Where will Singapore Treasury bills go from here?
T-bills here generally track the path of US interest rates, but they have diverged this year. After a record yield of 4.4 per cent last year, an upward trend is unlikely
SINGAPORE Treasury Bills (T-bills) have been a hot topic since interest rates began to rise in 2022. The Monetary Authority of Singapore (MAS) does not manage the monetary policy through interest rates. Hence, the interest rate environment in Singapore has mostly been dictated by the rate changes in the United States.
The US has led rate hikes since 2022. It was one of the first major economies to raise interest rates, and the current rate-hike cycle is among the most aggressive.
Favourable sentiment on Singapore T-bills rose significantly as their yields advanced considerably alongside the rise in the US Federal Funds rate. Yields on six-month T-bills hit a peak of 4.4 per cent in the auction in November 2022.
Against comparable instruments such as Singapore Savings Bonds (SSBs) and fixed deposits, T-bills offered an attractive yield with a shorter tenor to mitigate the interest rate risks. It was not surprising that their popularity surged, as investors looked for a short-term pivot from equities in this economic downturn.
But that was in 2022. Things began to change considerably for T-bill yields this year. They started to decline despite the US Federal Reserve continuing to hike rates to combat still-elevated inflation in the US. Inflation remained higher than expected in early 2023, staying above 6 per cent until its recent fall to 5 per cent in March.
In Singapore, inflation fell to 5 per cent in March, after hovering at more than 6 per cent since last year. The MAS chose to remain on the current appreciating path for its S$NEER, instead of further tightening the monetary policy. This was likely necessary after the gross domestic product contracted in the first quarter of 2023.
T-bill yields have gone against expectations. Despite rates going higher in the US, their yields have fallen this year, even as the Fed hiked rates by 25 basis points in March and then again in May.
The decline in T-bill yields here is unlikely to be a direct effect of the banking crisis. In the US, the failure of some banks drove investors into US Treasuries, seen as a safe haven for their monies. Yields on the US Treasury bonds fell in March.
For Singapore, the banking crisis in the US has further highlighted the stability and strength of the monetary environment. The stability of Singapore’s financial system is likely to underpin sentiment, contributing to the drop in T-bill yields.
In addition, the SGD had been appreciating significantly against USD since October 2022. Last year, the USD strengthened against most currencies due to the aggressive rate hikes.
Across previous rate hike cycles in history, most notably in 2007 and 2019 during the transition into a rate pause, yields on the Singapore Government Securities had been observed to start falling off at the start or even before the rate pause. Assuming that history is likely to repeat itself, and with expectations for a pause in rate hikes by the Fed in June, T-bill yields are quite unlikely to see an upward trend from here.
Furthermore, the inflation narrative driving the need for higher interest rates is likewise slowing down. Singapore’s core inflation rate fell from 5.5 per cent in January to 5 per cent in March, while MAS projects the core inflation rate to fall to 2.5 per cent by end-2023. Accounting for the increase in GST (Goods and Services Tax) at the start of 2023, it is likely fair to say inflation has softened.
Moving forward, we believe the optimal case is for T-bill yields to hover at the current level, or gradually taper off. For the six-month T-bills’ yield to break past its glorious 4.4 per cent record, a sharp spike in inflation will be needed to drive interest rates higher.
The recent Opec+ announcement on oil production cuts might be an unknown variable in the inflation equation. But energy demand is weakening alongside lower consumption globally.
Investment-grade corporate and/or retail bonds are some alternatives to T-bills. Examples include the Astrea retail bonds of various tenors, which carry a bond rating of A+ from both S&P and Fitch Ratings.
Such bonds enable investors to lock in higher yields as the likelihood of a recession grows, while strong credit quality allows for greater stability in this volatile period.
The writer is a fixed income analyst of the Bondsupermart team at iFAST Financial, the Singapore subsidiary of mainboard-listed iFAST Corporation Ltd.
