With T-bill yields falling to lows, which assets bring higher returns?

[SINGAPORE] Low yields for Treasury bills (T-bills) amid a falling interest rate environment have sent investors in search of other assets that can give them more income.

The cut-off yield on the latest six-month T-bill was at 1.39 per cent, auction results from the Monetary Authority of Singapore on Nov 20 indicated.

The previous six-month auction, which closed on Nov 6, offered 1.37 per cent. This was the lowest since 2020, during the Covid-19 pandemic, when T-bill rates fell to around 0.2 per cent amid a globally low interest rate regime.

Such rates are far from competitive, for those hoping to retrieve returns worth their while.

For investors seeking highly liquid, low-risk investments with yield offerings, money market funds – a type of mutual fund that invests in cash, cash equivalents and short-term debt securities – come to mind.

But investment experts are mixed on whether such funds, at this point, are best for investors to park their cash for higher yields.

Ray Sharma-Ong, deputy global head of multi-asset bespoke solutions at Aberdeen Investments, said that yields have dropped sharply for Singapore money market funds in the last two years. Their gains may not look attractive now, relative to other products with higher returns

However, he said they can still be attractive against other “low-risk, short-term investment opportunities”, such as bank current accounts or fixed deposits.

“Money market funds have liquidity profiles that are similar to current or savings accounts, but offer returns that are quite similar, if not better, than banks’ fixed deposits,” the analyst said.

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Saxo’s chief investment strategist, Charu Chanana, said that money market funds remain “a good parking spot for cash”, especially for investors who value liquidity and stability.

“But with interest rates drifting lower, their yields have come down too – now around 1 to 2 per cent. They’re ideal for short-term needs, but not the place to chase high returns,” she said.

“For those looking for more income, you’ll need to move slightly out the risk curve.”

Reit ETFs

Another asset type at present – real estate investment trust (Reit) exchange-traded funds (ETFs) – are attracting attention too, offering 5 to 6 per cent yields.

This is in addition to the potential for capital recovery if interest rates start to fall, said Chanana.

However, the Saxo analyst said that investors should remember that they are still equities, which means their prices can move with market sentiment.

“Higher borrowing costs and property revaluations remain real risks. So while they’re compelling for income seekers, they’re not a substitute for cash or bonds,” she said.

Saw Cheng Hin, head investment specialist at Julius Baer, said that other potential blind spots for the sector include front-loading of economic activity earlier in the year, which could result in softer rental reversions and occupancy rates in the second half.

“Office, industrial and data-centre segments continue to show healthy performance, while retail has been steady,” he said. “We remain a little more cautious on the hospitality sector.”

This is because with activity in the travel and hospitality space now stabilising following the “strong recovery post-pandemic”, the focus of investors is shifting towards others which offer more attractive growth prospects, noted Saw.

Sharma-Ong added on to this list by flagging the possibility of yield traps – where high yields from these ETFs could reflect weak fundamentals such as ageing malls, soft offices or declining occupancy.

“Reit managers may raise debt or equity to chase growth, too, which pressures distributions per unit,” he said.

To the Aberdeen Investments analyst, re-financing concerns still stand in this sector, with certain Reits’ expiring borrowings secured at a lower rate before the latest rate upcycle.

“Now, they’re facing rising blended interest costs after the re-financing,” he added.

Navigating these risks would therefore require “active management and due diligence”, the analyst said.

Higher-yielding bond funds

Adam Darling, fixed-income investment manager at Jupiter Asset Management, said that to some, high-yield bonds are some of the most “efficient” asset classes globally.

The average par-weighted default rate for high-yield bonds is about 3 per cent a year, according to Moody’s Global High Yield universe.

Within high-yield bonds, there are also junk bonds, which offer even higher yields. But they are higher-risk due to their lower credit ratings (typically BB or lower) from agencies.

Companies which have issued junk bonds include Tesla and Netflix – though they have stopped doing so since late 2022 and 2024, respectively, as their bonds were upgraded to investment-grade status.

The risk of defaults is no doubt higher with these high-yield debt securities. However, investors typically still recover around 40 per cent of their investments on average upon defaults, data from Moody’s indicated. The actual annual loss, therefore, is typically closer to 1.8 per cent.

Darling said: “The key is to avoid weak companies with poor balance sheets because those are the ones that can wipe out value entirely.”

Saxo’s Chanana said that short-duration government or high-quality corporate bond funds can be “a good next step” for investors.

An example of a top-performing corporate bond fund is the Vanguard Intermediate-Term Corporate Bond Index Fund, which gained 6.9 per cent, as at Jul 24, over 12 months. Its fund size was about US$57 billion as at Jul 21.

This is in light of how investment types like these still focus on safety, but offer a bit more yield, Chanana said.

“The key trade-off is that you take on some interest rate and credit risk, though modest,” she said. “Think of them as ‘cash-plus’ rather than cash.”

Private markets investing

More companies are staying private for longer, Shaylen Padayachee, senior portfolio manager at Partners Group, observed recently, implying that the opportunity set in private markets is “considerably broader” than that in public markets.

“We are in the midst of a long-term structural shift in which public markets and private markets are increasingly swapping roles ... with this shift expected to continue,” he said. 

This comes amid private markets being more focused on financing the “foundational assets” that support the economy, as public markets become increasingly speculative and concentrated around a handful of mega stocks. 

There are hence strong tailwinds behind private markets in the short term, Padayachee said, as transaction activity picks up amid macro parameters stabilising and the cost of debt coming down.

Regarding private-market portfolio returns, the exact breakdown can vary from investor to investor, depending on their objectives. 

“A growth-focused portfolio is likely to be tilted towards private equity, infrastructure and real estate; an income-focused portfolio will have more exposure to private credit and adjacent asset classes such as royalties,” said the portfolio manager at Partners Group. 

He added that growth portfolios usually see returns in the high teens (16 to 19 per cent), and income portfolios in the low double digits. 

Diversified income portfolios

At this point, Singapore equities could still appeal to investors seeking attractive yields.

The Straits Times Index, for instance, offers a dividend yield of close to 5 per cent, supported by reasonable valuations with a PE ratio in the mid-teens, noted Julius Baer’s Saw.

“In addition, the Singapore dollar has remained a reliable store of value compared with other major currencies, and initiatives such as MAS’ Equity​ Market Development Programme should further underpin sentiment towards the local equity market,” he said.

High-quality Singapore dollar fixed-income instruments remain “a sound option” for investors looking to lock in stable returns, the analyst highlighted.

Chanana said that beyond bonds and Reits, investors can consider diversified income portfolios – blending Singapore bonds, global investment-grade funds, or even covered-call ETFs for steady payouts.

Broadly-speaking, income strategies still act as “all-weather cushions” within investor portfolios, said Sharma-Ong, offering yield pickup and helping to stabilise returns across different market environments.

“By generating regular cash flows, they help dampen portfolio volatility and reduce reliance on price appreciation alone for total returns,” he said.

To Saxo’s Chanana, the end goal is to balance liquidity, yield and risk. “With yields compressing again, diversification really matters.”