As interest rates continue to rise, investors have been asking, what are some of the products that are available to take advantage of a rising interest rates environment to invest their excess cash. Here is a compilation of some of the products, their pros and cons and if they make a good investment at this point of time where interest rates are probably going to continue to rise. One thing to take note is that the highest point of the interest rate is not reached yet, and hence there is a good chance that investors may get a better interest rate months down the road, and this will be factored into the assessment as well.
Here are a quick summary of some of the options:
Floating Rate Bonds
Floating rate bonds are bonds that tracks the prevailing interest rate. This means that the interest rate of the bond will move up when interest rate goes up and vice versa. In exchange for this flexibility, they usually give a worse interest rate as compared to their fixed interest rate counterpart and should interest rate environment suddenly turn down, they will not be able to lock in the high interest rate for a longer period of time.
This product is not widely available in Singapore, but is a relatively common product in the US financial markets. Hence, the best way to access to this type of product in Singapore is through a US denominated floating rate fund. An example of the fund is: Allianz Global Floating Rate Notes Plus Cl AT Acc USD.
However, the value of the fund is also not immune to the rapidly rising interest rate during this period of the fund as the interest from the interest is insufficient to offset the losses as it takes time before the older dated lower interest bond to mature and for the fund to replenish the fund with newer higher interest bearing bonds. If you refer to the chart below, you will observe that the USD denominated bond is giving a better return than the SGD hedged version, as most of the gains comes from the rapidly increasing USD in the past few months.
The advantage of this fund is that investors do not need to time the peak of the interest rate to lock in their bond interest. Many analyst expect the Fed rate to reach 4.75% by 2023 as compared to the current rate at 3.25% this month.
Singapore Saving Bond
Singapore Saving Bond is an government initiative to get Singaporeans to diversify into fixed income product, away from the traditional low interest bearing cash deposit. It has a higher interest than deposits and reacts faster to the real time interest rate environment as compared to deposits which usually lags and is determined by the banks. The government also act as the market maker, allowing depositors to deposit and withdraw on a monthly basis with a low transaction fee and protected from market fluctuation. Investors can also hold on to their SSB for up to 10 years, with an increasing interest rate year on year. The interest for this month is 3.08% this month as compared to 2.60% last month. Interest will be paid out every 6 months to your CDP linked account.
https://www.mas.gov.sg/bonds-and-bills/Singapore-Savings-Bonds
Singapore Government T-bills
Singapore Government T-bills is a 6 month or 1 year deposit, which yield a higher interest rate than the Singapore Saving Bond. The disadvantage is that investors loses the flexibility of the ability to withdraw on funds on a monthly basis and they have to wait till the full maturity. Investors who are forced to liquidate their holdings for one reason or another, have to go through a dealer (usually a bank) which will usually charge a hefty fee to help convert it back to cash, which can potentially result in a loss in capital if the accrued interest is insufficient to cover the bank fee. The interest of the bonds are also unknown as it is subject to the bidding rate in an auction process, but investors can infer from the last tranche. For example, the interest for the previous tranche of Singapore T-bills is 3.66% and with an increasing interest rate environment, the interest for the current tranche should be higher.
https://www.mas.gov.sg/bonds-and-bills/Singapore-Government-T-bills-Information-for-Individuals
Singapore Government Bond
For investors who are looking for a longer investment horizon to lock in their interest, you can look at the Singapore Government Bond which usually has a period of 2 years to 50 years of period.
However, the buying and selling of SGB can get complex for the average investors. Investors can either buy from the government when it is open for bidding or buy from the secondary market from a broker or bank. Unlike the SSB and SG T-bills, the issuance is on a need to basis by the government to finance a certain project and is not available on a regular basis. For example, the last tranche was on 28th Sept for a 30 years infrastructure bond and there is no announced issuance in the near future. You also is unable to decide on the period of the bond and if you wish to redeem early, you will have to sell it at the secondary market.
Buying a bond in a secondary market requires a lot more knowledge from investors and it is sometimes not as straight forward. The conventional wisdom is that, the longer period the bond, the higher interest it should give to compensate for the longer period of risk that an investor takes. However, at the current moment, the longer dated bonds actually as lower interest as compared to a shorter duration bond.
For example, a 50 year bond has an interest of 3.12% as of 21st Oct, as compared to 3.63% for a 1 year bond of the same date. This is what is referred to a inverse yield curve, which I mentioned often in past articles as one of a great indicator of a recession.
https://eservices.mas.gov.sg/statistics/fdanet/SgsBenchmarkIssuePrices.aspx
There is also a higher transaction fee as compared to SSB and you need to understand how that works if you wish to buy or sell the bonds in the secondary market. One of the secondary market is managed by Fund Supermart, which is a subsidiary of IFAST.
https://secure.fundsupermart.com/fsm/bonds/sgs-bond
Insurance products
The last method to save is to use insurance products. These products usually have a investment period of 3 years and have a slightly higher interest rate as compared to SSB or SG T-bills. The most recent version of these products, which was issued in late Sep and early Oct is by China Taiping and NTUC Income.
China Taiping i-Save 3.1% for 3 years
https://www.sg.cntaiping.com/en/personals/landing-life-wealth/wealth/saving/i-save.html
NTUC GroEase 2.98% for 3 years
https://www.income.com.sg/savings-and-investments/gro-capital-ease
Personally, I do not recommend these product at this moment in time, due to the rapidly rising interest rate environment and the inflexibility of these product. Like all insurance products, an early redemption will result in a loss of capital and if you wish to exit this product in the future to get into another product which gives a much higher interest rate, you may have to suffer some losses. However, once interest rates has peaked, these products may offer a good deal as compared to the more complex Singapore Government Bond as they offer competitive interest in a straight forward fashion.
So these are all the options for investors looking to capitalize on this rising interest rate environment. With the interest rate higher than the CPF-OA rate of 2.5%, it may be a good time to look into these products to generate higher interest!
Portfolio Strategy
The stock market tumbled upon a better than expected economic indicators with fears that the US central banks continuing to raise interest rate at a rapid pace with inflation remaining still running high.
The Cash portfolio lost 4.84%, CPF-IS lost 3.92% and SRS losing 3.92% for the month of September 2022. However, it seems that the worst for the current tumble seems to be over as recent high inflation numbers did not send the market into another tumble and a multitude of indicators are sending signals that inflation is coming down. One of the most important indicator is the global container freight rate, which saw a huge tumble during Sep.
The market had a strong rally in the later half of Oct as investors hope that the US central bank may not need to go further than what the market expects. The market is expected to rally further should freight rates and commodity prices continues to fall and stabilize, which seems to be the case in the near future.
I have plans to switch a portion of the fixed income portfolio into a US floating rate bond fund to take advantage of the still rising interest environment. More details will be shared later.
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