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Here's what higher US bond yields mean for T-bills, stocks & REITs

19 Aug 2023

With the US 10-year government bond yield reaching close to the highest level since 2007, we analyse what it means for T-bills, stocks and REITs.

bond yield rise tbills stocks reits aug 2023

What happened?

We have been getting questions from the Beansprout community on why the yield on the Singapore 6-month T-bill has declined despite higher bond yields globally. 

This week, we saw headlines on Bloomberg that global yields have reached 15-year highs. 

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Source: Bloomberg screenshot 

 

The US 10-year bond yield went to 4.3%, reaching close to highest levels since 2007. 

However, we saw a further decline in the Singapore 6-month T-bill cut-off yield to 3.73% in the auction on 17 August. 

Let us try to understand what is causing the divergence in the Singapore 6-month T-bill yield and the US 10-year government bond yield, as well as find out what are the implications for us as savers and investors. 

Here’s what you need to know about rising US government bond yields 

#1 – Fed officials have suggested that there might be more interest rates ahead 

The latest Fed meeting minutes indicated that there could be more rate hikes in the future to bring down inflation. 

According to the minutes, officials saw “significant upside risks to inflation, which could require further tightening of monetary policy”.

The persistent inflation is driven by the resilience in the US economy. In particular, economists have removed an earlier forecast that the US banking crisis earlier this year could lead to a mild recession this year. 

The latest US retail sales data also indicated that consumer spending has been stronger than previously expected.

This has led investors to increasingly expect that the Fed has to keep interest rates ‘higher for longer.’ 

#2 – Rise in US government bond yields largely for longer maturity bonds 

This expectation that interest rates will be kept ‘higher for longer’ has been reflected mainly in the higher bond yields for longer maturity US government bonds.

For example, the US 10-year government bond yield surged to close to 4.3% from about 4.0% earlier this month. 

The US 10-year government bond yield has already gone up previously after Fitch downgraded the credit rating of the US government bond. 

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Source: Tradingview 

 

However, the bond yield on shorter maturity US government bonds has not gone up by such a significant extent. 

In fact, the 3-month US government bond yield just inched up to about 5.44% from 5.41% a week ago.  

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Source: Tradingview

 

#3 – Investors are still expecting no further rate hikes for now 

This view that interest rates will ‘remain higher for longer’ is likewise reflected in investor expectations for US interest rates.

Despite the concerns on further Fed interest rate hikes, investors are still largely expecting that the Fed will keep the benchmark rate unchanged for the rest of this year, according to the CME Fedwatch Tool

However, this may not mean that we will see interest rates coming down quickly after that. 

Based on current expectations, investors are only expecting that the benchmark rate may be cut in May 2024, and the Fed fund rate will remain above 4% at the end of 2024. 

Clearly, we may not be going back to the days of low interest rates and borrowing costs anytime soon. 

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Source: CME Fedwatch Tool 

 

What would Beansprout do?

With the increase in bond yields of longer maturity US government bonds, the 10-year Singapore government bond yield has also increased to 3.20% on 18 August from 3.07% on 11 August

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Source: MAS

 

However, both the 6-month and 1-year Singapore T-bill yield have been little changed. In fact, we saw a slight fall in the cut-off yield in latest 6-month T-bill auction. 

 

What this means is that we may not see the 6-month T-bill yield rising sharply even if the US 10-year government bond were to rise further.

Likewise, fixed deposit rates may not increase significantly from current levels, especially if banks in Singapore remain flush with liquidity.  

However, we can still find the best high-yield savings account or best fixed deposit rate in Singapore to make our savings work harder. 

Where the higher 10-year bond yields might have a larger impact, would be on the returns of the stock market. This week, we saw US and Singapore stock indices falling with the highest 10-year bond yields. 

This is because higher interest rates for an extended period of time would mean that the funding cost for companies with debt will go up. Unless companies can grow their sales or improve on their margins to offset the higher borrowing cost, their earnings may be negatively impacted. 

Hence, higher interest rates are generally seen as being negative for stocks especially for companies with high levels of debt. 

This is especially so for REITs, which make use of borrowings to fund the acquisition of real estate assets. With the higher 10-year government bond yield, the iEdge S-REIT index has fallen by more than 5% since the start of the month. 

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Source: Tradingview 

 

If we are looking at holding S-REITs for dividend income, we would need to be selective and looking closely at the amount of debt each REIT has. You can use our REIT tool to compare Singapore REITs and how they fare against our checklist. 

Lastly, we will be watching out closely for the upcoming Jackson Hole Symposium on 24-25 August to get further signals on what the Fed’s next interest rate move might be. 

Join the Beansprout Telegram group or Facebook group to get the latest updates on Singapore stocks, bonds, REITs and ETFs. 

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