Nobody cares more about our money than we do.

I read something by Suze Orman which resonated with me and I would like to share it here:

Right now, interests are still relatively low even though they’re headed up probably. We still have one of the lowest interest rate environments ever.




Everybody knows that when interest rates go up, the value of bonds go down.

If you are going to buy a bond mutual fund, you have to be very careful because if interest rates go up, the value of that bond mutual fund will go down. And, in a mutual fund, there is absolutely not maturity date.

So, what are you thinking? The worst thing you could do with your money right now is put it into a bond mutual fund.




Not too long ago, my dad came to me after visiting a local bank right here in Singapore. 

He showed me a few pieces of paper which a financial advisor at the bank gave to him. 

Basically, he was advised to invest in a unit trust which was invested in bonds. 

Luckily, he did not commit right away.

Bond funds are not the place to be now and I have said this in various blog posts before.

As I believe that the very low interest rates we currently see cannot persist for many more years, buying long term bonds is a risky proposition.
Why? See: CPF or SGS?

Now we have "perpetual bonds". What are these?  See:
Perpetual bonds: Good or bad?





We have to remember that nobody cares more about our money than we do. 

Don't take what "finance professionals" say as the Gospel truth, especially not when they want to benefit from our business.

This actually raised a question in my mind as to whether wealth managers are providing products which are fit for purpose or are they self serving sales people.
See: Be cautious even as we accept higher risks.






My parents have both been sold unsuitable products by "advisers" in local banks before. 

I tell them to remember that these "advisers" are just sales people and it so happens they work in banks and they sell financial products. 

The more they sell, the more they make. 

They are not altruistic or noble.




We have to look after our own interests. 

No one else would.

Related posts:
1. Unscrupulous and rude person from Prudential.
2. Inflation adjusted retirement income plan.
3. Know what is good for us.
4. Why a wealthy nation cannot afford to retire?

A chat on FDs, SSBs, OCBC 360 and CPF Top Ups.

Solace is a regular guest blogger here at ASSI and he has shared generously, without any agenda, his thoughts on personal finance and investment matters. He is sharing with us a conversation he had with a friend recently:

I had a conversation with a friend recently about FD, Singapore Saving Bonds (SSB), OCBC 360 and CPF.

Friend: u know hor, now got SSB, very good, very stupid to put money in FD.

Me: if u aim 10yrs, then it is better than FD, but if gt saving targets of 1-4 yrs, yearly renewal in FD for 1.X% is higher.

Friend: Then like that, isn't OCBC 360 better than FD. But I think I looking for long term risk free like 10 yrs.

Me: ocbc 360 can be better than FD only if u meet all their criteria plus they could change their terms and conditions anytime. since u want to look at risk free rate for long term time frame, why not consider your CPF SA risk free rate 4%?

Friend: erm, I don't trust or like CPF system, I might not even get my money back. I think Singapore bonds more "Reliable" than CPF

 

Me (internal thoughts): wah Lao aey, Singapore bonds more reliable than CPF? CPF is used mainly to buy govt bonds. Their nature is the same......

 

I gave up without speaking further. Cos need to spend too much time to explain further. Plus my friend might not listen to it as I sense that he is fixed in his views......

We need to do a very common sense when treating topping up SA

U know ppl in their 30s and 40s easily earn mid 4 figure pay. I am sure they hit the 7% tax bracket one of the year. U know what I talking abt right.

A 7% tax saving and a 4% interest, combine together, isn't it like 11% return in a year!

Sth we can't even get in equities market!

Or I shld say, majority cannot achieve 11% return in a yr....

Count it as my short version of guest blog haha

This is my version of "common sense investing" LOL

"Starting 2016, members 55 and above will enjoy an additional 1% extra interest on the first $30,000 of their combined balances. This is on top of the current 1% extra interest earned on the first $60,000 of their combined balances." CPF Board.

It seems that many more CPF members are warming up to the idea of topping up their CPF-SA and RA. This, I believe, is a good thing.

We should make full use of the CPF and make it a cornerstone in our plan for retirement adequacy. It is, quite simply, the sensible thing to do.

In investments, we go for low hanging fruits first. Why should it be different when it comes to planning for retirement adequacy?

