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

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.

Recently published:
Learn how to become a millionaire.
Ticketing for "Evening with AK and friends 2023" is ongoing.

Learn how to become a millionaire! DBS, OCBC & UOB FTW!

I have been quite prolific recently as a blogger.

The month of March is coming to an end soon, and with it, 1Q 2023.

Will be talking to myself about my 1Q 2023 passive income very soon.

Before that happens, I will be taking the next few days off from blogging.

If you enjoy my blogs, not to worry. 

I have scheduled a few YouTube videos to be released on a daily basis.

So, in place of my blogs, you can still eavesdrop, literally, as I talk to myself on YouTube.

If you want timely notifications, remember to subscribe to my YouTube channel.

It is a free service.

Here, I will share two YouTube videos which I released recently.

They are both very short and do not require watching, just like all my other YouTube videos.

You only have to listen.

So, close your eyes and give them some rest.

The first video is very personal.

It is basically a glimpse into my past, and if you don't like this type of content, you can skip it.

The second one has quite a few numbers being thrown around but it really isn't that profound.

I just want to show that anyone can be a millionaire by investing for income.

Yes, if AK can do it, so can you!

Till my next blog, stiff upper lip and soldier on!

The sky is not falling!

Ticketing for "Evening with AK and friends 2023" is ongoing.

A fortnight of banking crises and what did I learn?

Three signs of a banking crisis.

First is credit risk.

This is when loans turn bad and debtors are unable to make repayments.

Other assets can also turn bad and are unable to generate income required to make loan repayments.

We could see this playing out in the U.S. commercial real estate sector.

It also means it will be harder for certain borrowers to access credit.

Refinancing also becomes difficult as banks become more selective and risk averse.

Credit will tighten significantly as there will be heightened scrutiny of borrowers' credit worthiness.

Second is liquidity risk. 

We might see withdrawals by depositors exceeding the available funds held by the banks.

This could lead to panic and runs on banks.

We saw this happened to Silicon Valley Bank in the U.S.A.

Later on, we also saw depositors withdrawing large amounts from First Republic Bank.

Even the $30 billion infusion provided by 11 big U.S. banks was insufficient.

Both S&P and Moody's downgraded First Republic Bank to junk.

Third is interest rate risk. 

Rising interest rates reduce the value of long duration bonds held by banks.

This leads to weaker balance sheets.

In case many depositors need to make large withdrawals at the same time, banks might be forced to realize those losses by liquidating these long duration bonds.

Funding cost for banks can also rise further as they pay more to their depositors.

Funding cost could, in some instances, be higher than what banks receive in interest payments. 

This could be the case if many long term loans on fixed rates were taken by the banks' customers before the interest rate hikes.

What is a systemic banking crisis?

A systemic banking crisis occurs when a large number of banks in a country have solvency or liquidity problems.

It could happen because of external shocks or because failure in one bank or a group of banks spreads to other banks in the system.

So, this explains why the U.S. regulators took over Silicon Valley Bank and Signature Bank very quickly.

It also explains why they moved to guarantee all deposits, even those larger than $250,000 insured under the F.D.I.C.

It was to prevent the failure of these two banks to spread to other banks in the system although in so doing, the U.S. regulators created a moral hazard as bad actors are not punished but bailed out.

Systemic banking crises are financial nightmares. 

These crises often result in deep recessions for the countries concerned.

This is because banking crises usually affect consumer and business confidence.

Spending, investing and lending on all fronts reduce because of extreme fear.

Banking crises in major economies could also spread to other countries, resulting in a global banking crisis.

This is called a contagion.

This is why the Swiss authorities assigned partial blame for the collapse of Credit Suisse to the recent U.S. banking crisis.

After all, often, it is a crisis of confidence arising from heightened fear that is more damaging to the banking system and economy than any other crisis.

We could yet see Mr. Market going into another depression as an economic recession looks more likely now than ever to hit the U.S.A. in the not too distant future.

Recently published:
DBS, OCBC and UOB test supports. Bitcoin to $1m a coin?

Ticketing for "Evening with AK and friends 2023" is ongoing.

DBS, OCBC & UOB test supports? Bitcoin at $1m! UBS buys Credit Suisse! First Republic Bank downgraded to junk!

The headlines which grabbed my attention this morning were two.

First, that Credit Suisse would be purchased by its Swiss rival, UBS, for 3 billion Swiss Francs.

