After T-bills, what’s next?

By Navin Sregantan

If you’ve only got a minute:

• Even though yields are coming off their peaks, T-bills remain attractive in 2023 as interest rates are likely to stay elevated.
• There are other options that investors can consider for income like short duration and high-quality bonds, high dividend stocks and short-term endowment plans.
• Remember to do your due diligence before deciding which investment options are best suited to you.

For much of 2022, rising interest rates led to Treasury bills (T-bills) - Singapore government debt securities that mature typically in 6 months or 1 year - being the talk of the town.

Even though yields are coming off their peaks, T-bills remain attractive in 2023 as interest rates are likely to stay elevated, at least, compared to the past decade.

With T-bills from last year either having recently matured or are nearing maturity, it begs the question:

“What are the next steps for investors to consider?”

Before getting to that, it first helps to have a quick recap of the events that got us here.

2022: Fixed income is attractive again

Since the onset of Covid-19 in 2020, there were extraordinary moves in the market with inflation turning negative, a growth slowdown and market stimulus by global central banks. It resulted in interest rates being kept low and, in some cases, negative.

However, we saw a reversal of this trend in 2022. Other than geopolitical tensions (e.g. Russia-Ukraine crisis), the year was characterised by persistent inflation, which in turn, saw most central banks make monetary policy moves to raise interest rates.

This meant that due to rising yields, for the first time in a decade, investors were able to find meaningful opportunities in high quality fixed income investments. For example, there was increased participation in T-bills, other fixed income investments like Singapore Savings Bonds and in fixed deposits too.

To put things into context, a June 2020 T-bill would which was yielding 0.2% would now provide a yield of more than 3.7% per annum (p.a.). Meanwhile, a 12-month Singapore dollar-denominated fixed deposit which was yielding 0.4% in 2018, now provides a yield of about 3% p.a..

In other words, investors can look forward to being compensated with higher yields while take less or zero risk than a couple of years ago.

What are the alternatives to T-bills?

DBS Chief Investment Office (CIO) is of the view of that both interest rates and inflation are likely to stay elevated in 2023.

Bearing this in mind, investors can consider other income-generating investments on top of T-bills.

Some examples include:

• Short duration, high quality bonds
• High dividend stocks
• Short-term endowment plans

Short duration, high-quality bonds

After the aggressive rates hikes of the past year, markets are expecting an increasing likelihood of lower rates in 2024 and 2025. There are also market uncertainties and recession risks to contend with.

DBS CIO is of the view that investors can consider locking in higher yields in short-duration, high quality fixed income instruments like investment grade (IG) corporate bonds.

Historically, the average yield on IG corporate bonds is around 3.2% p.a.. With elevated interest rates, these bonds have become attractive again. As of end-April 2023, they have an average yield of 4.9% p.a., which offers an opportunity for investors seeking higher potential returns than fixed deposits or T-bills.

However, corporate bonds are not affordable investments – they usually require a minimum investment of $200,000, which prices many retail investors out.

That said, retail investors can invest in a basket of high-quality bonds through robo-advisors like DBS digiPortfolio and pooled investment products like unit trusts or exchange-traded funds (ETFs).

Save-Up digiPortfolio

DBS digiPortfolio’s Save-Up portfolio, provides a low-risk and high quality exposure to the fixed income market.

As of end-April 2023, the Save-Up portfolio was generating a yield of 5.2% p.a. with an IG credit quality and a portfolio duration of 2.9 years.

The portfolio’s current yield is significantly higher than its long-term projected range of 1.5 – 2.5% p.a..

Save-Up does not have a lock-in period, which means it can be useful for investors to park funds while waiting for market opportunities.

Read more: How to start investing with a robo-advisor
Find out more about: DBS digiPortfolio

CIO Liquid+ Fund

DBS CIO’s Liquid+ Strategy is an investment approach that focuses on investing in government and IG bonds with an average duration of the portfolio being between 1 and 3 years.

Investors can also consider investing in the DBS CIO Liquid+ Fund (minimum investment of $1,000), provided their risk tolerance allows for it. With this fund, investors have the option of choosing between having dividend payouts being paid out or reinvested.

The DBS CIO Liquid+ Fund is available for retail investors and is an expression of DBS CIO’s Liquid+ Strategy. Moreover, investors can consider this fund as part of the income half of the DBS CIO Barbell Strategy.

Read more: An introduction to the Barbell Strategy
Find out more about: Investing in unit trusts with DBS

High dividend stocks

Among the most accessible ways to earn passive income is through investing in dividend stocks.

Dividend stocks that tend to be popular are those of mature companies with stable revenue, profits and cashflow. Many of these companies are known as Blue-Chips.

While not exactly dividend stocks, real estate investment trusts (Reits) are also a popular choice for dividend hunters as they are required to distribute 90% of income earned to unitholders.

For dividend investors, such stocks and Reits can be found at relatively reasonable prices during periods of high yields for fixed income instruments.

For investors who prefer exposure to equity markets while wanting to receive regular income, an option to consider is DBS digiPortfolio’s Income Portfolio (minimum investment of $1,000).

The Income Portfolio provides access to income-generating equities as well as fixed income securities, in a readymade solution.

The portfolio also distributes regular income for the clients and as of end-April 2023, the portfolio’s distribution yield stands at 4.8% p.a., contributed by a mixed-asset portfolio of income equities, government, and corporate bonds.

Read more: Tips to pick quality dividend stocks
Find out more about: DBS digiPortfolio

Short-term endowment plans

A short-term endowment policy –a hybrid of both life insurance and savings components – is another way to grow your wealth.

Such hybrid plans are commonly used to save money for specific savings goals, like funding children’s education or your retirement. These plans also provide basic life insurance protection for as long as the policy is in force.

While returns tend to be lower relative to equities, these products can provide you with the stability of income.

However, be prepared to commit to your policy as surrendering early may lead to a loss in the premiums paid.

At the time of writing, SavvyEndowment - a 3-year endowment plan - has a guaranteed maturity yield of 3.65% p.a., provided you hold it till maturity.

Read more: 4 types of insurance plans to boost your retirement income
Find out more about: SavvyEndowment

Sticking with T-bills?

Of course, you can. When T-bills along with other fixed income instruments were making headlines in 2022, it was for a good reason.

We have not seen such attractive returns for fixed income investments with an AAA credit rating and issued by the Singapore government in a long while.

At current yields, T-bills still offer investors, especially those who are conservative, a safe investment option with competitive returns. The same applies for fixed deposits.

That said, this works best for those who do not have an immediate need for their funds. You also have to be aware of volatility in the markets.

As markets are not counting out the possibility of lower interest rates in the next 2 years, if you would like to lock in better long-term rates today, SSBs might be an option. This because you can enjoy the flexibility to exit the 10-year tenor investment anytime without any capital loss and penalty.

Read more: Investing in T-bills

In summary

The higher yields offered by high quality bonds today present investors with a limited window of opportunity. This applies to those who are weighing their options after their fixed deposits and/or T-bills have matured.

By investing in diversified IG bond funds, you do not need to worry about holding onto the investments until maturity as you can sell them anytime, with relative ease. This contrasts with fixed deposits and endowment plans which are instruments that should be held to maturity.

At the end of the day, always remember to align your investments to your risk profile. In other words, always remember to do your due diligence before deciding which options are best suited to you.

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Sources:

DBS Treasures, “Global Credit 2Q23: Redefining Quality”, Accessed 18 June 2023.

DBS Treasures, “Credit: The Case for Bonds Over Deposits”, Accessed 18 June 2023.

DBS Treasures, "DBS CIO Liquid+ Fund", Accessed 18 June 2023.

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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