Some blog posts in which CPF-SA was discussed:
1. Do you want to be richer? (2010)
2. Build a bigger retirement fund with CPF-SA. (2012)
3. Don't see money, won't spend money. (2013)
4. Upsize $100K to $225K in 20 years. (2014)
5. AK reveals his CPF-SA numbers. (2015)

Related posts:
1. Singapore Savings Bonds: Good or not?
2. Why fixed deposits over structured deposits?
3. UOB ONE Account or OCBC 360 Account?

Get ready for investment with Solace: here.

US$300K portfolio sunk. Buy bonds, not stocks in 2023?

Reader says to AK:

Bond yields are rising again.

T-bills and Singapore Savings Bonds are looking  more attractive again.

I know you have always put money in your CPF account and, now, you are putting money in T-bills and Singapore Savings Bonds too.

I am now wondering if I should follow.

The Federal Reserve will continue to pursue their plan to keep increasing interest rates until stubbornly high inflation is under control.

We could see Fed Fund Rate at 6% or more.

This is going to impact earnings badly, crush equities and REITs, sending economies into recession.

I am worried about a hard landing and I am at a crossroads trying to decide if I should partially or wholly liquidate my US$300,000 portfolio or what is left of it in the US stock market which includes tech names. 

I also have exposure to US commercial REITs listed on SGX.

(Sensitive details omitted.)

Put more money into fixed income like you?

What is the best way forward?

I know you would say you don't give advice but please talk to yourself on this.

AK says to reader:

Let me cut to the chase.

You have misunderstood what I have been doing or at least the purpose of my actions.

It is true that I have always done voluntary contributions to my CPF account even as a "young" retiree, maxing out the annual contribution limit.

If you remember, it is not only because I think of the CPF as a risk free and volatility free AAA bond which pays a relatively attractive coupon.

It is also because I have always believed that we need some high quality bonds in our investment portfolio.

An investment portfolio that is 100% in equities is probably going to be more volatile and not everybody has a strong enough situation to accept more volatility.

It is also about not putting all our eggs in one basket because we don't know what we don't know.

Watch (or listen) to new YouTube video on buying bonds or stocks in 2023 by AK Production House:

As for my increased activity in the Singapore Savings Bond space, it is just a replacement for my activity in the CPF space.

I am not increasing allocation to fixed income in this instance, therefore.

As for my increased activity in the T-bill space, I am mostly just locking up money which was locked up before.

If that sounds like money which I would never have put in the stock market anyway, it is exactly that.

I am still very much invested in the REITs and businesses which I blog about regularly.

I think you know this but you might have been thinking a bit too much and need to clear up the mind fog.

Of course, I must say that I do not invest in the US stock market, tech stocks or not, and I do not have any exposure to US office REITs.

So, the equities and REITs in my investment portfolio would look very different from what you have in yours.

However, I will say that if you are losing sleep because of your investments, you could have put in more money than you should have and, in such an instance, reducing exposure to a level which gives you some solace might be a good idea.

Watch (or listen) to new YouTube video on buying US office REITs by AK Production House:

If I were you, I would go back to basics, especially if you are 100% in equities and if you do not have CPF savings.

Do you have an adequate emergency fund? 

If you do, that is the money you can put in T-bills and Singapore Savings Bonds. 

Why?

Well, that is money which should never be put to work in equities anyway.

Quite simply, if you should ever need the money in an emergency, you don't want to be at the mercy of Mr. Market.

You don't want to be in a situation where you must accept whatever price Mr. Market should offer because you don't have a choice.

An emergency fund is insurance.

I know some investment "gurus" say we don't need an emergency fund but it really is necessary.

I know some people would use their emergency fund to buy stocks but that is so wrong.

An emergency fund is not an opportunity fund!

What if an emergency should come hot on the heels of a supposedly good opportunity?

Swans are not all white in color.

I am going to leave a link to a blog which you might or might not have read before as I think it will be helpful to you.

You might want to take a break from the stock market if things are freaking you out.

Peace of mind is priceless.

Watch (or listen) to new YouTube video on retirement income for life by AK Production House:

References:

1. Buying US office REITs in 2023?

2. Survivability and opportunity in times of distress.

Related posts:
1. Largest investments.
2. T-bills, SSBs and CPF.

The Business Times, 6 Mar 23:
Holding cash will be a winning strategy in 2023.

Growing passive income: Equities, CPF and bonds.

I have been blogging about the passive income generated by my investment portfolio every quarter for many years now.

I have also shared how much interest income my CPF account makes every year.

Some readers asked if my quarterly passive income reports included the interest income from my CPF account?

The answer is "no."

I blog about passive income from my investment portfolio and interest income from my CPF account separately.

If we were to add the two streams of income which is something I have not done before, then, my annual passive income would be a larger amount.

It would be quite easy for anyone who might be interested in knowing what the larger amount might be to find the relevant blogs and add the numbers.

I won't bother doing it because unlike my quarterly passive income reports and my annual CPF interest income reports which share my thought processes as well, I feel that simply putting the two together in a single blog to show a larger number isn't helpful in any way to anyone.

Well, it could generate some interest like some tabloid newspaper article would sensationalize some event but it would have no value otherwise.

A bigger number is simply the logical conclusion and it might even give people the impression that I am bragging.

Anyway, to continue, with interest rates rising, interest income from my savings accounts and fixed deposits will become more meaningful but I am too lazy to start a new series of blogs on interest income generated this way.

I have blogged about the importance of saving money often enough in the past and also why having a meaningful percentage of our portfolio in cash or fixed income isn't a bad thing.

Think emergency fund and war chest.

Think survivability and opportunity in times of distress and if you are new to my blog, I have an "e-book" on this: HERE.

As interest rates have risen significantly, I will be diverting funds from my fixed deposits which are maturing into Singapore T-bills  (i.e. zero coupon bonds issued by the Singapore government) as these have much higher interest rates than fixed deposits of equivalent durations (i.e. 6 months and 12 months.)

Treasury Bills Statistics.
Source: MAS

As these T-bills will be held in my CDP account, the interest income earned will show up in my quarterly passive income reports.

Similarly, as I am diverting funds which I originally earmarked for my CPF account to Singapore Savings Bonds which now offer an average 10 year return of more than 3% per year, the returns will add to my quarterly passive income as these bonds are also held in my CDP account.

These developments will have an impact in the accounting of my passive income in the future but the impact is probably a relatively small one.

The change is still noteworthy especially if I continue to divert funds from existing fixed deposits to T-bills. 

This is more so if funds originally meant for my CPF account is diverted into Singapore Savings Bonds at the same time.

So, what can we expect in a nutshell?

Higher passive income numbers in my quarterly updates and slower growing interest income in my yearly CPF updates, everything else being equal.

If T-bills continue to see increasing yields, I might have to stop being lazy and make a trip to DBS to move funds from my CPF account into T-bills.

They should really allow us to do this on their banking app just like applications for T-bills using cash or SRS money.

Anyway, I am glad fixed income in Singapore is once again a financially more rewarding option for income investors.

It is definitely good news for those of us who are more risk averse.

Cash is not trash at least it isn't if we are referring to the Singapore Dollar.

I want to end the blog by saying that things aren't all doom and gloom for most of us.

We can continue to grow our passive income whether we are preparing for retirement or in retirement as long as we stay financially prudent.

Gambatte!

Recently published:
DBS, OCBC & UOB at 40% of portfolio?

References:
1. CPF or SSB?

2. 3Q 2022 passive income.

3. My CPF interest income.

For those who are interested in Treasury Bills, this is a good resource by DBS: Apply for T-Bills.

Singapore Savings Bond (Part 4): Good or not?

More details have been released with regards to the Singapore Savings Bond. Here is a quick and very simple summary:


1. Person must be at least 18 years old, have a bank account (DBS, POSB, OCBC or UOB) and a CDP account.

2. Application for the bond will be through the ATMs (DBS, POSB, OCBC or UOB) or internet banking (DBS and POSB only). Fees will be charged by the banks for application and redemption requests.

3. New Savings Bond to be issued every month. Application and requests for redemption must be done before the window closes 4 working days before end of the month. Must be in multiples of $500.

4. Application amounts of $500 to $50,000 are allowed but each person can only hold a maximum of $100,000 of Savings Bond at any one time.

Source:
http://www.channelnewsasia.com/news/singapore/mas-on-how-to-apply-for/1839400.html

Quite obviously, the Savings Bond (just like the CPF) is not created with HNW individuals in mind. 

It is meant to help the average Singaporean who is more of a saver and who wants a safe place to park his savings which will reward him with a higher interest rate compared to a paltry 0.1% paid by some banks for money in savings accounts now.

I must first state the obvious and that is the Savings Bond is a better place to park our savings than a regular savings account if we have more liquidity than we need on a monthly basis. The most obvious reason for saying this is the much higher interest rate.

Although the Savings Bond is not as liquid as a regular savings account, it really is not too bad. The minimum lock up period is basically one month.





We could apply for a savings bond this month, receive it next month and if we decide that we need the money back, we could request for a redemption and get the money back in the following month. We would be paid a pro rated interest income based on the coupon for a holding period of 1 year (which is 0.9% per annum based on an example given by the MAS). We will not suffer any loss of capital in the process either.

If the holders of these Savings Bonds would like to get higher interest rates, they must hold the bonds for longer periods of time. How does this work?

If someone should hold it for the full one year before redemption, he could enjoy a coupon of 0.9%. If he should hold the bond for another year, in the second year, he could receive a coupon of 1.5% (using the example given by the MAS earlier). So, on average, it would be 1.2% per annum which is the coupon for a 2 year bond.

The coupon for each following year steps up until the 10th year and the average coupon for each of the 10 years could be 2.4% (which is the coupon for a 10 year bond around now).

In my earlier blog post on the Singapore Savings Bond, I said that it does not seem very attractive for me, the operative word being "me". When I said I have reservations about it and that I don't really like it, I was thinking about me. OK, why did I say what I said?

For a while now, I could get higher interest rates from fixed deposits offered by the banks and I feel that interest rates will only go higher in future.  So, for example, one year or so ago, a 13 months fixed deposit in UOB was offered an interest rate of 1.08% p.a. Today, the offered interest rate is 1.45% p.a. This is a big increase in a year.






Of course, we must note the following points about the fixed deposits:

1. Minimum amount required is $20,000.

2. No interest will be paid in case of early redemption.

So, logically, for someone who has less than $20,000 to be deposited or who might need to make an early redemption in case of an emergency or opportunity (depending on whether the money is in his emergency fund or war chest), if $20,000 is all he has, this option is out.

However, if someone has quite a bit of spare cash, then, whatever liquidity is not required for the immediate future, fixed deposits with higher interest rates might make more sense than the Savings Bond in terms of returns. Just remember to have the fixed deposits in tranches of $20,000 (or whatever is the minimum sum required by the bank).

The Singapore Savings Bond is a good thing to have as it allows people to get higher interest rates for their savings with as little as $500. The very short minimum lock up period with no risk of capital loss are favourable points too.

Whether the Savings Bond is the best option for us, however, would depend on our circumstances, our motivations as well as the alternatives available to us.




-------------------
Added (3 Feb 2017):

Monetary Authority of Singapore has added 
three more application channels for Singapore 
Savings Bonds (SSBs) - OCBC's and UOB's 
banking portals and OCBC's OneWealth app.

MAS said in a news release (Feb 1) 
that since the start of the programme, 
a "significant number of investors" applied 
for the bonds through DBS/POSB's Internet 
banking portal and that there were requests for 
more online options. Those interested can also 
apply via ATMs of the three Singapore banks.

Source: http://www.channelnewsasia.com/news/singapore/more-application-channels-for-singapore-savings-bonds/3483842.html

Related post:
Singapore Savings Bond (Part 3).

Croesus Retail Trust: AK makes a suggestion.

This blog post is in reply to a reader's question on Croesus Retail Trust: here.

Hi Capricon,

Not that I know of, no. Of course, I could have missed it. -.-"

I know the management is caught in a situation where they really want to seize acquisition opportunities because commercial property prices are rising fast in big cities in Japan.

However, the biggest advantage of being a business trust has been blocked by the management's own promise not to gear beyond 60%. After their recent two acquisitions, they don't have much left in terms of debt headroom.

I do not see how a higher unit price will help them to borrow more money since gearing is calculated based on the value of the properties in the Trust and not its market cap.

If they want to do another acquisition without having gearing cross beyond 60%, the way is to do equity fund raising either through rights or placement.

Actually, Jeremy Yong could consider something else. The Trust could issue perpetual bonds because they are treated as part of the equity structure. So, gearing would actually drop and the Trust would have the money to do more acquisitions. As long as the NPI yield is higher than the coupons to be paid on the bonds, unit holders will benefit. However, if the Trust does this, I hope the bonds are in JPY and not in S$.

Do you have Jeremy Yong's contact details? If you do, send him an email and tell him what AK suggested. Of course, I do not know if it is practicable or not. Just a crazy idea, perhaps. ;p

Related posts:
1. Croesus Retail Trust: Luz Omori and Liz Wave I.
2. Perpetual bonds: Good or bad?

Money continues to flow into Singapore.

Singapore continues to attract inflows of money. I have friends from USA and Europe who are parking their money in savings accounts in Singapore although they get only 0.1% interest. Why? The Singapore Dollar has been appreciating against their home currencies and is likely to get stronger.

Singapore also has a AAA rating when it comes to sovereign bonds. This has been attracting much attention. The latest to announce intention to invest in Singapore bonds is Schroder Investment.

Does it stop at bank deposits and bonds? Emphatically, no. Hot money is hungry for productive assets in Singapore. The rising supply of money has kept interest rates low, creating a credit boom. This is a big reason why prices of condominiums, especially those in the luxury segment, have shot through the roof in recent times.

The last I heard, some people with a lot of money have turned their attention to industrial properties in Singapore as yields on residential properties are relatively low at about 4% now. Will industrial properties see their prices pushed up next?

The rising value of the Singapore Dollar and continuing inflow of money into our country has created problems for our industries as well because our exports become less competitive. As it is, our GDP shrank 7.8% in the last quarter.

I believe that the Monetary Authority of Singapore has to limit hot money inflows or cap gains on the Singapore Dollar and soon.

Singapore bonds attract Schroder with Asia’s sole AAA ratings
Thursday, 25 August 2011

© 2011 - The Edge Singapore

Park emergency fund in fixed deposits or SSBs?

A reader asked if it is better to put our emergency funds in Singapore Dollar fixed deposits or in Singapore Savings Bonds?

Read the very thoughtful comment from the reader: HERE.

This is my reply:

For the longest time, I favored fixed deposits over Singapore Savings Bonds for my emergency fund.

This is largely because I am able to get my hands on the money immediately upon breaking a fixed deposit. 

On the other hand, as you have rightly pointed out, we have to wait for a month before we can get our money in the case of Singapore Savings Bonds if we were to make early redemptions. 

In an emergency, I probably need the money in a hurry. 

Waiting a month before I could get the money might be a luxury I could not afford. 

Even now, I am using the Singapore Savings Bond only as an alternative for money which I had planned to make voluntary contributions to my CPF account with. 

10 years is relatively long term and mimics what the CPF does for me and at least for people who are 45 years old or older.

Why do I say this?

From an interest income perspective, the Singapore Savings Bond makes more sense now than voluntary contribution to our CPF accounts.

CPF or Singapore Savings Bonds? It is a no brainer!

In using fixed deposits to store my emergency fund, I make sure that each fixed deposit is relatively small with sums of between $10K to $25K each. 

This is because if I were to break a smaller fixed deposit, I would lose less interest income compared to breaking a larger fixed deposit. 

It is a reason why fixed deposit promotions like the recent one from UOB which requires a minimum sum of $50K in fresh funds to qualify are not viable for my emergency fund. 

This is only my belief, of course, which applies to my own circumstances and, maybe, eccentricities.

The following blog is probably most relevant to this discussion and you might want to read it if you have not done so before: 

Singapore Savings Bond: Good or not? 

Here are more references: 

1. A special chest for emergency fund 

2. Why fixed deposits over structured deposits?

Happy emergency fund building!

Recently published:
SSBs, T-bills, Fed up!

Continuing interest in S-REITs.

We might have heard people saying "low can go lower and high can go higher" and if we have been an investor for a while, we would know that this is indeed the case.

S-REITs' performance in recent times has been nothing short of stellar. I will admit that I am turning cautious on S-REITs and I have said as much in an earlier blog post:

Never lose money in real estate and REITs?

In that blog post, I said I had turned cautious on S-REITs but I had not turned negative on them. This has not changed.

Conditions remain benign for S-REITs and as long as they stay this way, S-REITs will continue to be attractive to yield hungry investors. Money will always go to where it is treated best.

But while Singapore-listed REITs may seem expensive after a rally over the past year or so, they aren’t when compared with equities and bonds, says Tim Gibson, head of Asian property equities at Henderson Global Investors, which manages US$106.7 billion.

REITs are generally required to pay out much of the income from their underlying properties as dividends. Gibson says S-REITs offer the highest yields, both on an absolute basis and compared with the country’s five-year government bonds.

The yield on the FTSE ST REIT Index is around 5.17 percent, while the five-year Singapore bond yields around 0.5 percent and the Straits Times Index’s (STI) dividend yield is around 2.8 percent.

“As long as interest rates remain under control, S-REITs are in the sweet spot to continue their strong performance,” Gibson says.

Henderson’s new Global Property Income Fund will invest around 25 percent of its assets in Singapore-listed REITs.

Source: Dow Jones Newswire.

U.S. Investors are rediscovering their appetite for foreign real estate... putting more money into overseas funds that invest in offices, malls and apartment complexes than they have in six years.

New Jersey's pension fund recently invested US$500 million in a new US$4 billion real estate portfolio that Blackstone Group is raising for real estate investment in Asia.

Commercial real estate provides diversification away from stocks and bonds, and boost income while reducing overall risk because it acts differently than stocks and bonds over time.

Foreign REITs that own top-notch property in many parts of the world tend to be cheaper than those in the U.S.

REITs usually trade at premiums to the value of the real estate they own because investors are willing to pay for the liquidity that REITs offer, and because the value that many REIT management teams can create through acquisitions, developments and superior operations.

Source: Reuters.

Could S-REITs see their unit prices climbing higher? Well, if the reports are to be believed and if S-REITs are viewed as being more attractive investments than REITs in other countries, we could see their unit prices going to a level where distribution yields are much lower than they are now.

Some readers might remember that I mentioned Saizen REIT is relatively inexpensive compared to residential properties J-REITs and, not too long ago, Mr. Market woke up to this fact. Even so, the REIT, at 20c per unit, is still trading at a discount of about 20% to its NAV.

Although I reduced my overall investment in S-REITs last year as I moved resources to certain undervalued stocks, S-REITs remain a big part of my portfolio as I enjoy the relatively high distribution yields they generate for me.

Related posts:
1. Saizen REIT: A brief break through.
2. AIMS AMP Capital Industrial REIT: Making money.
3. 2012 full year passive income from S-REITs.

Increasing bond exposure on higher yields.

In my last blog post, I shared how much passive income I received in the first 9 months of 2023.

My investment portfolio is still bringing home the bacon.

However, there is more variety to the bacon now.

Why do I say this?

Over the years, I have been very consistent in saying that I want to maintain a meaningful percentage of investment grade bond in my portfolio.

For a long time, I said that I treat my CPF savings as the investment grade bond component of my portfolio.

Risk free and volatility free, there really isn't a better option for a person like me.

I have a blog post titled "Unless we are very rich, CPF is all we need" to share my perspective on the matter.

This is the link to that blog post: HERE.

Of course, I share my CPF numbers at the start of every year, showing how much interest income is paid to me.

This interest income is not included in my quarterly passive income update.

Why?

The CPF interest generated is not immediately available for withdrawal to be used in any way we like.

We will be allowed to withdraw any CPF savings in excess of the Full Retirement Sum and the Basic Healthcare Sum when we turn 55 and not earlier.

My quarterly passive income report has always been about income generated by my investments in the stock market.

This year, however, my investment portfolio also includes bonds.

In the last one year or so, with bond yields much higher, I have also been buying Singapore Savings Bonds and T-bills.

So, my quarterly passive income report this year has another flavor.

A sprinkling of fixed income.

With bonds being much more rewarding now than 1 year ago, I am going to continue strengthening my T-bill ladder and, hence, enlarge the bond component of my portfolio.

I am a lazy fellow and would always go for low hanging fruits first.

Taking advantage of the CPF-SA and the CPF-MA was an easy decision so many years ago.

Taking advantage of the higher bond yields now is another easy decision for me.

To be sure, the coupons received from bonds will not make an earth shattering difference to me even as they nudge my quarterly passive income a little higher.

However, if we focus on this difference, we are missing the point.

What's the point then?

This is risk free and volatility free.

There is assurance that we will get paid during good and bad times.

This is very comforting to me.

Having such a component in my investment portfolio helps to smooth out rough patches which are bound to appear from time to time.

All else being equal, I will continue to increase exposure to this asset class in 2024.

If AK can do it, so can you!

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.

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