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Fixed income strategy: SSBs or T-bills? My plan.

Saturday, March 25, 2023

I know I said I was going to take a break from blogging until end of the month before I blog about my passive income for 1Q 2023. 

However, my OCD grabbed me again, and this is an update on what I am doing in the fixed income space.  

Yields fell along the entire yield curve with the Fed's 0.25% interest rate hike decision recently.

It was lower than the 0.5% which Mr. Market thought the Fed would implement before the banking crisis unfolded earlier this month.

The Fed chose to defend financial stability with a smaller interest rate hike than to fight inflation with a bigger rate hike.

Mr. Market interpreted that decision by the Fed as relatively dovish. 

Apparently, Mr. Market is pricing in interest rate cuts to happen before the year ends.

This is despite Jerome Powell's statement that there would be no interest rate cut this year.

Well, Mr. Market's argument seems to be that if the U.S. economy goes into a recession later in the year, the Fed would have to cut interest rate.

Who is going to blink first?

Mr. Market or Mr. Powell?

Your guess is as good as mine.

The 6 months T-bill auction here in mid March saw cut-off yield declining to 3.65% p.a. from the 3.98% p.a. we saw in the early March auction.

So, what are my thoughts?

I am also expecting the U.S. economy to weaken and possibly go into recession before the end of the year.

In such an instance, yields are more than likely to decline.

So, if I can get some longer duration bonds with relatively attractive yields now, I think I should do it.

Instead of putting in a bid for the 6 months T-bill auction happening at the end of March with some incoming dividends, I have increased the size of my application for Singapore Savings Bond.

The Singapore Savings Bond offered in the month of March has a 3.15% p.a. 10 year average yield which is higher than the 3% p.a. average interest rate from the CPF for my age.

I am really not increasing allocation to fixed income here but diverting some funds which otherwise would have been earmarked for CPF voluntary contribution in 2024.

To reiterate, if Mr. Market is right and if the Fed is close to the end of their tightening cycle in the USA, then, there is more downside risk for yields, which are already on their way down. 

In such a situation, if we want to have some fixed income exposure, we might want to lock in higher yields in longer duration risk free and volatility free Singapore Savings Bonds while they are still available.

This is especially if I could get a higher return than what the CPF offers me.

Even with a lower yield, I am aware that the 6 months T-bill would probably give a higher than 3.15% p.a. cut-off yield.

However, given the outlook, my desire to lock in a higher yield for a longer duration outweighs my desire for a higher yield in the short term in this instance.

There is also reinvestment risk with the 6 months T-bill as yields could be substantially lower 6 months later if Mr. Market is right.

Having said this, I would most probably resume bidding for 6 months T-bill in April, especially if the 10 year average yield for Singapore Savings Bond falls below 3% p.a. 

This is a reasonable expectation with yields softening at all points on the yield curve.

6 months T-bill is still a viable option for excess cash which we would like to put to work in the short term.

However, if the 10 year average yield of Singapore Savings Bond were to fall below 3% p.a., I would be better off doing voluntary contribution to my CPF account for exposure to longer duration bonds.

It is good to know that, in case yields continue to decline, voluntary contribution to CPF remains a viable option for someone like me who wants to maintain a meaningful exposure to fixed income in his investment portfolio.

There is no hurry to do voluntary contribution to CPF since we are many months away from the end of the year.

Will see what the Singapore Savings Bonds offer in the next few months.

What I do in April in the fixed income space will depend on the what the Singapore Savings Bond offers.

If you are also interested in this month's Singapore Savings Bond offer, remember to apply by 28 March 2023.

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