With falling T-bill yields, where to park your money?

This post was created in partnership with POSB . All views and opinions expressed in this article are Beansprout's objective and professional opinions.

What happened?

Singapore treasury bills (T-bills) yields have been on a downward trend since June. 

In the 17 October 2024 1-year Singapore T-bill auction, the cut-off yield fell to 2.71% per annum (p.a.), the lowest yield on the 1-year T-bill in two years. 

Likewise, in the 24 October 2024 6-month Singapore T-bill auction, the cut-off yield fell to 2.99% p.a..

This shift comes as the US Federal Reserve began cutting interest rates. 

Like many investors, I took advantage of the higher T-bill yields earlier this year.

But now, as those T-bills near maturity, I’m faced with the question: what’s the best move for my money?

I have seen quite a lot of discussion in the Beansprout community comparing the different options available – from bond funds to ready-made portfolios to endowments. 

In this article, I’ll share what I’m considering and how I’m weighing the options to find a higher yield for my mid-to-long term savings.

What I’m considering before choosing an alternative investment solution 

Before settling on an alternative investment to diversify my savings beyond T-bills, I’m evaluating my options based on a few key factors:

• Investment return – How much can I expect to earn     ?
• Investment Size – How much am I willing or able to invest in this alternative?
• Level of active management – Do I want to be hands-on with my investment, or should I opt for a more passive approach?
• Liquidity – How quickly can I access my funds if needed? On the flip side, will I be able to lock in interest rates for a longer period of time? 

Here’s how I’m approaching each of these considerations.

#1 – Investment return

The first factor I’m considering is returns. In the past, T-bills provided higher returns due to favorable interest rates but as interest rates decline, I’m looking to diversify my portfolio by including investments that offer the potential for a higher expected yield while managing my risk.

However, it’s equally important to understand how those returns are generated and whether they’re sustainable. For example, I’d assess the credit risk of the bonds within a bond fund to ensure it aligns with my own risk appetite.

#2 – Investment size 

What I appreciate about T-bills is that they allow me to start with a minimum investment of just S$1,000. 

However, not all investment options offer such a low entry point. 

For example, purchasing most individual bond issuances in Singapore typically requires me to be an accredited investor, with a minimum investment of S$250,000. 

Even if I had the capital, investing in a single bond wouldn’t provide the same diversification benefits as a portfolio of bonds.

#3 – Level of active management 

Next, I’d consider how involved I want to be in picking my investments, and whether I prefer to tap into the expertise of professional managers to select bonds for me.

By investing in a bond fund, I’d leave the active management to the fund manager, whose goal is to generate returns above the benchmark. However, this comes with the limitations of the fund’s mandate, such as its geographical exposure or the credit quality of the bonds it holds.

I’d still need to rebalance my portfolio based on factors like macroeconomic conditions and the fund’s performance. 

Alternatively, to ensure optimal asset allocation, I could consider an actively managed portfolio of funds, where the manager handles rebalancing as needed.

#4 - Liquidity

I also need to consider my liquidity needs—essentially, how long I’m willing to tie up my funds.

If I expect to need access to my money in the near future, it’s crucial to choose an investment with high liquidity, allowing me to cash out easily. 

However, I need to balance this with the potential benefit of locking in interest rates for longer periods.

With interest rates trending downward and the Fed expected to make further cuts, locking in rates might offer greater peace of mind, even if the headline interest rate is slightly lower than the current T-bill yield.

What are the Singapore T-bill alternatives I’m considering?

After weighing my key considerations, here are some of the options I’m currently considering as alternatives to diversify my savings outside of Singapore T-bills.

#1 – Bond funds

Earlier, I mentioned that bond funds offer a potential for higher yields compared to T-bills and could benefit further if interest rates continue to fall. 

Two examples of such bond funds are the DBS CIO Liquid+ Fund and the Nikko AM Shenton Short Term Bond Fund. Both invest in a diversified portfolio of short-term bonds.

As of 30 September 2024, the DBS CIO Liquid+ Fund offers a yield of 4.66% p.a., while the Nikko AM Shenton Short Term Bond Fund provides a yield of 4.23% p.a.. 

These funds focus on higher-quality bonds with lower risk, boasting an average credit rating of A- as of the same date. 

