10 years.

Mr Ho said that the interest rate curve has normalised. This means yields on short-term bonds should be lower than those on longer-term bonds of the same credit quality. 

So, investors “can actually get a bit of yield premium”, or a higher yield, by buying into longer-dated credit, he added.

Mr Ho further noted that investors can lock in yields for a longer period of time if they invest in bonds with a longer time to maturity. “You can be assured that you are getting the coupon yields that are quite stable, at least for 10 years,” he added.

Long-term versus short-term

Mr Aaron Chwee, head of wealth advisory at OCBC, said that long-duration bonds with terms of more than 10 years may struggle, as they are sensitive to interest rate changes and inflation expectations.

He noted that potential tariffs from the Trump administration could raise inflation risks and as inflation rises, long-dated bonds become less appealing: “Investors may therefore seek alternatives for better inflation protection.”

Mr Chwee forecasts that 10-year and 30-year US Treasury yields could rise to 5 per cent and 5.5 per cent respectively in 12 months, adding: “US treasuries offer high liquidity, allowing investors to buy and sell easily without significantly impacting prices. Holding some of these assets also allows investors to diversify since bonds move inversely to equities.”

DBS Bank is not ruling out short-dated bonds in its portfolio. Mr Hou said these bonds give capital protection, even if the Fed does a surprise U-turn by raising rates instead.

“In a scenario where the Fed were to hike rates by 100 basis points (1 percentage point), the returns on short-dated bonds is protected at 2.9 per cent,” he added.

As to why short-dated bonds offer capital protection, DBS Bank noted that they have a shorter time to maturity, which makes their prices less sensitive to fluctuations in interest rates.

DBS Bank added that investors should opt for high-quality, investment-grade bonds, as opposed to riskier high-yield bonds, or junk bonds.

These include bonds issued by companies with lower credit ratings that are below investment grade. They offer higher interest rates to compensate investors for the increased risk of default.

Mr Hou said the bank believes “risk is better expressed in equities rather than in high-yield bonds”.

This means that investors should be investing in equities instead of high-yield bonds for the risky portion of their portfolio, while investment-grade bonds should comprise the less risky portion of their portfolio.

He had this final word of advice for potential bond investors: “What we always tell our clients is that you are not paid to take concentration risks on bonds, so diversify your bond portfolio by buying into bond funds and not individual bonds.”