We just had the result of the latest 6-month T-bill auction, and the cut-off yield was 2.99%. The latest 1-year T-bill yield was 2.71%. The latest SSB offering was 2.25% for the first year and 2.56% for the 10-year average. What should we do with our cash? Are these lower rates the norm going forward?
Interest Rates Trend
If you have been investing in T-bills or SSB since 2022, you may realize the current rates are less attractive. We used to see ~4% for 6-month T-bills and above 3% for SSB.
Here is the 6-month T-bill historical chart:
The latest rate of 2.99% is roughly the rate we saw in mid-2022. Throughout 2023 and 2024, the rates hovered around ~4%.
Here is the 1-year T-bill chart:
Again, the latest rate of 2.71% is roughly the same as in 2022. We used to see >3.5% from the end of 2022 through 2024.
Now, let’s see the SSB historical rates:
The pattern is the same for SSB. The latest rates are around the level back in 2022, and we saw much higher rates throughout 2023 and 2024.
So, what can we learn from the three charts above? Unfortunately, the rates offered by these fixed-income investments are trending down. The era of high interest rates may already be leaving us.
Other Cash Alternatives
What about the other alternatives, such as fixed deposits? Let’s look into the latest fixed deposit rates (as of 24 October 2024):
- The best 1-month fixed deposit is 3.08% from GXS.
- The best 3-month fixed deposit is 3.28% from GXS.
- The best 6-month fixed deposit is 3.10% from Maybank.
- The best 9-month fixed deposit is 3.10% from DBS.
- The best 12-month fixed deposit is 3.20% from DBS.
Okay, the rates are slightly better, slightly above the 3% mark. However, these rates are much lower than what we saw in 2023 and 2024.
If you have been following cash management account rates, you may have noticed that they have also lowered their rates recently.
The trend seems clear: the rates are going down.
Future Rates Projections
The US Federal Reserve has recently cut interest rates by 0.5%. However, this is only the start of this rate-cut cycle. The Fed expects another 0.5% rate cut by the end of this year, followed by a full 1% rate cut in 2025.
And this is what the market expects:
The market seems to agree with the Fed, expecting two more rate cuts this year and four more rate cuts next year.
With the Fed and the market expecting more rate cuts next year, the high interest rate era may already be behind us, and rates may start to normalize again.
Can We Achieve Soft Landing?
One thing to note is that the projection above indicates the expectation of an economic soft landing, meaning inflation slowly normalizes while the economy remains strong. Could there be other possibilities where the soft landing scenario does not materialize?
Hard Landing / Recession
Based on history, this hard landing scenario is one of the more likely scenarios. When the Fed hiked interest rates high and fast, we usually ended up with a recession. What will happen to interest rates should a recession come?
If a recession occurs, the Fed will likely cut interest rates even faster to stimulate the economy again.
Inflation Coming Back
Even though inflation is already on the way down, it has yet to reach the target rate of 2%. However, we should also note that the government data is backward-looking, and thus, the actual inflation may be lower. The Fed also acknowledged this by preemptively cutting rates by 0.5% even when inflation has not reached its target rate of 2%.
By looking at delayed data, the Fed may risk making inaccurate decisions about rate cuts, such as cutting too soon or too much. Should this happen, we may start to see inflation picking up again, which will force the Fed to hike interest rates again.
What Do We Do?
The data seems to indicate that we may see lower rates going forward. We need to get used to the rates normalizing in the coming months or years.
We have always advocated locking in higher rates for longer while they last, for example, by migrating short-term cash allocation from T-bills or fixed deposits into Singapore Savings Bonds. SSB locks the rates for ten years while allowing monthly redemption without penalty, making it a relatively liquid option.
For medium—and long-term allocations, we have advocated investing them in longer-term investments, such as stocks or REITs, which tend to perform better over a longer period.
What do you think? Have you positioned your portfolio to account for the interest rate changes in the coming months?
