Choose wisely when it comes to the many options for your excess cash

IN JUST one month, benchmark 10-year US Treasury yields have fallen sharply from about 5 per cent to less than 4.5 per cent, as at Nov 17.

This decline was precipitated by several events, including a slightly dovish statement by the Federal Reserve, which nevertheless held rates as expected, as well as a milder-than-expected consumer price index (CPI) print.

Short-term Treasury yields have also moderated slightly over the past month, though the extent of moderation has been much smaller than that of longer-end yields. Singapore fixed-deposit (FD) rates have generally held above 3 per cent, while the overnight Sora (Singapore Overnight Rate Average) also remains above 3.8 per cent.

Where are short-end rates headed?

Based on CME’s FedWatch tool, markets are now pricing in a 100 per cent probability that the Fed would no longer hike rates this cycle, and over 50 per cent probability of the first cut in early May – with 100 basis points worth of cuts by end-2024. We disagree with this market consensus as we expect the Fed to hold rates for the majority of 2024 instead.

US inflation has stayed well above the Fed’s 2 per cent target. While the recent CPI reading of 3.2 per cent was markedly lower than that in the previous month (3.7 per cent), it remains well above the 2 per cent target, and we have yet to see any signs of a sustained decline in inflation. We also see upside risks to inflation arising from energy, given the current geopolitical uncertainties in the Middle East and the ongoing moderation of low-base effects; and services, if the US labour market remains resilient.

The Fed has also cautioned against premature talk of rate cuts and, on the contrary, has even mentioned the possibility of further hikes, depending on economic data. With the Fed consistently emphasising a “data-dependent” approach to policymaking, we think it is premature to call for rate cuts when we have had very few signs of either the US entering a recession, or US inflation moderating sustainably.

In other words, our expectation is for rates to remain higher for longer. This makes it imperative for investors to manage their cash wisely – we think they will be rewarded for an even longer period as we are unlikely to return to the near zero-rate environment of the 2010s.

Attractive options to park cash

Investors these days have many attractive options to park their cash, ranging from more traditional choices like government securities and FDs to newer cash management solutions.

Singapore and US T-bills are among the safest instruments, with a very low risk of default as they are rated AAA and AA+, respectively by S&P. Singapore Savings Bonds (SSBs) are equally safe and generally have lower yields than T-bills over the short term, but they can be redeemed every month depending on an investor’s liquidity needs. Overall, we see these as the benchmarks for comparison, given their attractive yields of over 3 per cent coupled with very low risks.

FDs are also a common choice for investors, and these are fairly safe options up to the SDIC’s (Singapore Deposit Insurance Corporation) insured limit of S$75,000 (S$100,000 in April 2024). However, some of the most attractive rates may come with certain conditions, including minimum deposit amounts as well as minimum tenors.

As the term “fixed deposits” suggests, investors’ monies are often pseudo-locked in with penalties usually imposed upon early withdrawals. Overall, FDs are a fairly safe option with slightly higher yields over Singapore government securities, though they come with some limitations (including early withdrawal penalties) which investors should be mindful of.

An increasing number of financial institutions have also rolled out cash management solutions, which typically invest in money market and short-duration bond funds. They do not come with the backing of the government, unlike T-bills and SSBs, and are outside the SDIC’s deposit guarantee.

But a large proportion of their underlying holdings generally comprise T-bills or deposits. These solutions tend to be much more liquid than FDs, often allowing withdrawals within a few days. As a whole, we consider these cash management solutions marginally riskier than T-bills and FDs, but with the benefit of significantly higher liquidity.

Investors who wish to customise their own cash management solution can invest directly in money market and short-duration bond funds. There is no shortage of such products available on the market, and investors can mix and match the funds they like, depending on their investment profiles including risk appetite and investment horizons. Once again, such a mix-and-match solution is generally liquid, with the ability to withdraw your monies within a few days.

Which should you choose?

As with virtually any investment, the choice of products depends on an individual’s investment profile. We think that government securities (by Singapore and the US) are the safest options available, suitable for individuals with lower risk tolerance. FDs are a convenient option for the layman comfortable with the conditions attached to them, including those on early withdrawals.

Meanwhile, we think that cash management solutions are the most flexible option for investors who wish to earn decent yields while retaining the ability to withdraw their monies quickly.

The writer is a research analyst with the research and portfolio management team at FSMOne.com, the B2C division of iFast Financial. The latter is the Singapore subsidiary of iFast Corporation