Additionally, I can invest in selected bond funds with a low minimum investment amount and enjoy the convenience of easy redemption, along with the expertise of a professional fund manager. 

Since these funds are actively managed, fund managers carefully curate a diversified portfolio of high-quality bonds to provide steady income, even as interest rates fluctuate.

One key advantage of these bond funds is their liquidity. Unlike T-bills, which can only be sold on the secondary market, bond funds typically allow me to cash out whenever needed.

With a minimum investment of just S$1,000, short-term bond funds offer a relatively low-risk, income-generating option in a falling-rate environment.

You can invest in the DBS CIO Liquid+ Fund using cash, but the Nikko AM Shenton Short Term Bond Fund offers the flexibility to invest with CPF and SRS funds as well.

Why would I consider investing my SRS funds in the Nikko AM Shenton Short Term Bond Fund? 

For starters, SRS funds, which I primarily set aside for tax relief, currently earn an interest of just 0.05% p.a. sitting in my SRS account. Putting them to work through investments could help grow my savings instead of letting them sit idle.

Since I prefer a conservative investment approach, the Nikko AM Shenton Short Term Bond Fund stands out as a potential option, offering stability with the opportunity for higher returns than keeping funds in a low-interest SRS account.

I am also keeping in mind that these short term bond funds are not capital guaranteed, so I have to be willing to take on a little bit more risk to earn the higher potential yield. 

#2 – Ready-made investment portfolios

While buying individual bond funds allows me to access a diversified portfolio of bonds, I still need to decide when to buy and sell based on factors like performance and macroeconomic conditions. 

To simplify things further, I can consider ready-made investment portfolios, which offer a convenient and low-cost way to access a diversified mix of funds.

One example is DBS SaveUp Portfolio, which invests in 3–6 funds primarily focused on fixed income instruments. As of 30 September 2024, the SaveUp Portfolio was generating a yield of 4.79% p.a.

What makes the SaveUp Portfolio particularly appealing is its low entry point and flexibility. I only need a minimum investment of S$100 to get started, and there’s no lock-in period, so I can easily access my funds when needed.

Plus, with a management fee of just 0.25% p.a., it’s the most cost-effective option among the DBS digiPortfolios.

If I’m seeking a portfolio that generates regular income, the Income Portfolio offers exposure to a mix of equity and fixed income funds. These unit trusts invest in familiar sectors like REITs, Asian equities, and bonds.

What stands out to me about the Income Portfolio is the regular payouts it has provided historically. As of 30 September 2024, the portfolio offers a stable payout of 4% p.a. (payable quarterly).

With a low minimum investment of S$1,000, the Income Portfolio presents a solid option for building passive income while maintaining diversification.

To learn more about how ready-made investment portfolios can be an alternative investment solution, read the article here.

#3 – Endowments 

If I’m comfortable locking in my funds for a longer period compared to the T-bill, and seeking both guaranteed and non-guaranteed returns, an endowment policy like SavvyEndowment could be a good option to consider.

Endowment plans offer a key advantage: they combine life insurance with savings, providing the potential for higher returns while offering stability and protection. 

The trade-off, however, is liquidity. These policies usually require a commitment of several years, meaning I won’t have easy access to my funds during that period.

On the plus side, locking in interest rates offers peace of mind, especially if interest rates continue to fall in the future.

What are the main characteristics of each investment alternative?           

Based on my considerations of potential return, liquidity, minimum investment size, and level of active management, here’s how these options compare:

What would Beansprout do?

With Singapore T-bill yields falling and the possibility of further rate cuts ahead, it’s time to reassess where to park your savings.

High-quality bond funds, ready-made portfolios of income-generating assets, or endowments are some alternative options to earn a yield on our savings. 

If liquidity and active management are key, I’d consider bond funds like the DBS CIO Liquid+ Fund or the Nikko AM Shenton Short Term Bond Fund.

For a more convenient approach to diversified income-generating assets with expert portfolio management, ready-made options such as the DBS SaveUp Portfolio or Income Portfolio are worth exploring.

And if you’re open to locking up your savings for guaranteed returns over several years, while ensuring capital preservation, an endowment plan like SavvyEndowment might be a suitable choice.

Regardless of which option you choose, it’s crucial to ensure that it aligns with your investment objectives and risk appetite.

Discover more about these solutions offered by POSB here.

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