Fixed deposit deals for scaredy-cats

15 Jan 2018 
SOURCE: The Business Times © Singapore Press Holdings Limited. Reproduced with permission

​By Cai Haoxiang


DISTURBED by how markets keep going up? Feeling left out of the cryptocurrency boom (or bust)? Think it's too late to make any return on your money? Have no fear. Thanks to US Fed rate hikes, we are now getting an opportunity to earn some kind of return on our savings.


Yields on two-year US Treasuries, for example, have shot up from 0.6 per cent in mid-2016 to 2 per cent today. This means yields have more than tripled in one and a half years.


In Singapore, yields of the one-year T-bill, the shortest duration at which which we can lend our AAA-rated government money today, is up from 0.3 per cent for much of 2014 to a high of 1.8 per cent at the end of 2017. It has since fallen to 1.4 per cent on Thursday, but is still averaging 1.6 per cent this year.


Even if rates come down more by the time an end-of-month T-bill auction takes place, the Singapore government might still offer you a better fixed deposit rate than what banks give. The last I checked, DBS is only paying 0.35 per cent on 12-month fixed deposits. However, you can get as high as 1.2 per cent in other banks and finance companies.


If the US economy continues to perform, sharper rises in yields might be on the way. The upper bound of the Fed funds rate is already at 1.5 per cent. With three rate hikes this year and the next, as some analysts are expecting, we are talking overnight rates of 3 per cent by the end of next year.​


Strangely, the long end of the yield curve - risk-free bonds with a tenure of 10 years - has barely moved. Singapore 10-year bonds are trading at yields of 2.1 per cent. US 10-year Treasuries are trading at 2.5 per cent.


Short-term gain, long-term pain?

Yet investors might not want to rush into bonds that mature earlier, even though they might give a higher yield.


This is because they face reinvestment risk. If you buy the current 1-year T-bill at 1.6 per cent, and it matures next year when yields have fallen to 1 per cent, you are forced to reinvest your money at lower rates.


Conversely, if you bought a 10-year bond at 2 per cent, you've locked in those coupons for 10 years. One risk then is that if expectations for long-term yields spike up, you will sit on capital losses.


Of course, you can just treat the 1-year T-bill as a place to get some yield on money that would otherwise sit in the bank. In that case, why not?


To apply for Singapore bills and bonds, you need a Central Depository (CDP) account. With one, you will be able to apply for these Singapore Government Securities (SGS) through bank ATMs or Internet banking.


There are four T-bill auctions this year, falling at the end of January, April, July, and October. Just don't think too much and submit a "non-competitive" bid. The market will determine the yield for you.


Interestingly, you can apparently use your Supplementary Retirement Scheme (SRS) monies to buy primary issuance SGS bills and bonds. You have to go to a bank branch and fill in a hardcopy form, according to the forums. I might be trying my luck with that, as I cannot find that many opportunities in local stocks.


Another way to get exposure to attractive rates in the SGS market is through Singapore Savings Bonds (SSB). You can't buy these using the SRS yet. Perhaps if yields are high enough, investors should be given the option.


If held all the way, SSBs are like 10-year SGS bonds. However, they are issued every month, and contain a bonus provision: An embedded put option, exercisable monthly.


If the investor wants his principal back, he can simply submit a redemption request online, pay a nominal S$2 fee, and thus "put" or sell the bond back to the government. He gets principal plus accrued interest. Should rates spike and SGS prices fall as a result, the SSB holder is also protected from capital losses.


The latest SSB to be issued on Feb 1, 2018, which you can currently apply for, is yielding 1.55 per cent for the first year and 1.59 per cent for the second. Longer term, yields average 2.04 per cent a year if you hold on for 10 years. Even if you don't think the long-term yield is attractive, you can still beat bank deposit rates by being in SSBs. The one-year yield is now the highest ever since SSBs were introduced.


The catch is that one is limited to a maximum amount of S$50,000 per SSB issue, and a maximum individual holding of S$100,000.


Still, SSBs, along with SGS, are ironclad ways for scaredy-cats to get access to higher interest rates.


These rates are not to be sniffed at. With S$10,000, 1.6 per cent for 12 months will get you S$160. That's a few bonus restaurant meals.


How much to allocate to risk-free assets is a matter for debate. As much as cash is king, investors who only keep their money in fixed deposits and investment grade bonds won't be wealthy. They need to take risk.


For now, as rates rise, more options are opening up in order for conservative investors to sleep well.

In a market downturn, they might eat well, too.


Related Links

Bear flattening 

T-Bill issuance 2018


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