Second, that S&P downgraded First Republic Bank further into junk as the US$30 billion infusion by a consortium of largest U.S. banks was deemed insufficient.

It seems to me that the banking crisis is still an evolving story.

In Singapore, fundamentally, our local lenders are financially sound and the Monetary Authority of Singapore has issued statements to say that DBS, OCBC and UOB are well capitalized and have little exposure to Credit Suisse.

Although I believe that weakness in the stock prices of DBS, OCBC and UOB is an opportunity for long term investors to accumulate, I am going to keep some powder dry.

From a technical analyst's perspective, the downside risk is pretty real, and Mr. Market's negative sentiment towards the banking sector could see stock prices of DBS, OCBC and UOB testing their immediate supports.

This is because Mr. Market can be pretty irrational at times and has thrown the baby out with the bathwater many times before.

We could see supports breaking then.

During times like that, when buying opportunities with potentially better future returns present themselves, we would appreciate having a war chest ready.

OK, I will stop telling horror stories about banks for now and move on to something which might be a bit more cheerful for some people.

What is it?

A piece of news which didn't quite grab my attention but was at the back of my mind had to do with a cryptocurrency, Bitcoin.

What's cheerful about Bitcoin?

The ex-CTO of Coinbase, Balaji Srinivasan, predicts that Bitcoin will hit US$1 million per coin by the middle of June 2023!

What?

OMG!

You so stunned like vegetable?

You are not alone.

He says that there will be hyperinflation in the U.S.A. as the US$ will see its value, which has been declining, ultimately destroyed.

We are seeing challenges to the US$ in many countries as major economies like China and India have been getting their trading partners to use the Chinese Yuan and the Indian Rupee respectively as their currencies of choice.

The rapid hikes in interest rates in the U.S.A. also means that the country's debt servicing burden has risen dramatically.

The Fed has not been able to contribute to the government coffers because of this and instead the U.S. Treasury is being drained at a frightening pace.

The U.S.A. is, in fact, bankrupt.

To avoid a default, the U.S.A. has to take on even more debt which is why the debt ceiling has to be raised by Congress.

If it sounds like a PONZI scheme to you, it is because it sounds like a PONZI scheme.

Bitcoin's price is rocketing higher in response to this development, it seems.

The banking crisis has further accentuated a critical flaw of fiat currencies and how they can be produced at will by central banks.

This is a very scary situation and as long as the can continues to be kicked down the road, all seems OK but is it really OK?

This is one reason why I changed my opinion about Bitcoin sometime in the middle of last year.

I explained in a blog many months ago I chose to buy some Bitcoin over Ethereum because of Bitcoin's status as digital gold.

Like gold, Bitcoin's supply is limited.

I bought another small fraction of a Bitcoin when its price dropped to its long term support last year.

Yes, I hold some Bitcoin like I hold some physical gold.

Bitcoin and gold are currencies, and like all currencies, they can be traded.

However, my purpose is not to trade Bitcoin and gold.

I look at them as insurance against flawed fiat currencies. 

I believe in having insurance as I always have a crisis mentality.

Anyway, in case you missed those blogs or if you are interested in a refresher, they are linked in the references below.

We are living in very turbulent times and we can only do what we feel is right to have some peace of mind.

Recently published:
Building my investment in OCBC took many years!

Ticketing for "Evening with AK and friends 2023" is ongoing.

References:
1. Gold, silver and Bitcoin.
2. Bitcoin at long term support.

Building my investment in OCBC took many years. Gambatte!

As a new trading week is about to start, I am reminding myself not to be affected by Mr. Market's mood swings.

I am reminding myself that as an investor for income, my investment portfolio looks to be in a good place.

My businesses should continue to generate meaningful income for me.

I should not have to worry about daily fluctuations in stock prices.

As an example, it took me many years to build my position in OCBC which, today, is my largest investment in the Singapore stock market.

This is the latest video by AK Production House which should have an uplifting effect.

I hope that anyone who might be eavesdropping would feel encouraged after listening to the recording too.

Investing for income isn't sexy.

It isn't a good fit for people who want to get rich quick.

However, it is a steady way to build wealth.

If AK can do it, so can you!

Recently published:
Fear is palpable! Market crashing?

Ticketing for "Evening with AK and friends 2023" is ongoing.

Other recent YouTube videos by AK Production House: