Higher-yielding bond alternatives – with some guardrails for risk

THE days of low interest rates may be well and truly over. Global interest rates have risen substantially as central banks hiked them to combat inflation. So far, the US Federal Reserve had raised rates six times this year for a total of 350 basis points (“bps”) on their fed funds rate – 0.5 per cent in 2021 to 4 per cent in November 2022. The fed funds rate, the key interest rate for the US, determines the overnight borrowing rate among banks.

Bond yields are positively related to interest rates. When interest rates rise, bond yields rise in tandem. This is because investors would require higher yields to hold the bonds.

In Singapore, the Singapore Overnight Rate Average (SORA) has also risen in the year to date, from 0.14 per cent in January this year to 3.53 per cent on Nov 18. As a result, the yield on Singapore Government Securities (SGS) has risen. As at Nov 18, SGS bonds are yielding 3.03 per cent for the two-year issuances, and 3.11 per cent for the 10-year bonds. The yield for bonds of shorter tenor, such as SGS Treasury bills, stands at 3.98 per cent.