PRIVACY POLICY

Tuesday, October 3, 2023

SSB 3.32% p.a.: Higher for longer!

When I blogged about last month's SSB which offered 3.16% p.a. 10 year average yield, I said I would probably be buying some.

And I did.

Just a modest sum of money as I was "borrowing" the money from 2025.

It was money which I would otherwise have earmarked for voluntary contribution to my CPF account in 2025.

2025 would be the year I turn 54 years of age.

Now, I see this month's SSB offering 3.32% p.a.







What am I doing?

I will be buying again, I suppose.

Again, it would be a modest sum of money.

Although I am sticking to my strategy of growing the investment grade bond component of my investment portfolio, there might no longer be a hurry to lock in higher yields for the longer term now.

I recently produced two YouTube videos on the likelihood of interest rates staying higher for longer.

This is the current day narrative and it seems to have gained traction.

This is probably why the last T-bill auction surprised us with a cut-off yield of 4.07% p.a. too.

Much higher than many expected.

If you have not watched the YouTube videos yet, here are the links:

1. This could be BAD! Why look at bond yields?

2. Reason why it could be a lot WORSE!


The yield curve is still very inverted with the shorter durations being more rewarding.

So, strengthening my T-bill ladder would be more rewarding.

Still, reinvestment risk exists with the T-bill ladder.




I tell myself not to complicate things and simply stick to my plan.

1. Maintain and strengthen T-bill ladder for another source of recurring income.

2. T-bill ladder can be dismantled gradually to buy stocks during a recession.

3. Buy SSBs with money meant for VCs to the CPF as long as SSBs' 10 year average yield is higher than 3% p.a.

There is no way I am going to make all the money in the world.

If AK can talk to himself, so can you!

18 comments:

  1. Hi AK, when you said reinvestment risk for T-bills, you meant that we may incur a loss if we redeem earlier than the 6-mth or 1-yr duration?

    ReplyDelete
  2. Hi C,

    Reinvestment risk refers to when it is time to reinvest the money, we might not get a similar return from the new investment.

    With longer durations, reinvestment risk is not as big a consideration since we are locked in for many more years.

    ReplyDelete
    Replies
    1. Hi AK, think we can diversify between SSB and T bills? Cos SSB lock in rate for 10 years. Have to say now T bills are more attractive... :)

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  3. Hi AK,

    Many REITs have recently dropped quite a bit as interest rates are expected to remain higher for longer.

    CapitaLand Ascott has dropped over 11% YTD, and is down 6.19% in the past month.

    At $0.915, its dividend yield is about 6.22%. It's also nearing the lows of $0.88 formed last October. It seems like the recent correction poses a good buying opportunity. In addition to getting a yield of over 6%, there also seems to be substantial room for growth once the price recovers back to $1+.

    At 6.22% yield, it is also comparable with what the three banks are currently offering based on their forward dividend yield. (DBS's $1.92 at 5.8%, OCBC's $0.80 at 6.33% and UOB's $1.70 at 6.06% yield).

    The banks are generally more resilient than REITs but the recent correction seems to be a good time to diversify out to some of these REITs apart from accumulating shares in the banks as well.

    May I know what are your thoughts on it?

    Thanks.

    ReplyDelete
    Replies
    1. Hello, if I may add, with higher interest cost, most likely the DPU will drop for most REITS. With this, the yield may not be so high. May need the share price to drop more to compensate for this.

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  4. Hi SN,

    There is vital difference between REITs and the banks.

    REITs pay out 90% to 100% of their cash flow to investors.

    Banks pay out 50% of their earnings to investors.

    When we consider this, REITs are not attractive compared to the banks as investments, especially in today's environment of higher risk free rates which could stay higher for longer.

    I have been thinking of producing a YouTube video on this and your comment gave me another push. ;p

    ReplyDelete
  5. Hi AK,

    Ireit is going towards 0.375 lows too. FLCT also at 1 year lows. Would you concentrate your firepower on your highest convicted idea (i think banks) or spread it out (including reits)?

    Thankbyou fot talkong to yourself.

    ReplyDelete
  6. Hi KC,

    I would refer to my reply to SN's comment before yours. ;p

    Unfortunately, things are not looking good for REITs.

    I will be producing a YouTube video on this topic in the next couple of days.

    Look out for it. :)

    ReplyDelete
    Replies
    1. thanks AK, looking forward to it. As we speak, IREIT closed at 0.36.

      Delete
  7. Hi AK,

    Thanks for sharing your thoughts on the banks and REITs.

    Recently Venture Corp has dropped quite a bit due to weaker H1 earnings reported. It has been on a downtrend since the start of the year. It is down 28% YTD, and down 4.33% the past month. Many analyst have lowered their target price to about $14-$17.

    Despite the weaker H1 earnings reported, it has a healthy net cash position and a sustainable dividend payout ratio. It has been growing its dividends over the years and has maintained its dividend at $0.75 since 2020.

    At today's closing price of $12.15, it gives a 6.17% dividend yield. It is currently trading at a six year low. At $12+ now, it seems to be oversold in the short term.

    Will you consider Venture Corp undervalued at the current price range of $12-$13?

    If it is able to recover to $20+, there seems to be substantial room for capital appreciation, while getting paid a 6%+ dividend yield each year while waiting for the recovery. It seems to be quite attractive relative to the risk-free rate we can get from T-bills of about 4% today.

    Thanks.

    ReplyDelete
  8. Hi SN,

    I don't track Venture Corp. and have nothing meaningful to say in relation to the company.

    However, I will say that a recession seems to be on the cards as higher for longer is hitting bottom lines of businesses.

    Contract manufacturers will not be spared as their health depends on their customers.

    I am just hoarding cash now and I won't be buying anything.

    Cheap could get cheaper.

    ReplyDelete
  9. Hi KC,

    Things look grim for everything and not just long duration bonds.

    REITs could come under more pressure.

    Equities won't be spared either as Mr. Market demands higher returns against a backdrop of higher risk free rates.

    ReplyDelete
  10. Hi HH,

    Oh, that is what I am doing.

    Maintaining and strengthening my T-bill ladder.

    At the same time, I am increasing exposure to SSBs.

    ReplyDelete
  11. Hi AK, can enlighten me cos i don understand.. y choose SSB when there's higher yields in Tbills? Also, IReit like so low, wd u be buying more of it?

    ReplyDelete
  12. Hi garyp,

    I buy SSBs mainly to replace VCs to my CPF account when SSBs offer more than 3% p.a. in 10 year average yield.

    T-bills have higher yields than SSBs but they are very short term and re-investment risk is real.

    I am not buying all REITs in general as the current environment is not REIT friendly and it could get worse.

    I will be producing a video on this topic later this week. :)

    ReplyDelete
  13. Hi AK

    I read that there is opportunity cost using CPF to buy T-Bill and if not handled properly, will actually backfire compared to just leaving it in the CPF account. Such as the transaction costs, the interest lost during the transferring from CPF to T-bill and back.

    Can you maybe talk to yourself on what are the things to look out for if one wish to use CPF-OA to buy T-Bill.

    ReplyDelete
  14. Hi HH,

    Higher for longer is definitely not friendly to REITs.

    ReplyDelete
  15. Hi Jermel,

    I think I blogged about this before but I am too lazy to go find the blog post.

    So, in short, place only competitive bids when using CPF-OA money.

    Never bid lower than 3.33%.

    Only go for T-bills which are offered in the first half of the month.

    This way, we will only lose 7 months of CPF OA interest and not 8 months.

    Remember to transfer money from CPF IA back to CPF OA once the T-bill matures. ;)

    ReplyDelete