THE WRITING has been on the wall for some time. With US inflation down a long way from its peak in 2022, the US Federal Reserve has indicated that interest rates will likely be cut later this year.
Because Singapore effects monetary policy through its exchange rate, local interest rates tend to track US interest rates. So, it seems quite likely that local rates are on their way down too.
After hitting a high of 4.07 per cent in September last year, yields on local six-month Treasury bills (T-bills) have drifted lower to hover between 3.7 and 3.8 per cent since November last year.
As the risk-free rate falls, so too will bank interest rates. UOB, which once offered one of the highest savings account rates, announced that it will cut its lowest tier of interest rates to 3 per cent, from 3.85 per cent.
It is a matter of time before the other banks follow suit. Instead of transferring your funds from bank to bank to seek out higher interest rates, it’s probably time to put your money back into the market.
How should one go about allocating idle funds into investments?
GET BT IN YOUR INBOX DAILY
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
One asset class that has been overlooked by younger investors is bonds.
For more than half of the 2010s, the US federal funds rate was close to zero per cent, which meant that bonds priced at a spread over the risk-free rate also delivered mediocre returns compared to the roaring S&P 500 stock index.
Yet, as risk-free rates now fall, bonds might be “ready to perform”, as a Morgan Stanley report released on Apr 3 predicted.
As interest rates fall, high-quality bonds are likely to become more attractive and see prices rise as they see more demand. Investors could look to intermediate duration and select sectors of investment-grade corporates for opportunities, they added.
“In the last five Fed tightening cycles, high quality fixed income indices have outperformed in the one and three-year periods after the last rate hike, compared with the index returns for short-term bonds and cash – in some cases, by significant margins,” the report said.
It added that while bonds and equities have yielded negative returns in lockstep as a result of the US Fed’s aggressive tightening to tamp down inflation, stock and bond returns should move in opposite directions once again.
This would mean that a balanced portfolio strategy could return to seeing a better risk-return profile. A common rule is to hold a percentage of your portfolio equivalent to your age in bonds, with the balance invested in equities.
Still, this assumes that you are financially secure and do not have any near-term cash needs. If you are looking to buy a resale flat or get married in the next couple of years, you may have a lower risk appetite.
As for equities, younger investors tend to favour the S&P 500 index for its well-known outperformers, such as AI winners Nvidia and Microsoft.
Yet, I would suggest that investors invest in a global pool of large and mid-cap stocks through funds that track global indices such as the FTSE All-World or MSCI World Index.
While the S&P 500 index has yielded significant gains in the last year, so have Japan’s Nikkei 225 and India’s Nifty 50. Year to date, the indices have yielded total returns of 9.7 per cent, 7.5 per cent and 6.9 per cent as at Apr 30, respectively, in Singapore dollar terms.
As interest rates shift and markets experience volatility due to changing conditions, it is still important to stay invested.
Standing still in cash will only see your savings eroded over time.
