Yields on Singapore government securities likely to peak in early 2023 even as demand slows

In Singapore, benchmark yields for five-, 10-, 15- and 20-year government securities have come down since October. PHOTO: ST FILE

SINGAPORE – The run of ever-rising interest rates that has attracted investors to Singapore government securities like Treasury bills (T-bills) and Singapore Savings Bonds (SSBs) looks to be winding down.

There are growing indications in the United States that rates will not be hiked as aggressively as has been the case for much of the year, which will inevitably result in softening rates here after months of rises.

Yields on government securities have shot up from below 1 per cent a year a few months back to between 3 per cent and 4 per cent, sparking a surge in demand.

The last two T-bill auctions were so popular that the Monetary Authority of Singapore had to delay the release of the auction results.

The high yields have reflected those surging US interest rates, but markets now expect the US Federal Reserve will ease up a little after consumer prices rose less than expected in October.

Federal Reserve chairman Jerome Powell also said this week that smaller rate increases are likely as early as December, while warning that the fight against inflation is not yet over.

Interest rates in the US have already responded: The benchmark 10-year Treasury has fallen to 10-week lows of around 3.52 per cent and the two-year note, which moves in line with interest rate expectations, dropped to early October levels of about 4.22 per cent.

In Singapore, benchmark yields for five-, 10-, 15- and 20-year government securities have come down since October.

The trend is now being felt in other government securities: Yields on the two T-bill auctions in November fell after hitting a record high of 4.19 per cent a year in the Oct 27 round.

Mr Wong Di Ming, research analyst for global fixed income at Bondsupermart, expects three more hikes in the US, with rates peaking in early 2023.

Yields on T-bills here will continue climbing in turn, but the spread between six-month T-bills and the US Fed funds rate is narrowing as it gets closer to the end of the rate hikes, Mr Wong added.

The Fed funds rate, which is the target rate set by the US central bank, is the level at which banks charge one another for overnight loans of funds. It is now between 3.75 per cent and 4 per cent. 

Yields on Singapore Savings Bonds have also dropped.

The January issue is offering an average return of 3.26 per cent a year if held for 10 years, compared with 3.47 per cent a year for the December issue.

January’s SSBs still offer a higher average return than the November issue, which gives an average return of 3.21 per cent a year if held for 10 years.

But if an investor does not hold the January SSBs to maturity, the returns will be much lower than the November issue up until year eight, when the average returns from both issues are similar at 3.19 per cent a year.

The fall in yields comes as demand for government securities starts slowing.

Despite the large volume of applications in the last two T-bill auctions, the bid-to-cover ratio actually dropped – from 3.17 in the Nov 10 auction to 2.48 in the Nov 24 auction.

This ratio refers to the dollar amount of T-bills that are applied for versus the dollar amount being sold. A lower bid-to-cover ratio means the amount in applications has gone down compared with the amount on offer.

Subscriptions for SSBs fell for the December issue: The subscription rate was 1.7 times versus November’s 2.4 times and well under the record high of 3.5 times in August.

Mr Wong said fixed deposits have become more attractive to retail investors.

UOB is offering between 3.55 and 3.95 per cent a year for deposits of six-, 10- and 12-month tenures, and OCBC Bank is giving rates of 3.4 per cent to 3.9 per cent for deposits of 12 months.

“Ultimately, fixed deposits are still more convenient and easily accessible for retail investors, in contrast to SSBs and T-bills, which could have been the reason for the shift in demand,” Mr Wong added.

The Financial Horse blogger said T-bills and SSBs both have merits.

He noted that T-bills have higher short-term yields but are not easy to sell before maturity.

Investors can sell T-bills only at the branches of one of the three local banks: DBS Bank, OCBC or UOB.

On the other hand, Financial Horse said SSBs can be redeemed easily at the start of the month, and the investor can get back his money any time, but the short-term yields are not as attractive as those of T-bills.

Ms Lee Meng, executive financial services consultant at Gen Financial Advisory, said T-bills and SSBs can be used to plan for financial needs within a six-month to 10-year period, such as down payments for a big-ticket purchase like property or funding children’s education.

“However, for longer-term needs such as capital appreciation, lifetime retirement income or legacy planning, T-bills and SSBs are not attractive in both fit and performance”, Ms Lee added.

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